Unit 13: Types of Mortgages and Sources of Financing Flashcards
1
Q
A real estate loan that is neither FHA-insured nor VA-guaranteed.
A
Conventional Loan
2
Q
True/False A conventional loan is one that is NOT insured or guaranteed by a government agency.
A
True
3
Q
True/False Conventional loans usually have a higher loan-to-value ratio (LTV) than either FHA or VA loans.
A
False. Conventional loans usually have a lower LTV than either FHA or VA loans because a larger down payment is required for conventional loans compared with FHA and VA loans.
4
Q
True/False The total obligations ratio (TOR) may not exceed 36% for conventional mortgage loans.
A
True
5
Q
A loan characterized by payment of a debt by regular installment payments.
A
Amortized Mortgage
6
Q
The party employing the services of a real estate broker; amount of money borrowed in a mortgage loan, excluding interest and other charges.
A
Principal
7
Q
A method for amortizing a mortgage whereby the borrower pays the same amount each month.
A
Level-payment Plan
8
Q
True/False The interest portion of the first month’s mortgage payment is $937.50 with an interest rate of 4.5%, and the LTV is 80%. Therefore, the sale price of the property is $250,000.
A
False. $937.50 × 12 months = $11,250 interest per annum; $11,250 ÷ 4.5% = $11,250 ÷ .045 = $250,000 mortgage amount; $250,000 mortgage ÷ 80% or .80 LTV = $312,500 sale price.
9
Q
True/False An amortized mortgage is characterized by a constant (level) monthly payment.
A
True. An amortized mortgage calls for regular, equal payments. The amount of the payment that applies to interest gradually decreases, and the amount assigned to principal gradually increases.
10
Q
A financing technique in which the lender can raise or lower the interest rate according to a set index.
A
Adjustable-rate Mortgage (ARM)
11
Q
The variable component that is added to the margin to calculate the interest rate in an adjustable-rate mortgage.
A
Index
12
Q
The fixed component that is added to the index to calculate the interest rate in an adjustable rate mortgage.
A
Margin
13
Q
Limits the amount the interest rate of an adjustable-rate loan may increase at any one time (usually a year).
A
Periodic Cap
14
Q
Limits the total amount the interest rate may increase over the life of an adjustable-rate mortgage loan.
A
Lifetime Cap
15
Q
Limits the amount the monthly payments of an adjustable-rate loan can increase during any adjustment.
A
Payment Cap
16
Q
A financing arrangement whereby monthly mortgage payments are less than required to pay both interest and principal. The unpaid amount is added to the loan balance.
A
Negative Amortization
17
Q
A below-market interest rate usually offered for the first year on some adjustable-rate mortgages.
A
Teaser Rate
18
Q
True/False Negative amortization results from a mortgage payment that does NOT pay all of the interest due for the period.
A
True. If the monthly payment on the ARM is smaller than what is required to pay the interest for the period, it will result in negative amortization.
19
Q
True/False The calculated interest rate is the lender’s margin added to the index.
A
True
20
Q
True/False In times of rising interest rates, including a payment cap in an adjustable-rate mortgage reduces the amount of interest the borrower will pay over the life of the loan.
A
False. If interest rates rise sharply, but the payments do not because of a payment cap, the unpaid interest is added to the loan balance.
21
Q
The buyer makes regular payments smaller than what is required to completely pay off the loan (payments do not fully amortize the loan) resulting in a larger balloon payment to pay off the remaining amount due.
A
Partially Amortized Mortgage
22
Q
A single, large payment made at maturity of a partially amortized mortgage to pay off the debt in full.
A
Balloon Payment
23
Q
A mortgage loan amortized the same way as other loans with monthly payments, except that the borrower makes a payment every two weeks.
A
Biweekly Mortgage
24
Q
A loan covering both real and personal property.
A
Package Mortgage
25
A mortgage secured by a personal residence. It provides a line of credit available for draws when needed by the homeowner. It is sometimes used as a home improvement loan.
Home Equity Loan
26
Any new mortgage taken as part of the purchase price of real property by the seller.
Purchase Money Mortgage (PMM)
27
A form of mortgage that enables elderly homeowners to borrow against the equity in their homes so they can receive monthly payments needed to help meet living expenses.
Reverse Mortgage
28
True/False Under a purchase money mortgage (PMM), legal title passes to the buyer and the seller retains a vendor's lien right as security for the debt.
True
29
True/False A reverse mortgage loan insured by the federal government is called a package mortgage.
False. The only reverse mortgage insured by the federal government is called a Home Equity Conversion Mortgage (HECM).
30
True/False In a partially amortized mortgage, the payments do NOT fully amortize the loan.
True. With a partially amortized mortgage, the buyer makes regular payments smaller than what is required to completely pay off the loan by its date of termination. In other words, the payments do not fully amortize the loan.
31
A one-time mortgage insurance premium on FHA mortgage loans that is paid at closing.
Up-front Mortgage Insurance Premium (UFMIP)
32
Fee paid by FHA borrowers to obtain a loan (up-front and annual).
Mortgage Insurance Premium (MIP)
33
True/False An FHA borrower has monthly PITI of $2,276 MIP of $160, a car payment of $479, a revolving credit card minimum monthly payment of $165 per month, and a student loan of $200 per month. The borrower's gross monthly income is $8,000. The borrower's housing expense ratio (HER) is 32%.
False. The borrower's housing expense ratio is 30%. $2,276 + $160 = $2,436 monthly housing expense ÷ $8,000 gross monthly income = .3045 or 30% HER
34
True/False An FHA borrower has the following monthly expenses: PITI of $1,225, MIP of $175, car payment of $400, homeowners association fee of $60, college loan of $350, and a revolving credit card of $125. This borrower's total monthly housing expense for calculating the borrower's housing expense ratio is $1,460.
True. The housing expense ratio is $1,225 PITI + $175 MIP + $60 homeowners association fee = $1,460.
35
True/False The one-time mortgage insurance fee charged on FHA mortgage loans that is paid at closing is called the mortgage insurance premium (MIP).
False. The one-time mortgage insurance fee paid at closing is called the up-front mortgage insurance premium (UFMIP).
36
True/False The VA borrower's total obligations ratio cannot exceed 41%.
True
37
True/False The VA charges a funding fee for VA mortgage loans.
True
38
True/False The VA sets strict loan limits on all VA loans.
False
39
A source for the purchase of a mortgage loan by a borrower.
Primary Mortgage Market
40
Checking accounts; payable on demand by holder.
Demand Deposit
41
The process whereby financial middlemen consolidate many small savings accounts belonging to individual depositors and invest those funds in large, diversified projects.
Intermediation
42
A business entity that originates, sells, and then services mortgage loans. Mortgage lenders are not depository institutions. They originate loans and then package the loans together and sell the entire package.
Mortgage Lender
43
A business entity that conducts loan originator activities. Mortgage brokers can employ mortgage loan originators. Mortgage brokers do not make loans or service loans—they arrange loans.
Mortgage Broker
44
One who finds a lender for a potential borrower, and vice versa.
Mortgage Loan Originator (MLO)
45
True/False Mortgage lenders originate new mortgage loans and then sell them to secondary-market participants.
True. Mortgage lenders originate loans with either their own funds or borrowed capital. They package the loans and sell them to institutional investors and secondary market participants.
46
True/False Portfolio lenders can hold mortgage loans permanently in their portfolios.
True. Portfolio lenders prefer to hold mortgages rather than sell them.
47
A source for the purchase and sale of existing mortgages.
Secondary Mortgage Market
48
A disengagement process when depositors withdraw money from savings for direct investment in stocks, money market funds, and other securities.
Disintermediation
49
An institution in the secondary mortgage market that buys and sells mortgages.
Fannie Mae
50
A standardized conventional loan written on uniform documents that meets the purchase requirements of Fannie Mae and Freddie Mac.
Conforming Loan
51
A residential mortgage loan that exceeds the loan amount acceptable for sale to Fannie Mae.
Nonconforming Loan
52
Formerly called the Federal Home Loan Mortgage Corporation (FHLMC). A secondary mortgage market institution that buys and sells conventional, FHA, and VA loans.
Freddie Mac
53
A federal agency that is part of the Department of Housing and Urban Development (HUD). Ginnie Mae plays an important role in achieving the HUD’s goal of providing low-cost mortgage credit to traditionally underserved sectors of the housing market.
Ginnie Mae
54
True/False Ginnie Mae primarily purchases existing conventional mortgage loans.
False. Ginnie Mae purchases FHA and VA mortgage loans.
55
True/False Fannie Mae purchases existing FHA, VA, and conventional mortgages.
True. Fannie Mae purchases FHA, VA, and conventional mortgages from lenders and holds the mortgages in its portfolio.
56
A crime in which the intent is to materially misrepresent or omit information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have not been obtained had the lender or borrower known the truth.
Mortgage Fraud
57
True/False A straw buyer is someone who applies for a residential mortgage but who doesn't intend to actually own the property.
True. A straw buyer is someone whose credit is used to purchase a property and secure financing but who isn't actually going to own the property.
58
Real estate licensees should recognize potential red flags, such as a sale contract that states "owner of record" in the place where the seller's name is indicated.
True. Licensees should be aware of red flags that indicate possible fraudulent activity. For example, if a sale contract states "owner of record" rather than identify the seller's name, it should be a red flag to the selling real estate agent that a property flip might be occurring.
59
A body of federal law that is part of the Consumer Credit Protection Act and implemented by the Federal Reserve Board’s Regulation Z. The main purpose of the act is to ensure that borrowers and customers of consumer credit are given meaningful information with respect to the cost of credit so that consumers can compare the various credit terms available.
Truth In Lending Act (TILA)
60
Total yearly cost of credit.
Annual Percentage Rate (APR)
61
The Truth in Lending Act requires creditors to disclose certain information if certain credit terms, called triggering terms, are included in the advertisement. Triggering terms include the amount or percentage of down payment, number of payments, period (term) of repayment, amount of any payment, and the amount of any finance charges.
Triggering Terms
62
A disclosure form with good-faith estimates of credit costs and transactions terms that must the given to the borrower no later than the third business day after receiving the loan application.
Loan Estimate
63
A booklet containing consumer information regarding closing costs the borrower may incur at closing. RESPA requires lenders to give the booklet to loan applicants.
Special Information Booklet
64
A form that must be provided to the borrower at least three business days before closing; replaced the Settlement Statement (HUD-1).
Closing Disclosure
65
True/False The figure borrowers must be provided that includes the interest rate and other costs associated with a loan stated as a yearly rate is the annual percentage rate (APR).
True
66
True/False Borrowers must receive the Closing Disclosure at least three business days before the loan closing.
True. The TILA-RESPA Disclosure Rule requires the lender to provide the borrower with a written Closing Disclosure at least three business days before closing the loan.
67
True/False The Equal Credit Opportunity Act applies to residential borrowers only.
False. The Equal Credit Opportunity Act applies to all consumer and commercial credit, without regard to the nature or type of the credit or the creditor.
68
The actions undertaken by the Fed to influence the availability and cost of money and credit.
Monetary Policy
69
Purchase and sale of U.S. Treasury and federal agency securities.
Open-market Operations
70
True/False The discount rate is the interest rate charged member banks for borrowing money from the Federal Reserve.
True
71
True/False The Fed's principal and MOST effective tool for implementing monetary policy is the purchase and sale of U.S. Treasury and federal agency securities.
True. The Fed's principal and most effective tool for implementing monetary policy is open-market operations. Open-market operations involve the purchase and sale of U.S. Treasury and federal agency securities.
72
True/False Monetary policy refers to the actions taken by the Federal Reserve to influence the availability and cost of credit.
True. Monetary policy refers to the actions undertaken by the Fed to influence the availability and cost of money and credit to promote national economic goals.
73
is one with regular payments each month of principal and interest. The monthly payment remains the same each month; however, the amount applied to principal increases each month, and the amount applied to interest decreases each month.
A fully amortized mortgage
74
is a mortgage in which the monthly payments are a fixed amount, but the amount applied to principal increases each month and the amount applied to interest decreases each month.
A level-payment plan
75
typically require a larger down payment, compared with FHA and VA loans, and therefore have a lower LTV. Borrowers must pay for private mortgage insurance (PMI) for the portion of the loan above 80% LTV. Fixed-rate conventional mortgage loans have a due-on-sale clause, so they are not assumable.
Conventional loans are written by private lenders and are not guaranteed or insured by the federal government.
76
the buyer makes regular payments smaller than what is required to completely pay off the loan by the date of termination. A single large final payment, called a balloon payment, of accrued interest and remaining unpaid principal is made at loan maturity.
The Federal Housing Administration (FHA) is a government agency that insures mortgage loans made by approved lenders. FHA does not make loans nor does it regulate interest rates. Borrowers pay an up-front mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The annual premium is paid monthly as part of the monthly mortgage payment. Borrowers are required to make a down payment of at least 3.5%. The Section 203(b) FHA program insures fixed-rate loans on one- to four-family residences.
partially amortized mortgage
77
s a government agency that insures mortgage loans made by approved lenders. FHA does not make loans nor does it regulate interest rates. Borrowers pay an up-front mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The annual premium is paid monthly as part of the monthly mortgage payment. Borrowers are required to make a down payment of at least 3.5%. The Section 203(b) FHA program insures fixed-rate loans on one- to four-family residences.
The Federal Housing Administration (FHA) is a government agency that insures mortgage loans made by approved lenders.
