Real Estate Exam Unit 13

A house had a sale price of $240,000. The buyer obtained a loan for $220,000. If the lender charges three points, how much will the buyer pay in points?

A) $6,950 B) $7,540 C) $5,335 D) $6,600 The answer is $6,600. The buyer will pay $6,600: $220,000 × 3% = $6,600. Points are charged on the loan amount, not the sale price.

Frannie Mae

Conventiona, FHA-insuraced, VA-Guaranteed Loans

Credit unions.

Credit unions are cooperative organizations whose members place money in savings accounts. In the past, credit unions made only short-term consumer and home improvement loans.

Insurance companies.

Insurance companies accumulate large sums of money from the premiums paid by their policyholders. While part of this money is held in reserve to satisfy claims and cover operating expenses, much of it is free to be invested in profit-earning enterprises, such as large commercial real estate loans.

Investment group financing

Large real estate projects, such as highrise apartment buildings, office complexes, and shopping centers, are often financed as joint ventures through group financing arrangements like syndicates, limited partnerships, and real estate investment trusts.

Endowment funds

Many commercial banks and mortgage bankers handle investments for endowment funds. The endowments of hospitals, universities, colleges, charitable foundations, and other institutions provide a good source of financing for low-risk commercial and industrial properties.

Government-sponsored Enterprises (GSEs)

Organizations created by the federal government (Fannie Mae, Freddie Mac, Farmer Mac, Ginnie Mae) to help increase loan opportunities for homebuyers.

Ginnie Mae

Special Assistance Loans

Federal Reserve System (Fed)

The country's central banking system, which establishes the nation's monetary policy by regulating the supply of money and interest rates.

Primary Mortgage Market

The mortgage market in which loans are originated, consisting of lenders such as commercial banks, savings associations, and mutual savings banks.

Savings associations (also called thrifts) and commercial banks

These institutions are known as fiduciary lenders because of their fiduciary obligations to protect and preserve their depositors' funds. Mortgage loans are perceived as secure investments for generating income and enable these institutions to pay interest to their depositors

If a lender agrees to make a loan based on an 80% LTV, what is the amount of the loan if the property appraises for $314,500 and the sales price is $316,900?

A) $292,900 B) $291,300 C) $251,600 D) $183,200 The answer is $251,600. The loan-to-value ratio will be based on the relationship of the loan to either the appraisal or the purchase price, whichever is less. In this case, the appraisal is less. Therefore, the loan will be 80% of $314,500, which equals $251,600.

A buyer borrowed $85,000 to be repaid over 30 years in monthly installments of $456.30 at 5% annual interest. How much of the buyer's first month's payment was applied to reducing the principal amount of the loan?

A) $530.20 B) $400.00 C) $495.83 D) $102.13 The answer is $102.13. There are three steps: (1) First, find the amount of interest in the first monthly payment by multiplying the annual interest rate by the original amount of the loan: Principal × rate = interest ($85,000 × 5% = $4,250). (2) Then, divide the annual interest by 12 to find the first month's interest: $4,250 ÷ 12 = $354.17. (3) Finally, subtract that interest from the amount of the regular monthly payment to find the amount available to apply to principal: $456.30 - $354.17 = $102.13.

A borrower obtains a $100,000 home equity loan for 30 years at 6% interest. If the monthly payments of $599.55 are credited first to interest and then to principal, what will be the balance of the principal after the borrower makes the first payment?

A) $99,425.00 B) $99,900.45 C) $100,000.00 D) $99,500.25 The answer is $99,900.45. There are four steps: (1) First, find the amount of interest in the first monthly payment by multiplying the annual interest rate by the original amount of the loan: Principal × rate = interest ($100,000 × 0.06 = $6,000). (2) Then, divide the annual interest by 12 to find the first month's interest: $6,000 ÷ 12 = $500. (3) Next, subtract that interest from the regular monthly payment to find the amount of the first payment to be applied to the principal debt: $599.55 - $500 = $99.55. (4) Finally, subtract that amount from the original loan balance to find the balance remaining after the first payment: $100,000 - $99.55 = $99,900.45.

The Federal Reserve System divides the country into

A) 12 federal reserve districts. B) 9 federal reserve districts. C) 11 federal reserve districts. D) 7 federal reserve districts. 12

An FHA-insured mortgage loan would be obtained from which of the following?

A) An FHA-approved lending institution B) The Department of Housing and Urban Development C) An FHA-approved insuring institution D) The Federal Housing Administration (FHA) The answer is an FHA-approved lending institution. FHA insures loans but does not lend money. Loans must be obtained from FHA-approved lending institutions.

