Finance I

Question 1

Primary Mortgage Market

Answer 1

made up of lenders who originate loans. They make the money available directly to borrowers.

Question 2

Commercial Bank

Answer 2

financial institution that is designed to act as a depository for funds and as a lender for commercial activities – usually short-term loans.

Question 3

Credit Union

Answer 3

nonprofit financial institutions into which members place their money, usually through direct deposit. Credit unions pay no income tax, so they can pay higher interest rates on deposits than other savings institutions. They also offer a wide variety of loans at far lower interest rates than their competitors.

Question 4

Insurance Companies

Answer 4

Life insurance companies hold a major portion of the savings of the American public. Only savings and loan associations control more savings than life insurance companies do.

Question 5

Investment Groups

Answer 5

REITs enjoy special income tax benefits similar to those granted to mutual funds. They are exempt from corporate tax if they invest at least 75 percent of their assets in real estate and distribute 95 percent or more of their annual real estate income to their investors.

Question 6

Mortgage Bankers

Answer 6

involved in originating and servicing loans for other lenders. When so doing, they act as mortgage bankers and can represent life insurance companies, real estate investment or mortgage trusts and, in some cases, other banks.

Question 7

Mortgage Brokers

Answer 7

A mortgage broker is usually retained by a borrower to help obtain financing for a specific commercial property.

Question 8

Mortgage

Answer 8

a financing instrument that creates a lien against a property. The lender who gives the money is the mortgagee, and the borrower who gives the mortgage is the mortgagor.

Question 9

Promissory Note

Answer 9

(usually referred to as a “note” or a “bond”) and establishes legal evidence of the debt incurred.

Question 10

Mortgage Clauses

Answer 10

Identification of participants
Property description
Attachment of Note
Property Taxes
Insurance
Preservation and Maintenance of Property
Defeasance Clause
Acceleration Clause
Signatures and Acknowledgements 
Prepayment Penalty
Due on Sale Clause

Question 11

Identification of participants

Answer 11

The names of the mortgagor (borrower) and the mortgagee (lender) are listed on the mortgage document.

Question 12

Property Description

Answer 12

should be a proper legal description of the property

Question 13

Attachment of Note

Answer 13

simply refers to the note, stating in some way that the borrower will pay the full sum due according to the terms of the note.

Question 14

Property Tax

Answer 14

states that the mortgagor must pay all property taxes, assessments, claims, charges and liens on the property and that any failure to do so could put the mortgage into default.

Question 15

Insurance

Answer 15

lender will require the mortgagor to provide hazard insurance in an amount that will adequately protect the lender’s interest in the property. In addition to adequate coverage, the lender must be named as a coinsured party

Question 16

Preservation/Maintenace

Answer 16

requires the borrower to maintain the physical condition of the property and not to allow any abuse or destructive use that would reduce the value of the property.

Question 17

Defeasance Clause

Answer 17

states that if the borrower repays the debt when due, the words of grant are void, the mortgage is canceled and the title is given back to the borrower.

Question 18

Accelaration Clause

Answer 18

outlines what will happen if the borrower fails to pay the mortgage, to maintain the property or to perform any other agreement, stipulation or condition contained in the mortgage. Any failure on the part of the borrower can result in the lender accelerating the mortgage and take whatever steps are needed to recover the investment.

Question 19

Signatures and Acknowledgement

Answer 19

where the borrowers sign, showing they accept all of the conditions of the contract

Question 20

Prepayment Penalty

Answer 20

a lender will try to control prepayments by including a prepayment penalty clause that allows the lender to assess a penalty to the borrower for paying early.

Question 21

Due on Sale Clause

Answer 21

form of acceleration clause that requires the borrower to pay off the entire mortgage debt when the property is sold. The due-on-sale clause is also known as an alienation clause, a nonassumption clause, a call clause or a right-to-sell clause.

Question 22

PITI

Answer 22

Principal, Interest, Taxes, Insurance

Question 23

Principal

Answer 23

capital amount borrowed, on which interest payments are calculated,

Question 24

Interest

Answer 24

a charge for the use of the lender’s money.