78
The Fed has three economic tools to influence money supply:
(1) the purchase and sale of U.S. Treasury securities called open-market operations, (2) increasing or decreasing the discount rate charged to banks that borrow money from the Fed, and (3) increasing or decreasing the amount of funds that institutions must hold in reserve against deposit liabilities called the reserve requirement.
79
Which qualifying ratio applies to conventional mortgage loans?
A) 41% HER
B) 31% HER
C) 36% TOR
D) 31% TOR
C) 36% TOR. To qualify for a conventional mortgage, the borrower's TOR must not exceed 36%.
80
When investors bypass thrift institutions for direct investment elsewhere, the process is called
A) disintermediation.
B) loan correspondence.
C) capital-deficit area support.
D) intermediation.
A) disintermediation.
81
A partially amortized mortgage has a final payment required to completely pay off the loan called
A) secondary market activity.
B) a negative amortization payment.
C) Intermediation.
D) a balloon payment.
D) balloon payment. With a partially amortized mortgage, the buyer makes regular payments smaller than what is required to completely pay off the loan by the date of termination. A single large final payment, called a balloon payment is made at loan maturity.
82
The interest portion on the first monthly payment of a 30-year 6% mortgage is $650. If the loan-to-value ratio is 80%, how much did the owner pay for the house?
A) $68,750
B) $162,500
C) $130,000
D) $168,750
B) $162,500. Part ÷ rate = total. $650 × 12 months = $7,800 = part (the annual interest). $7,800 part ÷ .06 rate = $130,000 whole = loan amount. $130,000 loan (part) ÷ .80 rate = $162,500 purchase price.
83
Which statement is TRUE regarding VA mortgage loans?
A) The VA buyer may be charged for the real estate commission of the closing statement.
B) The VA funding fee may be added to the loan amount and financed over the life of the loan.
C) Lenders use a housing expense ratio and a total obligations ratio to qualify VA borrowers.
D) The total obligations ratio for a VA mortgage loan is 36%.
B) The VA funding fee may be added to the loan amount and financed over the life of the loan.
Funding fee expenses may be added to the maximum loan amount and financed over the life of the loan.
84
Which individual must be state licensed as a mortgage loan originator?
A) Employee who works as a loan originator for a mortgage brokerage company that is not federally regulated
B) Employee who works as a loan originator for First USA Credit Union
C) Employee of Bank of Florida who works as a bank teller
D) Employee who processes loans for First National Bank of Orlando
A) Employee who works as a loan originator for a mortgage brokerage company that is not federally regulated
Employees who work as loan originators for mortgage brokerage companies that are not federally regulated must be state licensed as a mortgage loan originator.
85
A commercial bank sold a group of 2,000 mortgages directly to Fannie Mae. This is an example of
A) secondary market activity.
B) intermediation.
C) loan correspondence.
D) primary market activity.
A) secondary market activity.
86
A prospective borrower has a projected PITI of $1,000, an MIP of $260, a monthly car payment of $290, and a student loan payment of $175 per month. The borrower's gross monthly income is $4,200. What is the borrower's HER?
A) 30%
B) 38%
C) 28%
D) 24%
A) 30%
$1,000 PITI + $260 MIP = $1,260 monthly housing expense ÷ $4,200 gross monthly income = .30 or 30% HER
87
A borrower has secured a VA loan of $89,000 at 6% interest with a 30-year term. The monthly payments are $533.60. How much of the first monthly payment will apply to interest?
A) $533.60
B) $445.00
C) $534.00
D) $501.58
B) $445.00. $89,000 loan amount × .06 interest rate = $5,340 annual interest ÷ 12 months = $445 interest paid in first month.
88
The law requiring lenders to furnish borrowers with the APR disclosure is the
A) Fair Housing and Lending Act.
B) Truth in Lending Act.
C) Consumer Credit Protection Act.
D) Real Estate Settlement Procedures Act.
B) Truth in Lending Act.
The Consumer Credit Protection Act (Truth in Lending Act) requires lenders to provide borrowers with the APR disclosure.
89
Which statement is FALSE?
A) Fannie Mae created the first secondary market for mortgage loans.
B) Fannie Mae deals directly with homebuyers.
C) Loans that meet Fannie Mae guidelines are called conforming loans.
D) Fannie Mae provides master commitments for large real estate projects.
B) Fannie Mae deals directly with homebuyers.
90
In an adjustable-rate mortgage, the calculated interest rate is the
A) payment cap + adjustment interval.
B) margin + payment cap.
C) index + margin.
D) interest rate cap + payment cap.
C) index + margin.