Which of the following is NOT a participant in the secondary mortgage market?

A) Credit union B) Ginnie Mae C) Freddie Mac D) Fannie Mae Explanation The answer is credit union. The credit union is a participant in the primary market; the other three are major, active participants in buying and reselling existing mortgages—secondary market activity.

A homeowner's child will start college soon. What financing option is available for the homeowner to obtain funds to pay for the child's education?

A) Home equity loan B) Open-end loan C) Participation financing D) Wraparound loan The answer is home equity loan. A homeowner can use the equity buildup in a home to finance such things as education; it is an alternative to refinancing.

On which type of loan can the borrower prepay without penalty?

A) Loans sold to Fannie Mae and Freddie Mac B) All of these C) VA loans D) FHA loans All off these

Which types of loan includes both real and personal property?

A) Open end B) Package C) Blanket D) Wraparound The answer is package loan. A package loan usually includes furniture, drapes, kitchen appliances, and washer/dryer as part of the sales price of the home.

What helps lenders reduce the risk on a conventional mortgage loan with a high LTV?

A) Private mortgage insurance B) Sale-and-leaseback arrangement C) Home equity D) Flood insurance The answer is private mortgage insurance. Private mortgage insurance provides lenders with funds in case of borrower default and encourages lenders to make higher LTV loans.

What does RESPA stand for?

A) Real Estate Systems Procedures Act B) Real Estate Settlement Prosecutory Act C) Residential Estate Specialist Practices Act D) Real Estate Settlement Procedures Act The answer is Real Estate Settlement Procedures Act. RESPA is designed to ensure that the buyer and seller are both fully informed of all settlement costs.

The grantor becomes the lessee (tenant) and the grantee becomes the lessor (landlord) under which of the following financing arrangements?

A) Sale and leaseback B) Partial sale C) Assumption of mortgage D) Wraparound mortgage The answer is sale and leaseback. A seller sells the land and the building to an investor and leases it back from the investor as a tenant.

A 16-year-old applied for a conventional loan in order to purchase a condominium. The lender denied the application, citing the applicant's age as the reason for the denial. Which of these is TRUE?

A) The lender lawfully denied the application because the applicant was under 18 and therefore was too young to legally sign a contract. B) The lender violated the ECOA because the applicant is too young to be expected to have an employment history. C) The lender violated the ECOA because lending decisions cannot be based on age. D) None of these are true. The answer is the lender lawfully denied the application because the applicant was under 18 and therefore was too young to legally sign a contract. A lender may not consider age unless the applicant is too young to legally sign a contract.

All of the following are true for buyers using an FHA or VA loan EXCEPT

A) These loans must have an appraisal when they are originated. B) FHA will allow a 100% loan-to-value ratio while VA will only allow 96.5%. C) The loan-to-value ratio is typically higher than those used for conventional loans. D) These loans do not allow prepayment penalties. The answer is FHA will allow a 100% loan-to-value ratio while VA will only allow 96.5%. VA loans allow for a 100% loan-to-value ratio, while FHA currently requires a down payment of at least 3.5%. Both loans typically have a higher loan-to-value ratio than conventional loans, and must have an appraisal when originated. In addition, these loans may not have prepayment penalties.

A developer obtained a loan for 12 parcels of real estate. The loan provides for the release of the mortgage lien on each parcel when certain payments are made on the loan. What type of loan is this?

A) Wraparound loan B) Blanket loan C) Purchase money loan D) Package loan The answer is blanket loan. This is a blanket loan with a provision for partial release as properties are sold. In a blanket loan, a borrower puts up several parcels of real estate to be used as security for the debt.

A loan that includes both real and personal property is

A) a FHA loan. B) an open-end loan. C) a package loan. D) a blanket loan. The answer is a package loan. A package loan usually includes furniture, window coverings, kitchen appliances, and washer/dryer as part of the sales price of the home.

The buyers purchased a model home and all its furnishings and appliances by using

A) a FHA-insured loan. B) a buydown. C) a package loan. D) a blanket loan. The answer is a package loan. A package loan is a real estate loan used to finance the purchase of both real property and personal property, such as in the purchase of a new home that includes window coverings and major appliances.