Question 25

Taxes

Answer 25

pay to the government to cover public services, such as schools, police, fire, and ambulance services.

Question 26

Insurance

Answer 26

homeowner’s insurance, flood insurance and/or mortgage insurance.

Question 27

Judicial Foreclosure

Answer 27

allows the sale of the mortgaged property under the supervision of the court, with the proceeds going first to satisfy the mortgage, then other lien holders, and finally the borrower if any proceeds are left.

Question 28

Non Judicial Foreclosure

Answer 28

the lender gives the borrower a notice of default (NOD) and the intent to sell the property in a form prescribed by that state’s statute. This type of foreclosure is sometimes referred to as “power of sale” foreclosure.

Question 29

Deed in Lieu Foreclosure

Answer 29

A defaulting borrower who faces foreclosure may avoid court actions and costs by voluntarily deeding the property to the mortgagee.

Question 30

Right of Redemption

Answer 30

The borrower's right of redemption, also called equity of redemption, is the right to reclaim a property that has been foreclosed by paying off amounts owed to creditors, including interest and costs

Question 31

Deficiency Judgement

Answer 31

If the sale does not yield sufficient funds to cover the amounts owed, the mortgagee may ask the court for a deficiency judgment. This enables the lender to attach and foreclose a judgment lien on other real or personal property the borrower owns.

Question 32

Loan Origination Fees

Answer 32

Typically 1 percent of the loan amount, although it could be higher. It covers the lender’s cost for generating the loan.

Question 33

Points or Discount Points

Answer 33

Points represent prepaid interest and the lender charges them to get additional income on the loan.

Question 34

Mortgagor Duties

Answer 34

Pay Mortgage Keep Property in good condition Pay taxes and assessments Protect property from loss-Insurance

Question 35

Who makes up the primary mortgage market?

