National Finance Flashcards

Question

The provisions of the Truth in Lending Act require all of these to be disclosed to a residential buyer EXCEPT A) the loan interest rate. B) a loan origination fee. C) discount points. D) the real estate brokerage commission.

Answer 1

The provisions of the Truth in Lending Act require all of these to be disclosed to a residential buyer EXCEPT A) the loan interest rate. Incorrect Answer B) a loan origination fee. Incorrect Answer C) discount points. Incorrect Answer D) the real estate brokerage commission. Correct Answer Explanation The Truth in Lending Act has to do with disclosing details of the proposed loan to a potential purchaser. The Act does not deal with brokerage commissions. Discount points, loan origination fees, and the loan interest rate are required by Truth in Lending Act. Reference: Finance > Laws Affecting Financing and Lending

Answer 2

A buyer wants a loan that has no adjustments or balloons and that will pay all the monthly taxes and insurance, along with principal and interest. The buyer also wants to have the loan fully paid off when the last payment is made. The lender will MOST likely recommend which loan? A) Term budget loan Incorrect Answer B) Adjustable-rate mortgage (ARM) budget loan Incorrect Answer C) Partially amortized budget loan Incorrect Answer D) Fully amortized budget loan Correct Answer Explanation Budget loans include payments for taxes and insurance and can be used with any loan payment type. The buyer also wanted the loan fully paid off with the last payment and only a fully amortized loan can do that without a balloon. Reference: Finance > Types of Loans

Answer 3

A land contract, contract for deed, or installment contract has been reached between the seller and the buyer. It MOST likely means that A) the mortgagee finances the property and retains title until the final payment is made by the mortgagor. Incorrect Answer B) the mortgagor finances the property and retains title until the final payment is made by the mortgagee. Incorrect Answer C) the buyer finances the property and retains title until the final payment is made by the seller. Incorrect Answer D) the seller finances the property and retains title until the final payment is made by the buyer. Correct Answer Explanation The answer is the seller finances the property and retains title until the final payment is made by the buyer. In a land contract, the seller will finance the property and retain title until final payment from the buyer is made. Mortgagor/borrower and mortgagee/lender are used when a mortgage is being used not a land contract. Reference: Financing > Types of Loans

Answer 4

Federal income tax regulations allow homeowners to reduce their taxable income by amounts paid for A) repairs and maintenance. Incorrect Answer B) both principal and interest. Incorrect Answer C) real estate property taxes. Correct Answer D) hazard insurance premiums. Incorrect Answer Explanation Points for loans, some origination fees, mortgage interest, and real estate property taxes can be deducted on income tax returns (remember POIT). The law does not permit tax deductions for ordinary repairs, home maintenance, and hazard insurance premiums. Reference: Finance > Special Processes

Answer 5

A couple applying for a residential mortgage loan has a combined monthly gross income of $8,000. Their total housing expense with a new loan would be $1,770, including principal, interest, taxes, and insurance (PITI). Their total debt expense, including housing expenses, would be $2,800. Under these conditions, would the couple qualify for a conforming loan under Fannie Mae guidelines? A) Yes, because their debt-to-income ratios are within criteria set by Fannie Mae. Correct Answer B) No, because their total housing expense is more than 50% of their total debt expense. Incorrect Answer C) Yes, because their total housing expense is less than 60% of their total debt expense. Incorrect Answer D) No, because their debt-to-income ratio exceeds the limits set by Fannie Mae. Incorrect Answer Explanation A conforming loan is one that qualifies under debt-to-income ratios set by Fannie Mae. The borrower's total housing expense must be no more than 28% of gross monthly income, and the borrower's total debt expense, including housing, must be no more than 36% of gross monthly income. To find the total housing expense ratio, divide the total housing expense ($1,770) by the monthly gross income ($8,000): 1,700 ÷ 8,000 = 22%. To find the total debt expense, divide that expense ($2,800) by the monthly gross income ($8,000): 2,800 ÷ 8,000 = 35%. In this situation, if their credit score and history are considered good by the lender, the couple would qualify for a conforming conventional loan. Reference: Finance > Special Processes

Answer 6

For the borrower, one discount point equals A) 1% of the loan amount. Correct Answer B) 2% of the purchase price. Incorrect Answer C) 1% of the purchase price. Incorrect Answer D) 2% of the loan amount. Incorrect Answer Explanation A discount point is 1% of the loan amount, not the purchase price. If a house sells for $100,000 and the borrower seeks an $80,000 loan, each discount point would be $800 (not $1,000): 1% (0.01) × 80,000 = 800. Reference: Finance > Terminology

Answer 7

Fannie Mae is an agency that A) guarantees payment of Freddie Mac mortgages. Incorrect Answer B) operates mostly in the primary mortgage market. Incorrect Answer C) buys mostly Federal Housing Administration (FHA) loans. Incorrect Answer D) operates mostly in the secondary mortgage market. Correct Answer Explanation Fannie Mae provides a secondary market for mortgage loans. Fannie Mae does buy FHA loans but deals primarily in conventional loans. Fannie Mae does not provide loans in the primary mortgage market or guarantee payment of loans. Reference: Finance > Sources of Financing (Primary and Secondary Mortgage Markets)

Answer 8

The borrower discovers that the loan is not assumable. What clause did the borrower find? A) Defeasance Incorrect Answer B) Acceleration Incorrect Answer C) Subordination Incorrect Answer D) Due on sale Correct Answer Explanation The alienation/due on sale clause requires when the property is sold the loan must be paid off and is not assumable. Acceleration is used when the borrower is in default and allows the lender to call the note due and payable. Reference: Finance > Terminology

Answer 9

The component of an adjustable-rate mortgage (ARM) that limits the percentage that the interest rate may increase over a specific time period, usually a year, is A) the margin. Incorrect Answer B) the life-of-the loan rate cap. Incorrect Answer C) the rate cap. Correct Answer D) the payment cap. Incorrect Answer Explanation The rate cap limits the amount an ARM's interest rate may change over a specific period of time, usually a year. The life-of-the loan rate cap limits the amount the rate may increase over the entire life of the loan. The payment cap sets a maximum amount the borrower will have to pay for a mortgage payment. The margin is the premium added to the index rate to adjust an ARM's interest rate. Reference: Finance > Types of Loans

Answer 10

A mortgage broker generally A) provides credit qualification and evaluation reports. Incorrect Answer B) brings the borrower and the lender together. Correct Answer C) grants real estate loans using investor funds. Incorrect Answer D) handles the escrow procedures. Incorrect Answer Explanation A mortgage broker is an intermediary who brings borrowers and lenders together. A mortgage broker locates potential borrowers, processes preliminary loan applications, and submits the applications to lenders for final approval. Mortgage brokers do not provide loans, handle escrow funds, or check borrowers' creditworthiness for loans. Reference: Finance > Terminology

Answer 11

A fixed-rate home loan that is fully amortized according to the original payment schedule A) permits the borrower to pay the same amount each payment period. Correct Answer B) has an interest rate that fluctuates based on an economic index. Incorrect Answer C) requires a monthly payment amount that fluctuates each month. Incorrect Answer D) cannot be sold in the secondary market. Incorrect Answer Explanation A fully amortized loan is a level-payment loan, with the same amount being paid by the borrower each payment period (usually monthly). The loan can be sold in the secondary market. An adjustable-rate mortgage has an interest rate that fluctuates based on an economic index. Reference: Finance > Types of Loans

Answer 12

Under current regulations, a U.S. Department of Veterans Affairs (VA) loan is assumable if A) the VA approves both the buyer and the assumption agreement. Correct Answer B) the VA approves the buyer only. Incorrect Answer C) the VA approves the assumption agreement only. Incorrect Answer D) the veteran agrees not to request a release of liability for repayment. Incorrect Answer Explanation For VA loans made after March 1, 1988, the VA must approve both the buyer and the assumption agreement before the loan may be assumed. The original veteran borrower remains personally liable for the loan unless the VA approves a release of liability after certain conditions are met. Reference: Finance > Types of Loans

Answer 13

When a mortgage loan has been paid in full, it is important for the borrower to be sure that A) the paid mortgage is returned to the lender. Incorrect Answer B) the paid note is placed in a safe deposit box. Incorrect Answer C) a deed of partial reconveyance is obtained. Incorrect Answer D) a satisfaction of the mortgage is recorded in the public record. Correct Answer Explanation When a note has been fully paid, the lender is required to execute a satisfaction (also known as a release or discharge). This document returns all ownership interest in the real estate originally conveyed to the lender. Entering the release into the public record shows that the debt has been removed from the property. Reference: Finance > Special Processes

Answer 14

In a Federal Housing Administration (FHA) insured loan transaction, A) the interest rate is set by the FHA. Incorrect Answer B) the discount points may be paid by the seller or the buyer. Correct Answer C) the mortgage insurance premium must be paid by the seller. Incorrect Answer D) the mortgage insurance premium may be paid by the seller or the buyer. Incorrect Answer Explanation Either the seller or the buyer may pay discount points in an FHA loan transaction. Interest rates are not set by the FHA but are negotiated between the lender and the buyer. An FHA loan includes a one-time upfront mortgage insurance premium (MIP), which can be financed, paid by the buyer, with an additional ½% MIP added to the monthly payments. Reference: Finance > Types of Loans

Answer 15

A silent second is a form of mortgage fraud perpetrated by which of the following two parties? A) The seller and the buyer Correct Answer B) The buyer and the first mortgage lender Incorrect Answer C) The seller and the first mortgage lender Incorrect Answer D) The first mortgage lender and the second mortgage lender Incorrect Answer Explanation A silent second is a type of mortgage fraud perpetrated by the seller and the buyer. A silent second is a loan (i.e., an extension of credit) that the seller gives the buyer to help with a portion of the down payment, and neither party informs the first mortgage lender. Why is this considered mortgage fraud? Major institutional lenders carefully calculate how much debt a borrower can handle based on the borrower's assets, monthly income, and recurring debt. This silent second might very well increase a borrower's debt load beyond the borrower's ability to pay, thereby increasing the chances that the borrower will default on the primary mortgage loan. Reference: Finance > Mortgage Fraud and Predatory Lending

Answer 16

The ratio of debt to the value of the property is A) the amortization ratio. Incorrect Answer B) the capital-use ratio. Incorrect Answer C) the debt-to-equity ratio. Incorrect Answer D) the loan-to-value (LTV) ratio. Correct Answer Explanation The LTV ratio is the ratio of debt to the value of the property, value being the sales price or appraisal value, whichever is less. The amortization rate is the interest rate in an amortized loan. Reference: Finance > Terminology

Answer 17

A borrower borrowed $100,000 from a family member, and used a parcel of real estate as collateral for the loan. During the loan origination phase, the borrower signed two documents: a promissory note and a trust deed. After paying the loan in full, the borrower received a document called Satisfaction of Lien. This document was inadequate because A) it didn’t show the lien was removed from the parcel of real estate. Incorrect Answer B) it didn’t reconvey bare legal title back to the former borrower. Correct Answer C) none of these. Incorrect Answer D) it didn’t show the loan was satisfied. Incorrect Answer Explanation Both mortgages and trust deeds are security instruments that turn a parcel of real estate into collateral for a loan. A lender wants collateral so that, in the event the borrower defaults, the lender can take back or sell the collateral at a foreclosure sale. A mortgage is between two parties (i.e., the lender and the borrower), and is merely a lien without any impact on title to the property. A Satisfaction of Mortgage shows the loan has been paid in full and the lien has been lifted from the title. A trust deed (a.k.a. a deed of trust) is also a loan document, but there is a third party called the trustee. The borrower conveys bare legal title to the trustee to hold until the loan is paid in full. After the loan is paid in full, the trustee must return or reconvey bare legal title back to the former borrower. An interest in real estate is conveyed with a written deed: The trustee executes (signs) a reconveyance deed to return bare legal title to the borrower. The reconveyance deed (a.k.a. a deed of reconveyance) does two things: 1) it reconveys bare legal title back to the former borrower, and 2) it shows the lien has been lifted from the property. A Satisfaction of Lien does show a lien has been satisfied and removed from a parcel of real estate. Reference: Finance > Lien Theory Versus Title Theory

Answer 18

To qualify for a conventional loan under Fannie Mae guidelines, a borrower's total monthly obligations, including housing costs plus other regular monthly payments, must NOT exceed A) 28% of the borrower’s total monthly gross income. Incorrect Answer B) 36% of the borrower’s total monthly gross income. Correct Answer C) 36% of the borrower’s total monthly net income. Incorrect Answer D) 28% of the borrower’s total monthly net income. Incorrect Answer Explanation Generally speaking, a conventional loan under Fannie Mae guidelines requires that a borrower's total monthly obligations, including housing costs plus other regular monthly payments, not exceed 36% of the borrower's total monthly gross income. A borrower's monthly housing expenses, including principal, interest, taxes, and insurance (PITI), must not exceed 28% of the borrower's total monthly gross income. Reference: Finance > Laws Affecting Financing and Lending

Answer 19

A developer had a mortgage loan on his entire housing subdivision. When he sold a lot to a buyer, he was able to deliver title to that lot free of the mortgage lien by obtaining a partial release. The developer's loan is A) an open-end mortgage. Incorrect Answer B) a package mortgage. Incorrect Answer C) a blanket mortgage. Correct Answer D) a purchase money mortgage. Incorrect Answer Explanation A blanket loan covers more than one parcel or lot. Usually, the loan contains a provision called a partial release clause, which allows the borrower to obtain the release of a lot from the blanket lien by repaying a certain amount of the loan. A purchase money mortgage is a second mortgage given back to the seller by a buyer to bridge the gap between the borrower's down payment and the first mortgage. In a package mortgage, the borrower pledges both personal and real property as security for a loan. An open-end mortgage secures a note executed by the borrower to the lender, as well as any advances of funds made by the lender to the borrower. Reference: Finance > Types of Loans

Answer 20

An individual who obtains a real estate loan and signs a note and a mortgage is known as A) the optionor. Incorrect Answer B) the optionee. Incorrect Answer C) the mortgagor. Correct Answer D) the mortgagee. Incorrect Answer Explanation The borrower who receives a loan and in return gives a note and mortgage to the lender is the mortgagor. The lender is called the mortgagee. An optionor is an owner who gives an optionee, a prospective purchaser or lessee, the right to buy or lease the owner's property at a fixed price within a certain period of time. Reference: Finance > Terminology

Answer 21

A mortgage in which a payment partially pays off both the principal and interest on the loan is A) a reverse mortgage. Incorrect Answer B) an interest-only loan. Incorrect Answer C) an amortized loan. Correct Answer D) a construction loan. Incorrect Answer Explanation The payment in an amortized loan partially pays off both principal and interest. An interest-only mortgage requires the payment of interest only for a stated period of time, with the principal balance due at the end of the loan or with the remaining principal balance and interest recalculated after the stated period. A reverse mortgage allows people 62 years or older to borrow money against the equity built in their home, and no payments are due until the property is sold or the borrower defaults, moves, or dies. A construction loan is generally short-term or interim financing in which the borrower pays interest only on the monies that have been disbursed in draws used to pay for construction. Reference: Finance > Types of Loans

Answer 22

Buyers seeking a mortgage on a single-family residence would be LEAST likely to obtain the mortgage from A) a life insurance company. Correct Answer B) a mutual savings bank. Incorrect Answer C) a commercial bank. Incorrect Answer D) a credit union. Incorrect Answer Explanation Life insurance companies make mortgage loans on large projects but rarely, if ever, on individual home purchases. Mutual savings banks, credit unions, and commercial banks are all sources of mortgages for individual residences. Reference: Finance > Sources of Financing (Primary and Secondary Mortgage Markets)

Answer 23

The federal Equal Credit Opportunity Act (ECOA) allows lenders to discriminate against potential borrowers on the basis of A) age. Incorrect Answer B) amount of income. Correct Answer C) race. Incorrect Answer D) dependence on public assistance. Incorrect Answer Explanation Lenders may reject applicants who have insufficient income for the loans they are requesting or for their lack of ability to repay the loans. Lenders may not discriminate against potential borrowers on the basis of race, color, religion, national origin, sex, marital status, age, or dependence on public assistance. Reference: Finance > Laws Affecting Financing and Lending

Answer 24

What is the major difference between conventional and government loans? A) A conventional loan is sold on the secondary market, while a loan is not. Incorrect Answer B) A government loan is sold on the secondary market, while a conventional loan is not. Incorrect Answer C) A government loan is insured or guaranteed by the government, while a conventional loan is not. Correct Answer D) A conventional loan is guaranteed or insured by the government, while a government loan is not. Incorrect Answer Explanation Government loans, such as Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loans, are insured or guaranteed by the government. Conventional loans are not insured or guaranteed by the government. Both government and conventional loans may be sold on the secondary market. Reference: Finance > Types of Loans

Answer 25

In a fixed-rate, fully amortized loan A) the principal amount in each payment is greater than the interest amount. Incorrect Answer B) each mortgage payment reduces the principal by the same amount. Incorrect Answer C) a balloon payment will be made at the end of the loan. Incorrect Answer D) each mortgage payment amount is the same. Correct Answer Explanation A fully amortized loan is paid off slowly, over time, in equal payments. Regular periodic payments are made over a term of years. In a partially amortized loan, such as a balloon mortgage, the principal and interest payments do not pay off the entire loan. A loan balance remains when the final payment is made. In the fully amortized loan, the lender credits each payment first to the interest due, then to the principal amount of the loan. As a result, while each payment remains the same, the portion applied to repayment of the principal grows and the interest due declines as the unpaid balance of the loan is reduced. Reference: Finance > Types of Loans

Answer 26

A home is purchased using a fixed-rate, fully amortized mortgage loan. With this loan, A) a balloon payment will be made at the end of the loan. Incorrect Answer B) the principal amount in each payment is greater than the interest amount. Incorrect Answer C) each mortgage payment amount is the same. Correct Answer D) each mortgage payment reduces the principal by the same amount. Incorrect Answer Explanation In a fully amortized loan, there will be no balloon payment because the periodic payments fully repay the loan by the end of the term period. Each mortgage payment reduces the principal by a slightly different (increasing) amount, but each mortgage payment (principal and interest) is the same. Reference: Finance > Types of Loans

Answer 27

A borrower obtained a $7,000 second mortgage loan for five years at a 6% interest annual interest rate. Monthly payments of principal and interest were $50. The final payment included the remaining outstanding principal balance. What type of loan is this? A) Fully amortized loan Incorrect Answer B) Partially amortized loan Correct Answer C) Straight loan Incorrect Answer D) Accelerated loan Incorrect Answer Explanation A partially amortized loan is a loan with a partial balloon payment. Principal is still owed at the end of the term, because periodic payments are not enough to fully amortize the loan and the final payment is larger than the others. A straight or interest only is a loan in which the borrower makes periodic payments of interest only, followed by a lump sum balloon payment of the full principal at the end of the term. In a fully amortized loan, the borrower pays both principal and interest in equal periodic payments over the life of the loan. An accelerated loan is a loan paid off early, in which the borrower pays the full balance owed at a time of default, sale of the property, or to redeem the property before foreclosure. Reference: Finance > Types of Loans

Answer 28

A borrower negotiates a 15-year term for a mortgage rather than choosing a longer, 30-year term. The shorter term for the mortgage will result in A) a higher interest rate. Incorrect Answer B) a higher monthly payment. Correct Answer C) a lower monthly payment. Incorrect Answer D) the same monthly payment as for a longer term loan. Incorrect Answer Explanation Because the borrower will be paying off the loan in a shorter time, the borrower will be required to pay a higher monthly payment. The lender may offer a lower interest rate for a shorter loan term, but the lender may offer the same interest rate for a loan regardless of its term. Reference: Finance > Types of Loans

Answer 29

Which of these are NOT costs or expenses of owning a home? A) Taxes on personal property Correct Answer B) Homeowners insurance Incorrect Answer C) Interest paid on borrowed capital Incorrect Answer D) Maintenance and repairs Incorrect Answer Explanation Personal property is not real estate. Non-homeowners and homeowners may pay taxes on personal property. Such taxes are not directly related to home ownership. Mortgage interest, home maintenance and repairs, and homeowners insurance all are costs directly related to owning a home. Reference: Finance > Special Processes

Answer 30

The charge for the use of the lender's money in a loan is A) the interest. Correct Answer B) the equity. Incorrect Answer C) the rate of return. Incorrect Answer D) the principal. Incorrect Answer Explanation Interest is the sum paid or accrued in return for the use of a lender's money. Interest on a promissory note is usually due in arrears at the end of each payment period. The rate of return is the return on the investment in a property. An owner's equity is the amount of money remaining once current liens, including the mortgage, are subtracted from the current value of the property. The principal is the balance owed on the original loan amount. Reference: Finance > Terminology

Answer 31

In a title theory state, the trustee on a trust deed holds bare legal title on behalf of A) the mortgagee. Incorrect Answer B) the beneficiary. Correct Answer C) the mortgagor. Incorrect Answer D) the trustor. Incorrect Answer Explanation The best answer choice is the beneficiary. A lender on a trust deed is called a beneficiary. The trustee holds bare legal title on behalf of the lender while the loan is outstanding and will manage the foreclosure in the event of borrower default. Mortgagor and trustor are terms that refer to borrowers; the trustee on a trust deed does not hold bare legal title on behalf of the borrower. A mortgagee is a lender, but beneficiary is the better choice because it is the specific term used on a trust deed. Reference: Finance > Lien Theory Versus Title Theory

Answer 32

A homeowner has owned her house for over 50 years. It has fallen into disrepair, but because she lives on a fixed income, she does not have the money to make the needed repairs. She has a considerable amount of equity in the house. What type of loan would BEST provide her the funds to make the necessary repairs? A) Open-end loan Incorrect Answer B) Blanket loan Incorrect Answer C) Home equity loan Incorrect Answer D) Reverse mortgage Correct Answer Explanation A reverse mortgage allows people 62 years of age or older who have considerable equity in their homes to borrow money against that equity. No payments are due until the property is sold or the borrower defaults, moves, or dies. A home equity loan uses the equity in the home as a source of loans but requires monthly payments of principal and interest that may be burdensome to older persons on a fixed income. A blanket loan covers more than one parcel or lot and permits the borrower to obtain a release of a parcel or lot from the mortgage lien when the lot is sold. An open-end mortgage is an expandable loan in which borrowers are given a limit up to which they may borrow, with each advance secured by the same mortgage. Reference: Finance > Types of Loans

Answer 33

The type of mortgage loan that uses both real and personal property as security is A) a term loan. Incorrect Answer B) a purchase money mortgage. Incorrect Answer C) a package loan. Correct Answer D) a blanket loan. Incorrect Answer Explanation A package loan includes not only the real estate but also all personal property and appliances installed on the premises. A blanket loan covers more than one parcel or lot and permits the borrower to obtain a release of a parcel or lot from the mortgage lien when the lot is sold. A purchase money mortgage refers to the instrument given by a borrower to a seller who takes back a note for part or the entire mortgage. A term/straight or interest-only loan secures only real property. Reference: Finance > Types of Loans

Answer 34

A disadvantage of a term or partial amortization loan over a fully amortized is A) the higher loan-to-value (LTV) ratio required. Incorrect Answer B) the longer term of repayment required. Incorrect Answer C) the higher interest costs. Incorrect Answer D) the balloon payment due at the end of the term. Correct Answer Explanation Term and partially amortized loans have lower interest costs, due to a shorter term of repayment. The higher the LTV, the lower the down payment, so a high LTV would be an advantage. Reference: Finance > Types of Loans

Answer 35

The Consumer Financial Protection Bureau (CFPB) requires that A) lenders provide a closing statement to all purchasers of residential or commercial properties. Incorrect Answer B) brokers be responsible for verifying that the new loan disclosure matches the new loan estimate. Incorrect Answer C) real estate brokers and lenders must include the annual percentage rate (APR) and all charges in all real estate advertisements. Incorrect Answer D) lenders provide the borrower with a new loan estimate at the time of application or no more than three days after application. Correct Answer Explanation CFPB provides that the lender provide the borrower with a new loan estimate of the settlement costs no more than three business days after receiving the loan application. The law requires full disclosure of APR and terms if certain items are included in the advertisement; it does not apply to all ads. The law does not apply to the purchase of commercial properties. CFPB does not require brokers to verify that the new loan closing disclosure matches a new loan estimate as there may have been changes. Reference: Finance > Laws Affecting Financing and Lending

Answer 36

The primary activity of Fannie Mae is to A) guarantee mortgages with the full faith and credit of the federal government. Incorrect Answer B) act in tandem with Ginnie Mae to provide special assistance in times of tight money. Incorrect Answer C) buy and pool blocks of conventional mortgages and sell bonds that use them as security. Correct Answer D) buy and sell only Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) mortgages. Incorrect Answer Explanation Fannie Mae buys and gathers existing conventional mortgages into bundles (pools) and raises money to do this by selling bonds backed by these pools of mortgages. Ginnie Mae is a division of the Department of Housing and Urban Development (HUD) that administers programs using VA and FHA loans as collateral. Reference: Finance > Sources of Financing (Primary and Secondary Mortgage Markets)

Answer 37

A purchaser cannot qualify for conventional financing and negotiates a contract for deed with a seller. The buyer in this arrangement A) must lease the property from the seller for the duration of the contract term. Incorrect Answer B) has possession and pays the property expenses and taxes. Correct Answer C) has a full legal interest in the property. Incorrect Answer D) receives a deed to the property at closing. Incorrect Answer Explanation In a contract for deed arrangement, the buyer takes full possession of the property and gets equitable title to the property. The buyer agrees to pay real property taxes, insurance premiums, and for the upkeep of the property. The seller is not obligated to execute and deliver the deed for the property to the buyer until all the terms of the contract have been satisfied. Reference: Finance > Types of Loans

Answer 38

All of these clauses in a loan agreement enable the lender to demand that the entire remaining debt be paid immediately EXCEPT A) an acceleration clause. Incorrect Answer B) a defeasance clause. Correct Answer C) an alienation clause. Incorrect Answer D) a due-on-sale clause. Incorrect Answer Explanation A defeasance clause requires the lender to execute a satisfaction of the loan when the loan has been fully paid. A due-on-sale clause provides that when the property is sold, the lender may declare the entire debt due or permit the buyer to assume the loan. An alienation clause states that the lender may collect full payment on a loan if the property is conveyed to another party without the lender's consent. An acceleration clause permits the lender to declare the entire debt payable immediately if the borrower defaults on payments on the loan. Reference: Finance > Terminology

Answer 39

Under a contract for deed or installment contract, the legal title to the property is held by A) the buyer/vendee. Incorrect Answer B) the seller/vendee. Incorrect Answer C) the buyer/vendor. Incorrect Answer D) the seller/vendor. Correct Answer Explanation A contract for deed or installment contract is also known as a land contract. Under the contract, the buyer/vendee holds equitable titles and agrees to make a down payment and a monthly loan payment that includes interest and principal. The seller/vendor retains legal title to the property during the contract term. Reference: Finance > Types of Loans Reference: Real Estate Financing > National

Answer 40

When an eligible veteran is negotiating to purchase a home with a U.S. Department of Veterans Affairs (VA)-guaranteed loan, as part of the loan process, the VA will issue A) a uniform residential appraisal report (URAR). Incorrect Answer B) a certificate of indebtedness. Incorrect Answer C) a certificate of reasonable value (CRV). Correct Answer D) a certificate of discount. Incorrect Answer Explanation The VA will issue a certificate of reasonable value based on a VA-approved appraisal of the property. The URAR is a standardized form used by licensed and certified appraisers to produce an opinion of value on residential property. Reference: Finance > Types of Loans

Answer 41

A purchaser is qualified to obtain a Federal Housing Administration (FHA) loan for his new home. Which of these would he apply to? A) Fannie Mae Incorrect Answer B) The FHA Incorrect Answer C) An FHA lender Correct Answer D) Freddie Mac Incorrect Answer Explanation The FHA does not negotiate loans. The FHA insures loans, which means the loan is backed by the government. Loans are made through an FHA-approved lending institution. Fannie Mae does not lend money directly to homebuyers but purchases mortgages in the secondary market. Freddie Mac is a federally chartered corporation that purchases mortgages in the secondary market. Reference: Finance > Types of Loans

Answer 42

Funds for Federal Housing Administration (FHA) loans are usually provided by A) the seller. Incorrect Answer B) the FHA. Incorrect Answer C) qualified lenders. Correct Answer D) the Federal Reserve. Incorrect Answer Explanation An FHA loan is insured by the FHA, and funds must be made available by FHA-approved lenders. Funds are not provided by the Federal Reserve, the FHA, or the seller. Reference: Finance > Types of Loans

Answer 43

A homeowner's son starts college soon. The homeowner has lived in her home for 10 years. To obtain funds to pay for her son's schooling, the homeowner might use A) an open-end loan. Incorrect Answer B) a participation mortgage. Incorrect Answer C) a home equity loan. Correct Answer D) a wraparound loan. Incorrect Answer Explanation A home equity loan can be a source for funds using the equity built up in a home as an alternative to refinancing. An open-end loan secures the current loan to the borrower and future advances made by the lender to the borrower. A wraparound loan allows the borrower to obtain additional financing, retaining the first loan on the property. In a participation mortgage, a lender participates in the income of the mortgaged property beyond a fixed return. Reference: Finance > Types of Loans

Answer 44

In a fixed-rate home loan that is amortized according to its original payment schedule, A) the interest rate may change based on an index. Incorrect Answer B) the monthly payment amount will fluctuate each month. Incorrect Answer C) the amount of interest to be paid is predetermined. Correct Answer D) the loan cannot be sold in the secondary market. Incorrect Answer Explanation The monthly principal plus interest payment will remain constant throughout the term of a fixed-rate residential loan. The interest rate in a fixed-rate loan does not vary. The loan will probably be sold on the secondary market. Reference: Finance > Types of Loans

Answer 45

To increase yield on a loan, the lender charges A) origination fees and points prepayment fees. Incorrect Answer B) setup fees interest. Incorrect Answer C) loan origination fees. Incorrect Answer D) discount points rates. Correct Answer Explanation The lender charges the borrower discount points to increase the yield, the true rate of return required by investors. Discount rates increase the lender's yield on loans. Loan origination fees cover the lender's costs in generating a loan. Interest is a charge for the use of the lender's money. A lender may recover unearned interest for payments made ahead of schedule by charging a prepayment penalty to a borrower who pays off a loan early. Reference: Finance > Terminology

Answer 46

A promissory note A) may not be executed in connection with a real estate loan. Incorrect Answer B) is an agreement to perform or not to perform certain acts. Incorrect Answer C) is a guarantee by a government agency. Incorrect Answer D) makes the borrower personally liable for the debt. Correct Answer Explanation A promissory note is the borrower's personal promise to repay a debt according to agreed-on terms. A promissory note is a contract, an agreement to perform a certain act. A borrower of real estate securing a mortgage loan will sign a promissory note agreeing to repay the loan. Reference: Finance > Terminology

Answer 47

Which of the following is a financing document without any impact on the way title is held? A) Mortgage Correct Answer B) Deed of trust Incorrect Answer C) Trust deed Incorrect Answer D) Land contract Incorrect Answer Explanation A mortgage is a financing document without an impact on the way title to the property is held. Or, in other words, a mortgage is merely a lien placed on a parcel of real estate, turning it into collateral for the borrower's loan. Throughout the lifetime of the loan, the borrower retains legal and equitable title to the property. A deed of trust (a.k.a. a trust deed) is a financing document: However, the borrower has conveyed bare legal title to the trustee for the benefit of the lender. A land contract is a type of seller financing that does impact the way title to the property is held. During the lifetime of the land contract, the seller (vendor) will hold legal title and the buyer (vendee) will hold equitable title. After the last payment is made under the land contract, the seller will give a deed to the buyer, merging legal title and equitable title in the buyer. Reference: Finance > Lien Theory Versus Title Theory

Answer 48

In a land contract, the buyer A) has possession during the term of the contract. Correct Answer B) obtains legal title at closing. Incorrect Answer C) does not pay interest and principal. Incorrect Answer D) is not responsible for the real estate taxes on the property. Incorrect Answer Explanation In a land (installment) contract, the buyer has possession of the property during the term of the contract. The buyer holds equitable title, while the seller holds legal title to the property. The buyer pays interest and principal on the loan and, in most cases, real estate taxes on the property during the term of the contract. Reference: Finance > Types of Loans

Answer 49

The component of an adjustable-rate mortgage (ARM) that sets the maximum amount the borrower will have to pay for a mortgage payment is A) the periodic rate cap. Incorrect Answer B) the margin. Incorrect Answer C) the payment cap. Correct Answer D) the life-of-the loan rate cap. Incorrect Answer Explanation The payment cap sets the maximum amount a borrower will have to pay for a mortgage payment in the term of an ARM. The periodic rate cap limits the amount an ARM's interest rate may change over a specific period of time, usually a year. The life-of-the loan rate cap limits the amount the interest rate may increase over the entire life of an ARM. The margin is the premium added to the index rate to adjust an ARM's current interest rate. Reference: Finance > Types of Loans

Answer 50

To qualify for a conventional loan under Fannie Mae guidelines, a borrower's monthly housing expenses, including principal, interest, taxes, and insurance (PITI), must NOT exceed A) 36% of the borrower’s total monthly net income. Incorrect Answer B) 28% of the borrower’s total monthly net income. Incorrect Answer C) 28% of the borrower’s total monthly gross income. Correct Answer D) 36% of the borrower’s total monthly gross income. Incorrect Answer Explanation Generally speaking, a conventional loan under Fannie Mae guidelines requires that a borrower's monthly housing expenses not exceed 28% of the borrower's total monthly gross income. The borrower's total monthly obligations, including housing costs plus other regular monthly payments, must not exceed 36% of the borrower's total monthly gross income. Reference: Finance > Laws Affecting Financing and Lending

Answer 51

A homeowner purchased her home for cash 30 years ago. Today she receives monthly checks from a mortgage lender that supplement her retirement income. The homeowner MOST likely has obtained A) a reverse mortgage. Correct Answer B) a package mortgage. Incorrect Answer C) an adjustable-rate mortgage. Incorrect Answer D) a shared-appreciation mortgage. Incorrect Answer Explanation A reverse mortgage allows people 62 or older to borrow money against the equity they have built in their homes. The equity diminishes as the loan amount increases. Reverse mortgages have a fixed rate of interest and are not adjustable. In a shared appreciation mortgage, the lender, in exchange for a favorable interest rate, participates in the profits the borrower receives upon selling the property. A package mortgage secures both real and personal property typically used in a resort purchase, where the unit is fully furnished. Reference: Finance > Types of Loans

Answer 52

If the amount realized at a sheriff's sale as part of a mortgage foreclosure is more than the amount of the indebtedness and expenses, then the excess belongs to A) the mortgagee. Incorrect Answer B) the sheriff's office. Incorrect Answer C) the mortgagor. Correct Answer D) the county. Incorrect Answer Explanation The mortgagor, or borrower, receives any money remaining from a foreclosure sale after paying the debt and any other liens. Reference: Finance > Special Processes

Answer 53

All of these are examples of seller financing EXCEPT A) a land lease contract. Correct Answer B) a contract for deed. Incorrect Answer C) a land contract. Incorrect Answer D) an installment land contract. Incorrect Answer Explanation A contract for deed form of seller financing is also known as a land contract, installment contract, and installment land contract. A land lease allows a tenant to lease land. Reference: Finance > Types of Loans

Answer 54

With a U.S. Department of Veterans Affairs (VA)-guaranteed mortgage, A) the funding fee amounts are negotiable. Incorrect Answer B) the borrower may have a prepayment penalty clause in the loan. Incorrect Answer C) discount points must be paid by the seller. Incorrect Answer D) the borrower must apply for a certificate of eligibility. Correct Answer Explanation A borrower must apply for a certificate of eligibility, which sets forth the maximum guarantee to which the veteran is entitled. Discount points can be paid by either the buyer or the seller. Prepayment penalties are prohibited. Funding fees are determined by the VA. Reference: Finance > Types of Loans

Answer 55

In determining whether a prospective buyer can afford a mortgage, a lender will typically use percentages based on A) the buyer’s gross monthly income and projected housing expenses. Incorrect Answer B) the buyer’s gross monthly income, total housing expense, and debt expenses. Correct Answer C) the buyer’s gross monthly income and most recent federal taxes. Incorrect Answer D) the buyer’s gross monthly income and debt expenses. Incorrect Answer Explanation In addition to reviewing a borrower's credit score, loan underwriters and automated underwriting programs use a formula allowing a maximum percentage of the buyer's gross monthly income for the monthly cost of buying and maintaining a home (for example, 28%). That cost includes mortgage principal and interest, plus amounts for taxes and property insurance. In addition, the formula sets a maximum percentage of the buyer's gross monthly income allowed for long-term debts, such as car payments, credit cards, student loans, and other mortgages (for example, 36%). Reference: Finance > Special Processes

Answer 56

This party administered the foreclosure process without going to court. Management of the foreclosure included recording several notices and sending certified copies of these notices to the property owner who was in default under a loan. At the foreclosure sale, this party conveyed the encumbered property to a new owner. Who was this party? A) Trustee Correct Answer B) Grantee Incorrect Answer C) Trustor Incorrect Answer D) Mortgagee Incorrect Answer Explanation Under a trust deed, the trustee manages the nonjudicial foreclosure, a process that does not involve going to court. A nonjudicial foreclosure typically involves the trustee recording two notices (the notice of default and the notice of sale) and sending certified copies of these notices to the borrower in default. At the foreclosure sale, the trustee conveys the property to the new owner using a trustee's deed upon sale (a.k.a. a trustee's deed). Who authorized the trustee to do all these foreclosure-related activities? The borrower did, by signing a trust deed that included a power of sale clause. Trustor and mortgagor both mean borrower. The trustee is the grantor executing the trustee's deed upon sale. Reference: Finance > Lien Theory Versus Title Theory

Answer 57

Real estate fraud, including mortgage fraud, is a crime under A) neither federal nor state law. Incorrect Answer B) both federal and state law. Correct Answer C) federal law. Incorrect Answer D) state law. Incorrect Answer Explanation Real estate fraud is a crime under both federal and state law. Penalties can include monetary fines and imprisonment. Reference: Finance > Mortgage Fraud and Predatory Lending

Answer 58

The difference between the current value and any liens on a property is the owner's A) equity. Correct Answer B) term. Incorrect Answer C) interest. Incorrect Answer D) principal. Incorrect Answer Explanation An owner's equity is the amount of money remaining once current liens, including the mortgage, are subtracted from the current market value of the property. The current value of a property, minus any liens, will provide the owner's equity in a property. The term is the length of time the borrower has to repay the lender. The principal is the balance remaining on the original loan amount. Interest is the charge from the lending institution for the use of money. Reference: Finance > Terminology

Answer 59

A bridge loan is best described as A) a wraparound loan that allows for a primary and secondary loan to blend into one payment. Incorrect Answer B) a package loan to finance the purchase of both real estate and personal property. Incorrect Answer C) a purchase money mortgage that secures seller financing. Incorrect Answer D) interim financing for an individual until permanent financing is obtained. Correct Answer Explanation A bridge loan is a short-term loan used for a temporary basis until permanent financing can be obtained. Reference: Finance > Types of Loans

Answer 60

A common feature of an adjustable-rate mortgage (ARM) is A) automatic conversion to a fixed-rate loan. Incorrect Answer B) negative amortization if rates decrease. Incorrect Answer C) the interest rate is fixed for a maximum of five years. Incorrect Answer D) a cap on the amount the rate may increase. Correct Answer Explanation Rate caps limit the amount the interest rate may change. Most ARMs have two types of rate caps: periodic and for the life of the loan. An ARM does not include an automatic conversion to a fixed-rate loan. A borrower who wants to convert to a fixed-rate loan will usually work with a lender to refinance the loan. Reference: Finance > Types of Loans

Answer 61

A buyer who signs a note and a mortgage is called A) the mortgagee. Incorrect Answer B) the vendor. Incorrect Answer C) the beneficiary. Incorrect Answer D) the mortgagor. Correct Answer Explanation A buyer who signs a mortgage—the document to be given to the lender—is a mortgagor. The buyer is also the maker (obligor) on the note. The lender is the mortgagee. A lender who provides a deed of trust is known as the beneficiary and is the holder of the note. A vendor is the seller in a contract. Reference: Finance > Terminology

Answer 62

A group of white-collar criminals set up an operation to steal money from a major institutional lender specializing in residential real estate mortgages. The criminals rent an office and install multiple phone lines. Each line was dedicated to a participant in the loan application process: one line was for imaginary employers, another for imaginary appraisers, a third line for an imaginary title insurance company, et cetera. The real estate that was supposed to serve as collateral for the loan did not actually exist. What is the name typically given for this type of mortgage fraud? A) Undue influence Incorrect Answer B) Loan flipping Incorrect Answer C) Ninja loans Incorrect Answer D) Air loans Correct Answer Explanation This type of mortgage fraud is called an air loan because the real estate supposedly serving as collateral for the loan does not exist. For example, the perpetrators might be getting a loan on Lot 101 in a 100-lot residential subdivision. A ninja loan is a type of fraud where the borrower has no income, no job, no assets, and lies to secure a mortgage loan. Loan flipping is a type of fraud perpetrated on a borrower. Here, the lender or broker encourages frequent refinancing to generate loan fees, not to benefit the borrower. Undue influence is the misuse of a position of trust. It is not specifically a type of mortgage fraud. Reference: Finance > Mortgage Fraud and Predatory Lending

Answer 63

Discount points on a mortgage are computed as a percentage of A) the amount borrowed. Correct Answer B) the closing costs. Incorrect Answer C) the selling price. Incorrect Answer D) the down payment. Incorrect Answer Explanation A discount point is 1% of the loan amount and is charged to the borrower at closing. Discount points are not based on the selling price or down payment. Reference: Finance > Terminology

Answer 64

Consumer Financial Protection Bureau (CFPB) states all of these for residential loans EXCEPT A) borrowers must receive information on settlement charges. Incorrect Answer B) the borrower may cancel the first home purchase loan transaction within three days after settlement. Correct Answer C) lenders must provide borrowers with a new loan estimate of closing costs. Incorrect Answer D) a new loan closing disclosure must be used at new loan closings. Incorrect Answer Explanation A borrower has no rights to cancel a first or second home purchase loan but does have cancellation rights for other loans, such as those for refinancing or home equity. CFPB does require that lenders provide borrowers with a new loan closing disclosure that states all charges to be paid by the borrower and the seller at settlement of the loan. Lenders must provide a new loan estimate of closing costs no more than three business days after receiving a loan application, along with information on settlement costs. Reference: Finance > Laws Affecting Financing and Lending

Answer 65

When a loan requires payments that do not fully pay off the loan balance by the final payment, which term BEST describes the final payment? A) Acceleration Incorrect Answer B) Balloon Correct Answer C) Adjustment Incorrect Answer D) Variable Incorrect Answer Explanation When the term of the loan is over and the payments made have not paid off the debt, the last payment is a balloon payment. The loan is called a balloon loan. Acceleration occurs when a lender calls for full payment of a loan before its term has ended. The adjustment in an adjustable-rate mortgage establishes how often the rate may be changed. A variable payment is one that may change over time, depending on the mortgage agreement. Reference: Finance > Types of Loans

Answer 66

A lender will take certain factors into consideration when deciding whether to grant a borrower a mortgage loan. A decision based on which factor is a violation of the Equal Credit Opportunity Act (ECOA)? A) Ability of the borrower to make the payments Incorrect Answer B) Creditworthiness of the borrower Incorrect Answer C) Amount of the borrower's income Incorrect Answer D) Age of the borrower Correct Answer Explanation ECOA prohibits lenders from discriminating against credit applicants on the basis of several factors, including age, race, sex, and marital status. A lender may consider a borrower's income, creditworthiness, and ability to make payments in determining whether or not to make a loan. Reference: Finance > Laws Affecting Financing and Lending

Answer 67

The Truth in Lending Act requires that lenders supply borrowers with information applying to A) any environmental issues impacting the property. Incorrect Answer B) the HUD-1 and final settlement costs. Incorrect Answer C) the true cost of credit or annual percentage rate (APR). Correct Answer D) an estimate of all the closing costs on the residential property. Incorrect Answer Explanation The Truth in Lending Act requires the disclosure of the APR or the true cost of credit on the loan. RESPA requires a new loan estimate of closing costs and a new loan closing disclosure before settlement. Reference: Finance > Laws Affecting Financing and Lending

Answer 68

A homeowner negotiates a home equity loan of $20,000 to pay for a basement renovation. The balance on the original mortgage for the home is $165,000. The home equity loan creates A) no additional lien on the property. Incorrect Answer B) a senior lien to the original mortgage lien. Incorrect Answer C) a new balance of $185,000 for the homeowner’s original mortgage. Incorrect Answer D) a junior lien to the original mortgage lien. Correct Answer Explanation With the new home equity loan, the original mortgage loan remains in first position with the equity line in second position or lower depending on the number of liens. The home equity loan is a separate loan contract, with its own balance and repayment schedule. Reference: Finance > Types of Loans

Answer 69

In a fully amortized loan, A) interest may be paid in arrears, at the end of each period for which it is earned. Correct Answer B) the final interest payment will be determined after the last payment is made. Incorrect Answer C) the interest portion of each payment increases throughout the term of the loan. Incorrect Answer D) only the interest is paid in each payment period. Incorrect Answer Explanation In fully amortized loans, interest is usually paid in arrears, although a lender may require that it be paid in advance, at the beginning of the period for which it is earned. The lender credits each payment first to the interest due, then to the principal amount. The portion applied to repayment of the principal grows, and the interest due declines as the unpaid balance of the loan is reduced. Reference: Finance > Types of Loans

Answer 70

All the following clauses in a loan agreement enable the lender to demand the entire remaining debt be paid immediately EXCEPT A) an alienation clause. Incorrect Answer B) an acceleration clause. Incorrect Answer C) a due-on-sale clause. Incorrect Answer D) a defeasance clause. Correct Answer Explanation A defeasance clause requires a lender to execute a satisfaction when the note has been fully paid. An alienation clause, also known as a due-on-sale clause, provides that when the property is sold, the lender may declare the entire debt due immediately. An acceleration clause permits the lender to demand payment of a loan balance immediately if the buyer defaults on the loan payments. Reference: Finance > Terminology

Answer 71

Which of these is the BEST example of credit history? A) A description of cash purchases Incorrect Answer B) The total amount of pending loans Incorrect Answer C) A description of how an individual uses money Correct Answer D) The total amount of newly approved loans Incorrect Answer Explanation The credit history is a record that shows the borrower's ability to repay debts. Reference: Finance > Special Processes

Answer 72

The term of a loan is A) the time period in which a borrower may cancel a loan contract. Incorrect Answer B) the length of time the borrower has to repay the loan. Correct Answer C) the time required to underwrite the loan. Incorrect Answer D) the years required to pay private mortgage insurance. Incorrect Answer Explanation For residential loans, a borrower generally negotiates with the lender a term of 15‒30 years. A longer term to repay the loan results in a lower monthly payment. A shorter term results in a higher monthly payment. Reference: Finance > Terminology

Answer 73

A borrower has just made the final payment to her lender for her home's mortgage. A lien on her property will remain until the lender records A) a reconveyance of mortgage. Incorrect Answer B) a reversion of mortgage. Incorrect Answer C) an alienation of mortgage. Incorrect Answer D) a satisfaction of mortgage. Correct Answer Explanation A satisfaction of mortgage, also known as a release or discharge, is executed by the lender when a note has been fully paid. This document returns to the borrower all ownership interest in the real estate originally conveyed to the lender. This release must be recorded in the public record to show that the debt has been removed from the property. Reference: Finance > Terminology

Answer 74

Which of these is MOST likely to play an important role in the credit application process? A) The seller’s credit score Incorrect Answer B) The age of the borrower Incorrect Answer C) The borrower’s dependence of public aid Incorrect Answer D) The borrower’s credit score Correct Answer Explanation The borrower's credit score and other basic qualifications are part of the loan application process. The Equal Credit Opportunity Act (ECOA) would make it unlawful for a lender to discriminate because of the borrower's age or dependence on public aid. Reference: Finance > Special Processes

Answer 75

A purchaser makes a 10% down payment on a house and acquires an 80% first mortgage from a lender. The seller takes back a purchase money mortgage from the buyer for the remaining 10%. In this arrangement, A) seller retains possession of the property and transfers equitable title to the buyer. Incorrect Answer B) seller has financed a portion of the purchase price and placed a junior lien on the property. Correct Answer C) seller delivers a home equity line of credit to the buyer at closing. Incorrect Answer D) buyer takes possession and the seller will deliver title upon the last payment. Incorrect Answer Explanation A purchase money mortgage is usually used to fill a gap between a buyer's down payment and a new first mortgage, as in this case in which the buyer is not able to make a full 20% down payment. The seller agrees to finance part of the purchase price (10% in this case) and records the purchase money mortgage against the property creating a lien on the property. The buyer gains possession of the property and legal title to the property. In a contract for deed, the buyer would take possession but not have legal title until paying the seller the final payment. Reference: Finance > Types of Loans

Answer 76

The borrower with a construction loan receives the loaned amount in A) stages, called draws, during the construction period. Correct Answer B) one sum at the beginning of the construction period. Incorrect Answer C) two payments at the beginning and at the end of the construction period. Incorrect Answer D) one sum at the end of the construction period. Incorrect Answer Explanation With a construction loan, the borrower receives money in stages, called draws, and makes periodic payments of interest. At the end of the construction period, the borrower must secure long-term financing to pay off the entire balance of the loan. Reference: Finance > Types of Loans

Answer 77

According to TILA-RESPA Integrated Disclosure (TRID) rules, when must the Loan Estimate form be provided to consumers? A) No later than three business days after the loan application is received by the lender Correct Answer B) No later than three business days before the closing Incorrect Answer C) No later than three calendar days before the closing Incorrect Answer D) No later than three calendar days after the loan application is received by the lender Incorrect Answer Explanation A business day includes Saturdays if the lender is open for business. Reference: Finance > Laws Affecting Financing and Lending

Answer 78

The FICO® score was designed to A) measure borrowers’ creditworthiness. Correct Answer B) access borrower’s intelligence. Incorrect Answer C) determine the property’s loan-to-value ratio. Incorrect Answer D) determine maximum loan qualifications. Incorrect Answer Explanation The FICO® Score was designed as a measure for lenders to assess a borrower's worthiness and ability to repay a loan. Lenders use other measures to determine a borrower's qualifications, maximum loan amounts, and property's value. Reference: Finance > Special Processes

Answer 79

The clause in a mortgage or deed of trust that gives a lender the right to demand that the entire loan balance be due upon the buyer's default is A) the acceleration clause. Correct Answer B) the alienation clause. Incorrect Answer C) the defeasance clause. Incorrect Answer D) the due-on-sale clause. Incorrect Answer Explanation The acceleration (speedup) clause allows the lender to declare the entire loan balance due on a borrower's default. The alienation/due-on-sale clause allows the lender to accelerate the balance due if borrowers alienate/sell their mortgaged property. The defeasance clause requires the lender to release its lien claim against the property when the entire debt has been paid. Reference: Finance > Terminology

Answer 80

Which of these BEST expresses the concept of equity? A) Current market value minus capital gain Incorrect Answer B) Replacement cost minus depreciation Incorrect Answer C) Current market value minus property debt Correct Answer D) Current market value minus cost of land Incorrect Answer Explanation Equity is the amount of money remaining after owners sell their property at market value and then pay off any mortgage debt. Equity is that portion of a property's value that exceeds the debt remaining on the property's loan. Current market value minus capital gain equals the actual total a property owner would acquire after selling a property and paying any capital gain taxes owed as a result of the sale. Current market value minus the cost of land provides the value of the improvements (home, garage, etc.) of a property. Replacement cost plus the cost of land minus depreciation equals the depreciated value of a structure. Reference: Finance > Terminology

Answer 81

A mortgage loan from a seller to a buyer to allow the buyer to complete the transaction is called A) a blanket mortgage. Incorrect Answer B) a contract for deed. Incorrect Answer C) a purchase money mortgage. Correct Answer D) a package mortgage. Incorrect Answer Explanation A purchase money mortgage is when the seller transfers legal to the buyer at closing but takes back a note for all or part of the purchase price. A contract for deed is not a mortgage loan but a contract where the seller agrees to take payments from the buyer/borrower and once the last payment is made, the buyer will receive legal title. A package mortgage is a loan secured by personal items, as well as real property. A blanket mortgage is a loan made on several properties or a number of lots in which a developer secures a partial release of the mortgage lien for each property or lot sold. Reference: Finance > Types of Loans

Answer 82

The financial return on investment in a property is known as A) the rate of return. Correct Answer B) the equity. Incorrect Answer C) the interest. Incorrect Answer D) the principal. Incorrect Answer Explanation The rate of return, usually expressed as a percentage, is the financial return on the initial investment or the appraised value of a property. The principal is the balance owed on the original loan amount. Interest is the sum paid or accrued in return for the use of a lender's money. An owner's equity is the amount of money remaining once current liens, including the mortgage, are subtracted from the current market value of the property. Reference: Finance > Terminology

Answer 83

The clause in a mortgage document that permits a lender to declare the entire debt payable if the borrower defaults on loan payments is A) an alienation clause. Incorrect Answer B) a defeasance clause. Incorrect Answer C) an acceleration clause. Correct Answer D) a subordination agreement. Incorrect Answer Explanation The acceleration clause in a mortgage permits the lender to declare the entire debt due and payable immediately if the borrower defaults on payments. The defeasance clause requires the lender to execute a satisfaction (a release or discharge) of the debt when the note has been fully paid. An alienation clause states that the lender may collect full payment on a loan when the property is conveyed to another party without the lender's consent. In a subordination agreement, a lender with a first lien position will agree to take a second lien position to another loan on the property. Reference: Finance > Terminology

Answer 84

When a homeowner with an existing mortgage gets a home equity loan to consolidate existing credit card loans, A) the lender will usually require the homeowner to refinance the existing mortgage. Incorrect Answer B) the original mortgage loan remains in place. Correct Answer C) the home equity loan takes a senior position to the original mortgage. Incorrect Answer D) the home equity loan amount is added to the existing mortgage balance. Incorrect Answer Explanation Home equity loans are a source of funds using the equity built up in a home and are an alternative to refinancing an existing mortgage. The original mortgage loan remains in place, and the home equity loan takes a junior position to the original mortgage lien. The home equity loan is a separate loan contract, with its own balance and repayment schedule. Reference: Finance > Types of Loans

Answer 85

Institutions in the secondary mortgage market A) set the interest rates required for loans made in the primary mortgage market. Incorrect Answer B) purchase a number of mortgage loans already funded and assemble them into packages to form marketable securities for investors. Correct Answer C) make direct loans to purchasers for second mortgages. Incorrect Answer D) provide loans to lenders in the primary mortgage market to raise capital for new loans. Incorrect Answer Explanation In the secondary mortgage market, loans are bought and sold only after they have been funded by lenders in the primary mortgage market. The secondary market activity enables lenders to sell mortgage loans to raise capital for new loans. Reference: Finance > Sources of Financing (Primary and Secondary Mortgage Markets)

Answer 86

The difference between a term loan and a partially amortized loan is A) the term loan will have a smaller monthly payment with a larger balloon. Correct Answer B) the partially amortized loan will have a lower payment and balloon. Incorrect Answer C) the term loan will have a larger payment and a smaller balloon. Incorrect Answer D) the partially amortized loan payment will pay the loan in full with the final payment. Incorrect Answer Explanation Term loans payments are interest only and so will be smaller than a partially amortized loan in which the payment pays both interest and principal. Reference: Finance > Types of Loans

Answer 87

An eligible veteran made an offer of $225,000 to purchase a home contingent upon obtaining a no-down-payment U.S. Department of Veterans Affairs (VA)-guaranteed loan. Three weeks after the offer was accepted, the VA issued a certificate of reasonable value (CRV) for $222,000 for the property. In this case, the veteran may A) withdraw from the sale on payment of a commission to the seller’s broker. Incorrect Answer B) withdraw from the sale with a three-point penalty. Incorrect Answer C) seek secondary funding for the $3,000. Incorrect Answer D) purchase the property by making a $3,000 cash payment. Correct Answer Explanation When the purchase price of a property is greater than the VA-issued certificate of reasonable value, the veteran may pay the difference in cash to purchase the property because secondary financing is somewhat restricted under VA regulations. Since the veteran's contract in this case was contingent on a no-down-payment VA-guaranteed loan, the veteran could also choose not to purchase the home and to seek another property to buy with no penalty.

Answer 88

A person who assumes an existing mortgage loan is A) generally released from liability but not always. Incorrect Answer B) not personally liable for the repayment of the debt. Incorrect Answer C) personally responsible for paying the principal balance. Correct Answer D) not in danger of losing the property by default. Incorrect Answer Explanation A buyer who purchases property and assumes the seller's debt becomes personally obligated for the payment of the entire debt. If the buyer defaults on the loan, the buyer is in danger of losing the property. Reference: Finance > Types of Loans

Answer 89

A loan fee charged by a lender to increase the lender's yield on a loan is A) a discount point. Correct Answer B) the principal. Incorrect Answer C) the yield. Incorrect Answer D) the interest. Incorrect Answer Explanation Discount points are used to increase the lender's yield on its investment. The yield is the profit the lender makes on a loan, the spread between the cost of acquiring the funds lent to the borrower, and the interest rate charged to the borrower. Interest is the sum paid or accrued in return for the use of a lender's money. The principal is the balanced owed on the original loan amount. Reference: Finance > Terminology

Answer 90

A borrower's poor credit history will A) not have an impact on her ability to obtain financing. Incorrect Answer B) never can be improved or corrected. Incorrect Answer C) impact her ability to obtain financing. Correct Answer D) not impact a positive employment history. Incorrect Answer Explanation A borrower's poor credit history will have a negative impact on the ability to obtain financing. One of the ways that borrowers can work to improve their credit history is by paying off debts in a timely manner. Reference: Finance > Special Processes

Answer 91

An adjustable-rate mortgage (ARM) would be a good choice for all of these EXCEPT A) a buyer who has a large down payment but needs a smaller monthly payment. Incorrect Answer B) anyone on a fixed income. Correct Answer C) a buyer who plans to live in the property less than six years. Incorrect Answer D) borrowers whose income will be increasing. Incorrect Answer Explanation ARM loans can adjust up to increase payments, which a borrower on a fixed income might not be able to afford. Reference: Finance > Types of Loans

Answer 92

Laws that determine the maximum interest rate a lender can charge are known as A) truth-in-lending laws. Incorrect Answer B) usury laws. Correct Answer C) borrower protection laws. Incorrect Answer D) fraud statutes. Incorrect Answer Explanation Usury is the act of charging an interest rate in excess of limits permitted by law. Laws that set the maximum interest rate are known as usury laws. Some states have set a specific interest limit, while others have set what is known as a floating interest rate, usually pegged each month at a certain percentage above a fluctuating economic indicator. Truth-in-lending laws and fraud statutes are designed to provide honesty and disclosures in lending transactions but do not set minimum interest rates. Reference: Finance > Terminology

Answer 93

With a construction loan, the borrower makes A) principal payments only during the construction period. Incorrect Answer B) constant payments of principal and interest during the construction period. Incorrect Answer C) monthly payments of interest and part of the principal. Incorrect Answer D) periodic payments of interest during the construction period. Correct Answer Explanation A construction loan is a type of nonamortized loan in which periodic interest payments are made to the lender, but nothing is applied during the construction period to the principal balance. When the construction is complete, the borrower must secure long-term financing that will pay off the entire principal balance. Reference: Finance > Types of Loans

Answer 94

When real estate is sold under an installment land contract and the buyer takes possession of the property, the legal title is A) subject to a purchase money mortgage. Incorrect Answer B) transferred to a land trustee. Incorrect Answer C) transferred to the buyer. Incorrect Answer D) kept by the seller until the purchase price is paid according to the contract. Correct Answer Explanation In a land contract, the seller retains legal title to the property during the contract term, and the buyer is granted equitable title and possession. At the end of the loan term, the seller delivers a clear title to the buyer. Reference: Finance > Types of Loans

Answer 95

If a property sold at a mortgage foreclosure does not bring an amount sufficient to satisfy the outstanding mortgage debt, the mortgagor may be responsible for A) a default judgment. Incorrect Answer B) a deficiency judgment. Correct Answer C) punitive damages. Incorrect Answer D) liquidated damages. Incorrect Answer Explanation A deficiency judgment entitles the mortgagee to a personal judgment against the borrower for the unpaid balance when a foreclosure sale does not produce enough cash to pay the loan balance in full after deducting expenses and accrued unpaid interest. It may also be obtained against any endorsers or guarantors of the note and against any owners of the mortgaged property who assumed the debt by written agreement. The mortgagee is not entitled to any damages. A default judgment is a judgment in favor of a plaintiff when a defendant does not appear in court. Reference: Finance > Special Processes

Answer 96

Charging more interest than is legally allowed is A) usury. Correct Answer B) allowed at a federal level. Incorrect Answer C) escheat. Incorrect Answer D) a deficiency. Incorrect Answer Explanation Usury is charging more interest on a loan than is permitted by law. Escheat is the reversion of property to a state or county in cases where a property owner dies intestate with no eligible heirs. A deficiency occurs when the foreclosure sale of a property produces less than the amount to pay for the foreclosure process and the outstanding debt on the property. Usury rates are set at the state, not federal, level. Reference: Finance > Terminology

Answer 97

If a mortgage lender discriminates against a loan applicant on the basis of age, it violates what law? A) Federal Housing Administration (FHA) Incorrect Answer B) Americans with Disability Act (ADA) Incorrect Answer C) U.S. Department of Veterans Affairs (VA) Incorrect Answer D) Equal Credit Opportunity Act (ECOA) Correct Answer Explanation Age is a protected category only under the ECOA. ADA does not have laws in regard to the age of applicants because the issue is covered under ECOA and applies to FHA and VA loans. Reference: Finance > Laws Affecting Financing and Lending

Answer 98

Which action is legally permitted? A) Advertising property for sale only to a special group Incorrect Answer B) Altering the terms of a loan for a member of a minority group Incorrect Answer C) Refusing to make a mortgage loan to a minority individual because of a poor credit history Correct Answer D) Telling a family with six children that an apartment has been rented, when in fact it has not Incorrect Answer Explanation Bad credit can cause anyone to be rejected, even those who are members of protected classes. Fair housing laws do prohibit altering the terms of a loan for a member of a minority group or advertising property for sale only to a special group. Refusing to rent an available apartment to a family with six children violates the Fair Housing Act. Reference: Finance > Laws Affecting Financing and Lending

Answer 99

When a seller takes back a purchase money mortgage from a buyer, A) the terms and conditions of the mortgage must be set forth in writing. Correct Answer B) the terms and conditions of the mortgage are included in the borrower’s first mortgage. Incorrect Answer C) the seller agrees to collect the buyer’s payments directly from the lender. Incorrect Answer D) the seller and the buyer may enter into an enforceable oral agreement. Incorrect Answer Explanation In order for the purchase money mortgage to be enforceable, the terms and conditions, such as principal and interest, must be set forth in detail in writing. The mortgage contract is made directly between the buyer and the seller. An oral agreement is not enforceable. The buyer makes payments directly to the seller. Reference: Finance > Types of Loans

Answer 100

A mortgage loan in which the borrower only pays interest for a stated period of time and pays off the principal balance at the end of that term is A) an interest-only loan. Correct Answer B) a package loan. Incorrect Answer C) an amortized loan. Incorrect Answer D) a balloon loan. Incorrect Answer Explanation Interest-only mortgages require payment of interest only for a certain period, with the principal balance and interest recalculated over the remaining years of the loan. A balloon payment loan is a partially amortized loan in which the periodic payments are not enough to fully amortize the loan by the time the final payment is due so that the final payment (called a balloon payment) is larger than the others. In a package loan, the borrower secures the loan with both personal and real property. In an amortized loan, the monthly payment partially pays off both principal and interest so that both are paid off slowly, over time, in equal payments. Reference: Finance > Types of Loans

Answer 101

The right of borrowers who have defaulted on a loan to redeem their property after foreclosure for a certain period of time established by law is called A) an equitable right of redemption. Incorrect Answer B) a statutory right of redemption. Correct Answer C) an owner’s right of redemption. Incorrect Answer D) a mortgagee’s right of redemption. Incorrect Answer Explanation Certain states have a period of time after a foreclosure sale in which the borrower in default may redeem the property if the borrower pays the court; the right to redeem the property within the period is called a statutory right of redemption. If a borrower in default pays the lender the amount in default plus costs, before the foreclosure sale, the debt will be reinstated in some states. This right is known as an equitable right of redemption. Reference: Finance > Special Processes

Answer 102

A lender that charges a rate of interest in excess of that permitted by state law may be guilty of A) misrepresentation. Incorrect Answer B) usury. Correct Answer C) fraud. Incorrect Answer D) truth-in-lending violations. Incorrect Answer Explanation Usury is the act of charging a rate of interest in excess of limits established by law. Fraud is a form of deceit or misrepresentation by which a lender or some other party attempts to gain some unfair advantage over a borrower or another person. Truth-in-lending violations involve improper disclosures or the lack of disclosures regarding the cost of credit from a lender. Truth-in-lending laws do not establish any set minimum or maximum interest rate in lending transactions. Reference: Finance > Terminology

Answer 103

In evaluating a prospective borrower's qualifications for a residential loan, a lending institution may consider all of these EXCEPT A) the total amount of revolving debt the borrower has. Incorrect Answer B) the appraised value of the property. Incorrect Answer C) the buyer is retired and so does not have a regular pay check. Correct Answer D) credit score and debit ratio. Incorrect Answer Explanation The Equal Credit Opportunity Act prohibits discrimination in granting credit on the basis of age, in particular because the borrower is retired or because of marital status, national origin, or dependence on public assistance. A credit score, appraised value, and total debt are used as part of a loan application evaluation process. Reference: Finance > Laws Affecting Financing and Lending

Answer 104

A developer receives a loan that covers five parcels of real estate and provides for the release of the mortgage lien on each parcel when certain payments are made on the loan. This type of loan is known as A) a blanket loan. Correct Answer B) a package loan. Incorrect Answer C) a reverse loan. Incorrect Answer D) a purchase money loan. Incorrect Answer Explanation A blanket loan covers more than one parcel or lot and may be used to finance subdivision developments. The loan permits a borrower to obtain the release of any one parcel or lot from the blanket lien by repaying a certain amount of the loan when a lot or parcel is sold. A purchase money loan involves a seller taking back a second mortgage from the buyer to fill the gap between a down payment and the first mortgage on the property. In a package loan, the borrower secures the loan with both real and personal property. A reverse mortgage allows people 62 years of age or older who have considerable equity in their homes to borrow money against that equity. Reference: Finance > Types of Loans

Answer 105

A couple purchased a home for cash over 25 years ago. Today they receive monthly checks from a lender that supplement their retirement income. The couple MOST likely have obtained A) an interest-only loan. Incorrect Answer B) an adjustable-rate mortgage. Incorrect Answer C) a reverse mortgage. Correct Answer D) a home equity loan. Incorrect Answer Explanation A reverse mortgage allows people 62 or older to borrow money against the equity they have built in their home. The borrower is charged a fixed rate of interest, and no payments are due until the property is sold or the borrower defaults, moves, or die. Adjustable-rate mortgages and interest-only loans require payments on the loans and do not provide any income to the borrower during the life of the loan. In a home equity loan, a borrower uses the equity built up in the home as a source of cash; the original mortgage remains in place, with the home equity loan being junior to the original lien. Reference: Finance > Types of Loans

Answer 106

Many states permit mortgagors to redeem their property after default but before a foreclosure sale. This right is called A) an owner’s right of redemption. Incorrect Answer B) an equitable right of redemption. Correct Answer C) a statutory right of redemption. Incorrect Answer D) a mortgagee’s right of redemption. Incorrect Answer Explanation If a borrower in default pays the lender the amount in default, plus costs, before the foreclosure sale, the debt will be reinstated in some states. This right is known as an equitable right of redemption. Certain states also have a period of time after a foreclosure sale in which the borrower in default may redeem the property if the borrower pays the court; the right to redeem the property within the period is called a statutory right of redemption. Reference: Finance > Special Processes

Answer 107

When a person buys a house using a mortgage loan, the difference between the amount owed on the property and its market value represents the homeowner's A) tax basis. Incorrect Answer B) capital gain. Incorrect Answer C) equity. Correct Answer D) replacement cost. Incorrect Answer Explanation Equity is created by a down payment and is the portion of the property held free of any mortgage. An owner's equity increases as a loan is paid down. The tax basis of a property is the amount of money the owner invests in the property. Replacement cost is one way to look at the construction cost of a building for appraisal purposes. It is the cost required to construct an improvement similar to the subject property using current materials and standards. Capital gain is the taxable gain from the sale of a property, the difference between the sales price and the tax basis of the property. Reference: Finance > Terminology

Answer 108

Which of these would be considered a trigger item under Regulation Z? A) “FHA financing available” Incorrect Answer B) “Low monthly payments” Incorrect Answer C) “A steal at only $175,000!” Incorrect Answer D) “Only $10,000 down” Correct Answer Explanation Specific credit terms, such as a down payment, monthly payment, dollar amount of the finance charge, or term of the loan, are called trigger items. If such items are included in any advertisement, the advertisement must include additional information as required by the regulation. Reference: Finance > Laws Affecting Financing and Lending

Answer 109

A real estate loan payable in periodic installments that are sufficient to pay the principal in full during the term of the loan is A) a fully amortized loan. Correct Answer B) an interest-only loan. Incorrect Answer C) a partially amortized loan. Incorrect Answer D) a straight loan. Incorrect Answer Explanation The payment in an amortized loan partially pays off both principal and interest. The mortgagor pays a constant amount, usually monthly. At the end of the term, the full amount of the principal and interest due is reduced to zero. In straight loans and interest-only loans, the borrower makes periodic payments of interest only, followed by a lump sum balloon payment of the full principal balance at the end of the loan term. In a partially amortized loan, the periodic payments are not enough to pay the principal balance, so a final payment (a balloon payment) is larger than the other payments to satisfy the debt. Reference: Finance > Types of Loans

Answer 110

Which law requires any advertisement that references mortgage financing terms to contain certain disclosures? A) Equal Credit Opportunity Act (ECOA) Incorrect Answer B) Fair Housing Act Incorrect Answer C) Real Estate Settlement Procedures Act (RESPA) Incorrect Answer D) Truth in Lending Act Correct Answer Explanation The Truth in Lending Act requires that trigger terms about mortgage financing in any kind of advertising must also include additional disclosures in the advertisement. The Fair Housing Act prohibits discrimination against protected classes in residential real estate advertising and practice. RESPA deals with closings and settlement and does not apply to advertisement. ECOA prohibits lenders and others who grant or arrange credit to consumers from discriminating against protected credit applicants. Reference: Finance > Laws Affecting Financing and Lending

Answer 111

The defeasance clause in a mortgage requires the mortgagee to execute A) a subordination agreement. Incorrect Answer B) a satisfaction of mortgage. Correct Answer C) an assignment of mortgage. Incorrect Answer D) a partial release agreement. Incorrect Answer Explanation A defeasance clause requires the lender to execute a satisfaction, also known as a release or discharge, when the note has been fully paid. Satisfaction of the mortgage returns to the borrower all interest in the real estate originally conveyed to the lender. A mortgagee may assign a note to a third party, such as an investor or another mortgage company (the assignee). When the debt is paid in full, the assignee is required to execute the satisfaction of the mortgage. Reference: Finance > Terminology

Answer 112

A lender's interest in a mortgage loan with a high loan-to-value (LTV) ratio is protected by obtaining additional security from A) private mortgage insurance (PMI). Correct Answer B) title insurance. Incorrect Answer C) impound accounts. Incorrect Answer D) the borrower's note. Incorrect Answer Explanation Loans over an 80% LTV are more risky and will typically require PMI. With PMI, the borrower purchases an insurance policy that provides the lender with funds in the event that the borrower defaults on the loan. Title insurance protects a lender or a buyer from defects in the chain of title. The borrower's note is a promise to repay the loan. Impound accounts hold buyers' funds for property insurance and taxes that the lender pays on behalf of the buyer. Reference: Finance > Special Processes

Answer 113

The total balance due on a mortgage loan is A) the equity. Incorrect Answer B) the principal. Correct Answer C) the interest. Incorrect Answer D) the rate of return. Incorrect Answer Explanation In finance terminology, the principal is the balance owed on the original loan amount. The interest is the charge for the use of the money. The rate of return is the return on the investment in a property, one way to measure its profitability. An owner's equity is the amount of money remaining once current liens, including the mortgage, are subtracted from the current market value of the property. Reference: Finance > Terminology

Answer 114

Which of the following is an example of predatory lending? A) A buyer and a seller remaining silent about a seller carryback purchase money mortgage Incorrect Answer B) A buyer falsifying income and minimizing recurring debt to qualify for a mortgage loan Incorrect Answer C) Lying to a prospective borrower about the true terms of a loan’s cost Correct Answer D) Taking out a mortgage on a non-existent parcel of real estate Incorrect Answer Explanation Lying to a prospective borrower about the true cost of a loan would typically fall under the category of predatory lending, rather than mortgage fraud. The other answer choices show mortgage fraud perpetrated upon lenders. If a borrower takes out a mortgage on nonexistent real estate (a.k.a. an air loan), then the lender is tricked into making a loan without any collateral. A buyer and seller keeping quiet about the seller making a loan to the buyer for a portion of the down payment is called a silent second. This is mortgage fraud because the major institutional lender has determined how much debt the buyer can carry: the silent second may push the buyer over the edge into defaulting on both loans. Finally, a buyer falsifying income and minimizing recurring debt to qualify for a mortgage is committing fraud against a lender. Because of the falsified information about the buyer's finances and debt load, the lender will be unable to correctly calculate if the buyer truly qualifies for the loan. Reference: Finance > Mortgage Fraud and Predatory Lending

Answer 115

A couple refinances their home with a new lender under a new loan agreement. They currently have a separate line of credit under their original lender. The original lender granting the line of credit agrees to take a second lien position on the property, granting first position to the new lender. The lenders have made this arrangement through A) a subordination agreement. Correct Answer B) a due-on-sale clause. Incorrect Answer C) a defeasance clause. Incorrect Answer D) an acceleration clause. Incorrect Answer Explanation The lenders sign a subordination agreement, which places the line of credit in a junior position to the new loan created through the refinancing of the property. A defeasance clause requires a lender to execute a satisfaction (release or discharge) of a loan when the borrower fully pays off the loan. A due-on-sale clause provides that when the property is sold, the lender may declare the entire debt due or permit the buyer to assume the loan. The acceleration clause in a mortgage permits the lender to declare the entire debt due and payable immediately if the borrower defaults on payments. Reference: Finance > Terminology

Answer 116

Conventional loans are viewed as the MOST secure loans because A) they are not purchased by investors in the secondary mortgage market. Incorrect Answer B) they are government insured loans. Incorrect Answer C) private mortgage insurance protects the lender for the full amount of the loan. Incorrect Answer D) their loan-to-value ratios are often lower than other types of loans. Correct Answer Explanation The borrower with a conventional loan usually makes a down payment of at least 20%, so that the loan-to-value ratio is 80%. The security for the loan is provided by the mortgage, and the payment of the debt rests on the borrower's ability to pay. Conventional loans are not insured or guaranteed by the government, unlike Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loans. Private mortgage insurance (PMI) protects the lender only for the excess of the loan amount over 80% of the property's appraised value. Conventional loans are often purchased from the original lenders through the secondary mortgage market. Reference: Finance > Types of Loans

Answer 117

The principal distinction between the primary mortgage market and the secondary mortgage market is in A) the use of discount points versus the use of origination fees. Incorrect Answer B) the insuring versus the guaranteeing of mortgage loans. Incorrect Answer C) the use of mortgages versus the use of deeds of trust. Incorrect Answer D) the origination versus the purchase of mortgage loans. Correct Answer Explanation Loans are originated in the primary mortgage market and bought and sold in the secondary mortgage market after they have been funded. The use of mortgages or deeds of trust is determined by state law. Insuring, guaranteeing, and the use of discount points and loan origination fees all occur in the primary lending market. Reference: Finance > Sources of Financing (Primary and Secondary Mortgage Markets)

Answer 118

The main difference between a purchase money mortgage and a contract for deed is A) how title is held. Correct Answer B) the type of payment being made. Incorrect Answer C) the type of deed used to convey title. Incorrect Answer D) when the buyer takes possession. Incorrect Answer Explanation In a purchase money mortgage, the seller conveys title to the buyer at closing and then is the lender on the mortgage. In a contract for deed, the seller does not convey title until the final payment. The buyer takes possession in both loan types, and the deed type makes no difference. Reference: Finance > Types of Loans

Answer 119

The process through which a lender agrees to accept from a distressed homeowner less than the current principal balance on the outstanding loan is A) a judicial foreclosure. Incorrect Answer B) a redemption. Incorrect Answer C) a short sale. Correct Answer D) a strict foreclosure. Incorrect Answer Explanation When a lender agrees to accept from a distressed homeowner less than the current balance on the outstanding loan, the process is known as a short sale. In a strict foreclosure, the court establishes a deadline for the defaulted balance on a mortgage to be paid, and if not paid, awards full legal title to the lender. A judicial foreclosure allows a property in default to be sold by a court order after the mortgagee has given sufficient public notice. Redemption is the right of a defaulted borrower to redeem a property either before a foreclosure sale (the equitable right of redemption) or for a specific period of time after a foreclosure sale (a statutory right of redemption). Reference: Finance > Special Processes

Answer 120

A homeowner has equity in their property and would like to consolidate some of his debt. Which of these loans would be the BEST for the homeowner? A) A reverse mortgage Incorrect Answer B) A home equity loan Correct Answer C) An adjustable-rate mortgage (ARM) loan Incorrect Answer D) A new term loan Incorrect Answer Explanation This loan is designed to allow the homeowner to tap into equity to pay off bills. A reverse mortgage may only be used by those over 62 and would not consolidate debt. A term and an ARM loan would not be used in this situation. Reference: Finance > Types of Loans

Answer 121

In an adjustable-rate mortgage, the interest rate is tied to an objective economic indicator called A) a reserve requirement. Incorrect Answer B) a mortgage factor. Incorrect Answer C) an index. Correct Answer D) a discount rate. Incorrect Answer Explanation The interest charged in an adjustable-rate mortgage varies with an outside economic indicator called an index. This index is beyond the control of either the borrower or the lender. The discount rate is the interest rate set by the Federal Reserve that member banks are charged when they borrow money. The mortgage factor is the number multiplied by the thousands of an amount borrowed to arrive at a monthly principal and interest payment. The Federal Reserve System requires that each member bank keep a certain number of assets on hand as reserve funds, which are unavailable for loans or any other use. Reference: Finance > Types of Loans

Answer 122

The loan-to-value ratio (LTV) may be defined as the ratio of a mortgage loan principal to A) the interest rate on the loan. Incorrect Answer B) the listed price of the property. Incorrect Answer C) the assessed value of the property. Incorrect Answer D) the property’s value. Correct Answer Explanation Mortgage loans are generally classified based on their LTV, which is the ratio of the mortgage loan principal to the value of the property. The value the lender will use is the sales price or the appraised value, whichever is less. Reference: Finance > Terminology

Answer 123

The clause in a trust deed or mortgage that permits the lender to declare the entire unpaid balance immediately due and payable upon default is A) the acceleration clause. Correct Answer B) the forfeiture clause. Incorrect Answer C) the alienation clause. Incorrect Answer D) the judgment clause. Incorrect Answer Explanation An acceleration clause gives the lender the right to declare the entire debt due and payable immediately if the borrower has defaulted. The alienation/due-on-sale clause allows the lender to accelerate the balance due if borrowers alienate/sell their mortgaged property. A forfeiture clause in a contract for deed requires the borrower to forfeit all amounts paid if the borrower defaults. A judgment clause permits a lender to file a lien against a borrower without having to initiate court proceedings. Reference: Finance > Terminology

Answer 124

Which of these acts as security for the loan? A) Deed of trust Correct Answer B) Subordination agreement Incorrect Answer C) Promissory note Incorrect Answer D) Conveyance deed Incorrect Answer Explanation A deed of trust or a mortgage are the two security instruments used in loans. The promissory note is a promise to pay the debt. A conveyance deed conveys title to real property and a subordination agreement is used to hold positions when new documents are recorded. Reference: Finance > Terminology

Answer 125

The purpose of a mortgage is to A) convey title of the property to a lender. Incorrect Answer B) restrict the borrower's use of the property. Incorrect Answer C) create a lien on the property. Incorrect Answer D) provide security for a loan. Correct Answer Explanation A mortgage is a financing instrument by which real estate is used as security, or collateral, for a debt. A restrictive covenant may limit a borrower's use of a property. While a mortgage does create a lien on the property, the lien is removed when the lender records satisfaction of the mortgage in the public record. Reference: Finance > Terminology

Answer 126

A homeowner has been making periodic payments of principal and interest on a loan, but the final payment will be larger than the others. This is A) a Federal Housing Administration (FHA) loan. Incorrect Answer B) a balloon payment loan. Correct Answer C) a home equity loan. Incorrect Answer D) a fully amortized loan. Incorrect Answer Explanation When the periodic payments of principal and interest or interest only are not enough to fully pay the loan by the time the final payment is due, the final payment is known as a balloon. A fully amortized loan requires equal periodic payments of principal and interest. An FHA loan is a fixed-interest loan with equal periodic loans of principal and interest and is insured by the FHA. A home equity loan typically does not have a balloon payment. Reference: Finance > Types of Loans

Answer 127

The clause in a mortgage instrument that would prevent the assumption of the mortgage by a new purchaser is A) a defeasance clause. Incorrect Answer B) an acceleration clause. Incorrect Answer C) a due-on-sale clause. Correct Answer D) a power of sale clause. Incorrect Answer Explanation A due-on-sale clause, or alienation clause, provides that when property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender. The due-on-sale clause allows the lender to prevent a future purchaser of the property from being able to assume the loan, particularly if the original interest rate is low. A defeasance clause requires a lender to execute a satisfaction of mortgage once the loan has been fully repaid. The acceleration clause is used if the borrower is in default. Reference: Finance > Terminology

Answer 128

The lender who provides a real estate loan to a borrower is known as A) the optionee. Incorrect Answer B) the mortgagee. Correct Answer C) the mortgagor. Incorrect Answer D) the optionor. Incorrect Answer Explanation The lender is the mortgagee. The borrower who receives a loan and in return gives a note and mortgage to the lender is the mortgagor. An optionor is an owner who gives an optionee, a prospective purchaser or lessee, the right to buy or lease the owner's property at a fixed price within a certain period of time. Reference: Finance > Terminology

Answer 129

Which of these is a TRUE statement about interest on a fully amortized loan? A) The interest is paid in arrears. Correct Answer B) The interest requires that the final interest payment will be determined after the last loan payment is made. Incorrect Answer C) The interest is paid each period without any payment on the principal. Incorrect Answer D) The interest increases throughout the term of the loan. Incorrect Answer Explanation A fully amortized loan requires a constant payment for both the principal and interest, with each payment for the life of the loan. Interest or principal do not increase in a fully amortized loan because the terms are set in the original loan documents and don't change. Reference: Finance > Types of Loans

Answer 130

Owners' equity in their residence is A) the balance remaining on the mortgage loan. Incorrect Answer B) the purchase price of the residence minus current mortgage liens. Incorrect Answer C) the difference between the current value of the property and any mortgage liens on the property. Correct Answer D) the amount paid each month for the use of the lender’s money. Incorrect Answer Explanation An owner's equity is the amount of money remaining once current liens, including the mortgage, are subtracted from the current market value of the property. The amount paid each month for the use of the lender's money is the interest paid for that month. The purchase price of the residence is the original amount paid for the property and may have changed. Equity = value today – debt today. Reference: Finance > Terminology

Answer 131

A financing instrument that establishes a third party to hold title on behalf of the lender is A) a trustee. Incorrect Answer B) a mortgage. Incorrect Answer C) a promissory note. Incorrect Answer D) a deed of trust. Correct Answer Explanation A deed of trust is a three-party financing instrument that conveys the deed to the property to a trustee who holds legal title on behalf of the lender, who holds the promissory note as the beneficiary of the trust. The trustee is the third party in this arrangement and is usually chosen by the lender. A mortgage is a two-party financial instrument in which the borrower, the mortgagor, signs a promissory note to repay the lender and provides the mortgage as a security for the debt. Reference: Finance > Terminology

Answer 132

A borrower wants to secure a loan with a very low down payment. Paying a low down payment provides A) no requirement for private mortgage insurance. Incorrect Answer B) a lower loan-to-value (LTV) ratio. Incorrect Answer C) a higher loan-to-value ratio. Correct Answer D) lower risk for the lender. Incorrect Answer Explanation The LTV ratio is the ratio of debt to the value of the property. The higher the ratio of debt to value, the lower the down payment by the buyer. A lower down payment means a less secure loan for the lender and may require the borrower to purchase private mortgage insurance in order to secure a loan. Reference: Finance > Terminology

National Finance Flashcards

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