A developer who wishes to finance a subdivision and provide for a release from the lien of individual lots or parcels as they are sold will obtain

A) a blanket loan. B) an FHA loan. C) an open-end loan. D) a package loan. The answer is a blanket loan. A blanket loan usually includes a provision known as a partial release clause, which permits the developer/borrower to obtain the release of any one lot or parcel from the blanket lien by repaying a certain amount of the loan.

One way a borrower can obtain a conventional loan and avoid paying for mortgage insurance is with

A) a larger down payment. B) no down payment. C) a subsidized down payment. D) a lower down payment. The answer is a larger down payment. The borrower can obtain a conventional loan with a larger down payment and thus avoid having to obtain private mortgage insurance (PMI). PMI provides the lender with funds in the event of default.

The provisions of Regulation Z require all of the following to be disclosed to a residential buyer EXCEPT

A) a loan origination fee. B) discount points. C) brokerage commissions. D) the loan interest rate. The answer is brokerage commissions. Regulation Z has to do with disclosing details of the proposed loan. It does not deal with brokerage commissions.

A loan that includes both real and personal property is called

A) a wraparound loan. B) a blanket loan. C) a package loan. D) an open-end loan. The answer is a package loan. A loan that includes both real and personal property is called a package loan.

Regulation Z generally applies to

A) business loans. B) commercial loans. C) agricultural loans of more than $25,000. D) a credit transaction secured by a residence. The answer is a credit transaction secured by a residence. The truth-in-lending law, implemented by Regulation Z, generally applies to a credit transaction secured by a residence, but it does not apply to commercial, business, or agricultural loans of more than $25,000.

The primary activity of Freddie Mac is to

A) buy and sell VA and FHA mortgages. B) act in tandem with Ginnie Mae to provide special assistance in times of tight money. C) guarantee mortgages with the full faith and credit of the federal government. D) buy and pool blocks of conventional mortgages D

Regulation Z defines a creditor as any person who

A) extends consumer credit only when dwellings are used as security. B) extends consumer credit any number of times. C) extends consumer credit more than 25 times each year (or more than 5 times when dwellings are used as security). D) extends consumer credit more than 10 times each year (or more than 2 times when dwellings are used as security). The answer is extends consumer credit more than 25 times each year (or more than 5 times when dwellings are used as security.) A creditor, for purposes of Regulation Z, is any person who extends consumer credit more than 25 times each year or more than 5 times each year if the transactions involve dwellings as security. The credit must be subject to a finance charge or payable in more than four installments by written agreement.

All of the following are examples of loans to individuals that are affected by the Truth in Lending Act under Regulation Z EXCEPT

A) home landscaping. B) household remodeling. C) commercial use. D) bedroom addition. The answer is commercial use. Regulation Z applies when credit is extended to individuals for personal, familial, or household uses, but not for business or commercial use.

A construction loan usually is

A) maintained until the purchase price has been fully paid. B) issued for the full amount of the expected cost of construction. C) short-term financing. D) the only loan a homebuyer will need to obtain. The answer is short-term financing. A construction loan is generally short-term or interim financing. Funds are issued in draws as construction is completed; after that point, a permanent loan is obtained to repay the construction loan.

All of these are lenders in the primary mortgage market EXCEPT

A) mortgage brokers. B) credit unions. C) insurance companies. D) endowment funds. The answer is mortgage brokers. Mortgage brokers do not loan their own money; they are intermediaries who bring borrowers and lenders together.

Lenders that originate mortgage loans

A) must be publically traded corporations. B) make up the primary mortgage market. C) make up the secondary mortgage market. D) must be federal insured depositories. The answer is make up the primary mortgage market. Not all lenders in the primary mortgage market are federally insured depositories. Insurance companies, pension funds, mortgage banking companies, and others also are part of the primary mortgage market.

One way a borrower can obtain a conventional mortgage loan with a lower down payment than 20% of the purchase price is by

A) obtaining permission from the FDIC. B) obtaining a blanket loan. C) obtaining private mortgage insurance. D) obtaining a package loan. The answer is obtaining private mortgage insurance. Private mortgage insurance provides the lender with funds in the event that the borrower defaults on the loan and the value of the equity fails to cover the outstanding loan balance. This allows the lender to assume more risk so that the LTV can be higher than for other conventional loans.

The basic components of the real estate financing market are

A) principal mortgage market and secondary mortgage market. B) primary mortgage market and secondary mortgage market. C) primary mortgage market, secondary mortgage market, and government influences, primarily the Federal Reserve System. D) primary mortgage market and government influences, primarily the Federal Reserve System. The answer is primary mortgage market, secondary mortgage market, and government influences, primarily the Federal Reserve System. The real estate financing market has the following basic components: primary mortgage market, secondary mortgage market, and government influences, primarily the Federal Reserve System.

RESPA is a federal law that was enacted to protect consumers from all of the following in the settlement process EXCEPT

A) property defects. B) kickbacks. C) referral fee requirements. D) excessive escrow account deposits. The answer is property defects. RESPA is a federal law enacted to protect the consumer in the settlement process by requiring accurate and timely information about the actual costs of a transaction, eliminating kickbacks and regulating referral fees, and prohibiting lenders from requiring excessive escrow account deposits.

The Federal Reserve System regulates the flow of money and interest rates in the marketplace by

A) setting the value of the member banks stocks. B) controlling the prime rate charged by member banks. C) controlling the reserve requirements of member banks and setting the discount rate. D) controlling the reserve requirements of the member banks. The answer is controlling the reserve requirements of member banks and setting the discount rate. The Federal Reserve System regulates the flow of money and interest rates in the marketplace by controlling the reserve requirements of the member banks and setting the discount rate it charges for loans it makes to those banks.

One of the federal laws requiring disclosure to a loan applicant who is rejected for a loan on the basis of a credit report is

A) the Fair Credit Reporting Act. B) the Truth in Lending Act. C) the Real Estate Settlement Procedures Act. D) the Community Reinvestment Act. The answer is the Fair Credit Reporting Act. If a loan application is rejected after consideration of a credit report, the federal Fair Credit Reporting Act (FCRA) specifies the information that the lender must provide to the loan applicant. The loan applicant has the right to a free copy of any credit report that was considered in the loan application process. Additional state protections may also apply.

Regulation Z was enacted pursuant to the Truth in Lending Act by the Federal Reserve Board but enforcing the law is now primarily the responsibility of

A) the Federal Deposit Insurance Corporation (FDIC). B) the Federal Housing Administration (FHA). C) the Federal Trade Commission (FTC). D) the Consumer Financial Protection Bureau (CFPB). The answer is the Consumer Financial Protection Bureau (CFPB). Regulation Z was enacted pursuant to the Truth in Lending Act by the Federal Reserve Board, but most of the Federal Reserve Board's responsibilities have been transferred by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to the Consumer Financial Protection Bureau.

If the purchase price of a property exceeds its FHA-appraised property value

A) the buyer takes out a second mortgage loan for the difference. B) at least 50% of the purchase price is paid in cash at closing. C) the buyer will qualify for an FHA-insured loan if the buyer pays the difference between FHA-appraised value and the purchase price in cash as part of the down payment. D) the buyer pays the difference between FHA-appraised value and the purchase price into an escrow account to be held for the benefit of FHA in the event the buyer defaults on the FHA-insured loan. The answer is the buyer will qualify for an FHA-insured loan if the buyer pays the difference between FHA-appraised value and the purchase price in cash as part of the down payment. If the purchase price of a property exceeds its FHA-appraised property value, the buyer can still qualify for an FHA-insured loan by paying the difference between the FHA-appraised value and the purchase price in cash as part of the down payment.

The lower the ratio of debt to value,

A) the greater the chances that mortgage insurance is required. B) the higher the down payment made by the borrower. C) the lower the down payment made by the borrower. D) the higher the interest rate charged the borrower. The answer is the higher the down payment made by the borrower. The lower the ratio of debt to value, the higher the down payment made by the borrower.

Mortgage banking companies

Mortgage banking companies originate mortgage loans with money belonging to insurance companies, pension funds, and individuals, as well as funds of their own. They make real estate loans with the intention of selling them to investors and receiving a fee for servicing the loans. Mortgage banking companies are generally organized as stock companies. As a source of real estate financing, they are subject to fewer lending restrictions than are commercial banks or savings associations. They are not mortgage brokers.

Mortgage brokers.

Mortgage brokers are not lenders, but they are mentioned here because they are intermediaries who bring borrowers and lenders together. Mortgage brokers locate potential borrowers, process preliminary loan applications, and submit the applications to lenders for final approval. They do not service loans once the loans are made. Mortgage brokers also may be real estate brokers who offer these financing services in addition to their regular real estate brokerage activities

Friddie Mac

Most Conventional Loans

Pension funds

Pension funds usually have large amounts of money available for investment. Because of the comparatively high yields and low risks offered by mortgages, pension funds have begun to participate actively in financing real estate projects. Most real estate activity for pension funds is handled through mortgage bankers and mortgage brokers.