Answer 35

``` Savings Associations Commercial Banks Credit Unions Insurance Companies Investment Groups Mortgage Bankers Mortgage Brokers ```

Question 36

What is a mortgage

Answer 36

A mortgage is a financing instrument that creates a lien against a property.

Question 37

What is a promissory note

Answer 37

A document that describes the amount of money borrowed, the terms under which it will be repaid, and any conditions that relate to either the borrowing of the money, or the consequences in event of default. This document establishes legal evidence of the debt incurred.

Question 38

What is the clause that requires the borrower to pay off the entire mortgage debt when the property is sold?

Answer 38

Due on Sale or alienation clause

Question 39

Pre-qualification

Answer 39

This process is informal. It can be done by a real estate agent or by a lender by using income, assets, debts and credit history. Does not guarantee or promise financing

Question 40

Pre-Approval

Answer 40

a formal process that only a lender can do and issues a preapproval letter.

Question 41

qualifying standards or loan underwriting standards.

Answer 41

The lender must: Determine the ability of the borrower to repay the loan. Estimate the value of the property that is collateral for the loan. Research and analyze the marketability of the title. Prepare the documents necessary to approve the loan and close the transaction.

Question 42

Lenders run the risk that:

Answer 42

The borrower will not be able to repay the loan. | If the borrower defaults on the loan, the property will be worth less than what is still owed on the loan.

Question 43

underwriting

Answer 43

evaluation process used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral determine whether a borrower and property meet the minimum requirements established

Question 44

To qualify for a mortgage loan

Answer 44

a borrower must meet the lender's qualifications in terms of income, debt, cash, and net worth. In addition, the borrower must demonstrate sufficient creditworthiness to be an acceptable risk.

Question 45

Types of Repayment Plans

Answer 45

Straight (Interest-only) Amortized Balloon payment Adjustable-rate

Question 46

Straight Loan or Term Mortgage

Answer 46

also called an interest-only loan, the monthly payments are allocated only to interest. No principal is paid off. At the end of the term, the borrower must be able to pay off the entire principal amount or get another loan.

Question 47

Amortized Loan

Answer 47

a borrower makes a periodic (usually monthly) payment of principal plus interest. These payments result in the loan being paid off gradually over time. Amortized loans are usually fixed-interest, long-term loans of 15 or 30 years. Same payment every month

Question 48

Balloon Mortgage

Answer 48

a loan that has one large final payment due when the loan matures. are partially amortized loans

Question 49

Adjustable Rate Mortgage

Answer 49

For a borrower that only intends to own the property for a short period of time ``` Components Index Margin Calculated rate Initial rate Adjustment period Interest rate caps Payment cap Negative amortization cap Conversion option Step rate or buy down Mortgage payment adjustment period ```

Question 50

Index

Answer 50

measure of economic conditions. Some of the most popular ones are the one-year Treasury Bill, the five-year Treasury note, the Cost of Funds Index and the Federal Home Loan Bank average. The lender selects an index and uses that as the starting point for the rate calculation. The interest rate is typically the index plus the margin.

Question 51

Margin

Answer 51

The lender sets a margin, usually between two percent and three percent, at the time of a loan's origination. The margin is added to the current index to set the interest rate

Question 52

Calculated Rate, or Note Rate

Answer 52

The index plus the margin establishes the calculated rate, or note rate.

Question 53

Initial Rate

Answer 53

lower than the current market rate and is fixed only for the first adjustment period set by the lender at the origination of the loan. In all probability, the interest rate will increase in the second adjustment period.

Question 54

Adjustment Period

Answer 54

specifies a specific time at which the interest rate may change. The adjustment period may be for any period of time but one year, three years and five years are the most common.

Question 55

Mortgage Payment Adjustment Period

Answer 55

determines when the lender will change the amount of the monthly payment to reflect the change in the interest rate.

Question 56

Interest Rate Caps

Answer 56

To protect borrowers from unlimited increases in the interest rate, lenders establish "rate caps.

Question 57

Payment Cap

Answer 57

insures a set monthly payment that remains the same although the actual interest rate may fluctuate throughout the year. A common payment cap is 7.5 percent of the initial payment. In this instance a monthly payment of $900 could not vary either up or down by more than $67.50 per month in any one-year period.

Question 58

Negative Amortization Cap

Answer 58

limits the amount of unpaid interest that the lender can actually add to the principal balance

Question 59

What is the major difference between prequalification and preapproval?

Answer 59

Prequalification is an informal process that a lender or an agent can do. Preapproval is a formal process that only a lender can do and it involves an actual loan application.

Question 60

What risks do lenders face when making a mortgage loan?

Answer 60

The borrower will not be able to repay the loan. | If the borrower defaults on the loan, the property will be worth less than what is still owed on the loan.

Question 61

What kind of problem can result from a straight loan?

Answer 61

A straight loan is an interest-only loan. If the property doesn't appreciate in value over time, the borrower could end up with less in proceeds on the sale than what he needs to pay off the loan.

Question 62

What kinds of limits are placed on the interest rate in an adjustable rate mortgage?

Answer 62

Interest rate caps limit the amount of interest the borrower can be charged. Periodic caps limit the amount the rate can change at any one time. Overall (or aggregate) caps limit the amount the interest can increase over the life of the loan.

Question 63

Loan Types

Answer 63

Conventional | Government

Question 64

Government Backed Loans

Answer 64

The Federal Housing Administration (FHA) The Department of Veterans Affairs (DVA) – sometimes simply referred to as VA Rural Housing Service (RHS) Texas Department of Housing and Community Affairs (TDHCA) Texas Veterans Land Board (VLB)

Question 65

Advantages Conventional Loans

Answer 65

Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. typically have fewer forms and processing can be more flexible than government usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits In the event of a loan refusal, borrowers have other lenders that they can make application to. There is only one of each government agency type Conventional lenders are much more flexible. Many offer a variety of loans with attractive provisions.

Question 66

Disadantages Conventional Loans

Answer 66

Typically conventional loans require higher down payments than government- Some conventional loans carry prepayment penalties, while government-backed loans do not.

Question 67

Conventional Mortgage

Answer 67

most common type of loan and is generally viewed as the most secure. Most conventional loans require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property's sale price.

Question 68

Fixed Rate Mortgages

Answer 68

Most conventional loans have traditionally been designed as fixed-rate loans. With this common type of mortgage program, the monthly payments for interest and principal never change

Question 69

Private Mortgage Insurance

Answer 69

usually insures the top 30% of a loan, protecting the lender in case the borrower defaults on the loan

Question 70

List two advantages of conventional loans over government-backed loans. (See other correct answers on screen.)

Answer 70

Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency.

Question 71

Most conventional loans require the borrower to make how much of a down payment?

Answer 71

Most conventional loans require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property's sale price.

Question 72

What are the two distinct features of fixed-rate fully amortized loans?

Answer 72

The interest rate remains fixed for the life of the loan. | The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

Question 73

What does federal law say about the termination of private mortgage insurance?

Answer 73

Federal law requires that any loans originated after July of 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments. However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI

Question 74

Graduated Payment Mortgage GPM

Answer 74

the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage

Question 75

Pleadged Account Mortgage

Answer 75

type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender. The account is drawn on during the first three to five years of the loan to supplement the periodic mortgage payments, thereby reducing the borrower's monthly payments in the initial years. Once the account is empty, the borrower makes the full mortgage payment.

Question 76

Buydown

Answer 76

variation of the PAM described above. In a buydown, the lump sum payment that is made to the lender at closing usually comes from a builder as an incentive to the buyer or from a family member trying to help out. That payment serves to reduce the interest rate on the loan for the first few years. At the end of that time, the rate rises. The lender assumes the borrower's income will also have risen during these years and he or she will be able to make the increased payments.

Question 77

Open End Loan

Answer 77

an expandable loan which gives a borrower a limit up to which he or she may borrow. Each incremental advance must be secured by the same mortgage and any advances may not exceed the original borrowing limit.

Question 78

Blanket Loan

Answer 78

covers more than one piece of property. Land developers commonly use blanket mortgages when they buy a plot of land and divide it into many separate lots.

Question 79

Wraparound Loan

Answer 79

allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan.

Question 80

Bridge Loan

Answer 80

hort-term loan that covers the period between the end of one loan and the beginning of another

Question 81

Purchase Money Mortgage

Answer 81

most commonly a technique in which the buyer borrows from the seller in addition to the lender.

Question 82

Land Contract

Answer 82

with an installment land sales contract, also called a contract for deed, the buyer does not receive legal title until the final payment is made

Question 83

Construction Loan

Answer 83

finance the construction of improvements to property, such as homes, apartments and office buildings. The lender commits to the full amount of the loan, but disburses payments over the life of the construction project.

Question 84

Home Equity Loan

Answer 84

borrow against the equity they have built up in their home.

Question 85

Package Mortgage

Answer 85

includes all the personal property and appliances that are installed on the property

Question 86

Reverse Annuity Mortgage

Answer 86

different from the others. With a reverse annuity mortgage, the lender is making payments to the borrower. This system allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell

Question 87

Shared Equity Mortgage

Answer 87

form of participation mortgage in which the lender shares in the appreciation of a mortgaged property if and when the property sells

Question 88

Sale and Leaseback

Answer 88

typically used by commercial enterprises to free up money that has been tied up in the real estate to use as working capital in the business.

Question 89

Greg and Joyce purchased a home from the builder who offered to pay $5,000 at closing as an incentive to get them to buy. What kind of mortgage will they get?

Answer 89

A buydown mortgage

Question 90

What is a release clause and in what type of mortgage would you find this clause?

Answer 90

This clause, found in a blanket mortgage, allows the borrower to obtain a release of any individual lot from the lien by repaying a certain part of the loan. The lender will issue the partial release for the one lot, with the provision that the mortgage will continue to cover the remaining lots.

Question 91

Define a purchase money mortgage.

Answer 91

With a purchase money mortgage, the buyer borrows from the seller in addition to the lender. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount, so the seller "takes back" a portion of the purchase price as a second mortgage.

Question 92

Describe a reverse annuity mortgage.

Answer 92

With this type of mortgage, the lender makes payments to the borrower. This system allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell.