Unit 7
A couple purchased a summer home in a new resort development. The house was completely equipped, and the couple qualified for a loan that covered the purchase price of the residence, including furnishings and appliances. This kind of financing is A) an unconventional loan. B) a blanket loan. C) a package loan. D) a wraparound loan.
The answer is a package loan. A loan that uses personal property and appliances installed on the premises as well as the real estate as security for the debt is a package mortgage. Package mortgages are not permitted in Pennsylvania.
Regulation Z generally applies when a credit transaction is secured by A) a commercial property. B) an agricultural loan. C) a residence. D) a business.
The answer is a residence. Regardless of the amount, however, Regulation Z generally applies when a residence is used to secure the credit transaction. The regulation does not apply to business, commercial, or agricultural loans of any amount.
An FHA-insured mortgage loan would be obtained from A) Fannie Mae. B) the Department of Housing and Urban Development. C) the Federal Housing Administration. D) any qualified lending institution.
The answer is any qualified lending institution. The common term FHA loan refers to a loan that is insured by the agency. FHA-approved lending institutions make these loans. The FHA insurance provides security to the lender in addition to the real estate. Fannie Mae purchases these loans.
The buyers were turned down for a mortgage loan. By law, the lender A) is not obligated to state any reasons for the denial. B) must immediately explain the reasons in the denial letter. C) may verbally discuss the negative reasons, but may not put these in writing. D) must inform the rejected applicants in writing the reasons within 30 days.
The answer is must inform the rejected applicants in writing the reasons within 30 days. Lenders and other creditors must inform all rejected credit applicants of the principal reasons for the denial or termination of credit. The notice must be provided in writing, within 30 days.
Who gets the BEST interest rates? A) Investors B) Tenants C) Owner occupants D) Landlords
The answer is owner occupants. Lenders reserve the best interest rates for owners who occupy the property because these owners are least likely to default.
A mortgage lender looks at the risk involved in making a loan. What is a good description of risk? A) Possibility that the investment will lose money B) Income that can be generated by the loan C) Cost of borrowing the money from the Federal Reserve D) Preventive measures to ensure loan payback
The answer is possibility that the investment will lose money. Risk is the likelihood that the investment will lose money and the yield is the return or income that can be generated from the loan.
A couple purchased a residence for $195,000. They made a down payment of $25,000 and agreed to assume the seller's existing mortgage, which had a current balance of $123,000. The buyers financed the remaining $47,000 of the purchase price by executing a mortgage and note to the seller. This type of loan, by which the seller becomes the mortgagee, is called a A) package mortgage. B) wraparound mortgage. C) balloon note. D) purchase money mortgage.
The answer is purchase money mortgage. When the seller finances all or part of the purchase price by accepting a note and mortgage from the buyer, the document that creates the seller's (mortgagee's) interest is a purchase money mortgage. Title passes to the buyer, and the seller essentially becomes the lender.
If a lender agrees to make a loan based on an 80% LTV, what is the amount of the loan if the property ap-praises for $114,500 and the sales price is $116,900? A) $91,600 B) $83,200 C) $92,900 D) $91,300
The answer is $91,600. The LTV is based on the appraised value or the sale price, whichever is less. $114,500 × 80% = $91,600.
Funds for Federal Housing Administration (FHA) loans are usually provided by A) the Federal Reserve. B) the Federal Housing Administration (FHA). C) qualified lenders. D) the seller.
The answer is qualified lenders. The FHA is not a direct lender, but rather insures loans made by approved lending institutions. Qualified lenders make the loans; the FHA insures the lender's risk of loss.
For what type of loan is the lender likely to charge a lower interest rate? A) 15 year fixed rate B) Jumbo loan C) Construction loan D) 30 year fixed rate
The answer is 15 year fixed rate. Lenders typically charge a lower interest rate if the money will be repaid in a shorter time. They usually charge more for risky loans, such as construction loans (project may not get finished) and jumbo loans (a lot of money secured by only one property).
Ideally, lenders prefer a down payment of at least A) 25%. B) 5%. C) 10%. D) 20%.
The answer is 20%. Lenders prefer at least a loan-to-value ratio of 80% or less. If the down payment is less than 20%, lenders frequently require some insurance to cover deficiencies in case of default.
By law, private mortgage insurance must be terminated when the equity in the home reaches A) 30% of the current appraised value. B) 22% of the purchase price. C) 25% of the purchase price. D) 20% of the current appraised value.
The answer is 22% of the purchase price. On loans originating after July 1999, federal law requires that PMI automatically terminate if a borrower has accumulated at least 22% equity in the home and is current on mortgage payments. The 22% of equity is based on the purchase price of the home.
Which federal law requires that borrowers be provided with a free credit report once a year? A) Truth in Lending Act B) Equal Credit Opportunity Act C) Fair and Accurate Credit Transactions Act D) Fair Housing Act
The answer is Fair and Accurate Credit Transactions Act. The Fair and Accurate Credit Transactions Act (FACTA) requires that annually, borrowers can ask for and receive a free credit report from each of the three major credit bureaus.
Which law requires that all advertising that references mortgage financing terms contain certain disclosures? A) Community Reinvestment Act B) Fair Housing Act C) Equal Credit Opportunity Act D) Truth in Lending Act (Regulation Z)
The answer is Truth In Lending Act (Regulation Z). The Truth in Lending Act (Regulation Z) provides strict regulation of real estate advertising in all media that refer to mortgage financing terms. When specific trigger terms are used, then the advertisement must include additional information including cash price, required down payment, annual percentage rate, and more.
What law allows borrowers to rescind certain loan transactions by notifying the lender within three days? A) Truth in Lending Act B) Real Estate Settlement Procedures Act (RESPA) C) Equal Credit Opportunity Act (ECOA) D) Community Reinvestment Act (CRA)
The answer is Truth In Lending Act. The Truth in Lending Act allows consumers a "cooling off" period of three days after the loan is made; if the borrower decides to not go through with the loan, the money is simply not dispersed. This cooling off period does not apply to the loan made to acquire a home. Once the loan is made and title is transferred, there is no going back.
Which of the following is an example of a conventional loan? A) A 60% loan-to-value ratio first mortgage loan secured through a credit union B) A loan obtained through a private lender with a VA guarantee C) A mortgage loan insured by the Federal Housing Administration D) An installment sale
The answer is a 60% loan-to-value ratio first mortgage loan secured through a credit union. A conventional loan relies solely on the ability of the borrower to repay the debt and the security provided by the mortgage. This is generally considered the most secure loan because it has the lowest loan-to-value ratio. A 60% LTV would be an example of a conventional loan.
Which of the following is required for a veteran to receive a VA loan? A) Mortgage insurance premium B) An appraisal that matches the purchase price C) Private mortgage insurance D) A certificate of reasonable value
The answer is a certificate of reasonable value. The VA issues a certificate of reasonable value (CRV) for the property purchased by the veteran. The CRV places a ceiling on the amount of a VA loan allowed for the property. If the purchase price is greater than the amount cited in the CRV, the veteran may pay the difference in cash.
The federal Equal Credit Opportunity Act allows lenders to deny loans to potential borrowers on the basis of A) sex. B) dependence on public assistance. C) amount of income. D) race.
The answer is amount of income. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against a borrower on the basis of race, color, religion, national origin, sex, marital status, age, and dependence on public assistance. The amount of income needed to qualify for a loan is a legitimate business rea-son for denying a loan.
A borrower obtains a mortgage loan to make repairs on her home. The mortgage document secures the amount of the loan as well as any future funds advanced to the borrower by the lender. This borrower has obtained A) an open-end loan. B) a wraparound mortgage. C) a growing equity mortgage. D) a blanket loan.
The answer is an open-end loan. An open-end mortgage loan secures not only the original amount borrowed but also future advances made to the borrower. This allows the borrower to "open" the mortgage and increase the amount of debt to the lender.
What assists the lender in determining that the collateral is sufficient for the amount of the loan? A) Tax assessed value B) Appraisal C) Depends on the amount of the loan D) Price agreed upon by buyer and seller
The answer is appraisal. The lender orders an appraisal to verify that if the property is repossessed for non-payment, the lender can recover the property in order to sell it to cover the remaining loan amount. Typically, the loan amount is a percentage of the sale price (agreed upon between the buyer and seller) or the appraised value, whichever is lower.
Once the commitment letter has been provided, licensees often encourage their buyers to A) make major purchases between the commitment letter and settlement. B) start shopping for new appliances. C) avoid driving through the neighborhood. D) avoid any major purchases until after closing.
The answer is avoid any major purchases until after closing. The lender is committed to making the loan when making a loan commitment, but this is contingent on the borrower's situation remaining the same. Borrowers should avoid any new loans until after closing.
In a loan that requires periodic payments that do not fully amortize the loan balance by the final payment, what term BEST describes the final payment? A) Balloon payment B) Acceleration payment C) Variable payment D) Adjustment payment
The answer is balloon payment. When periodic payments do not fully satisfy the debt by the time the last payment is due, the final payment needed to satisfy the debt is known as a balloon payment.
A developer received 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 arrangement is called a A) blanket loan. B) package loan. C) wraparound loan. D) purchase money mortgage.
The answer is blanket loan. When multiple parcels of real estate are financed using one note and mortgage, the loan is known as a blanket loan or blanket mortgage. Generally, the lien can be released on individual parcels as the loan is repaid.
A builder has only two homes left to sell in the development. While maintaining current values, the builder can assist the last two buyers by offering them a A) buydown. B) reduced sale price. C) reverse mortgage. D) construction loan.
The answer is buydown. A buydown is a way to temporarily (or permanently) lower the interest rate on a mortgage loan. A lump sum is paid in cash to the lender at closing. The payment offsets (and so reduces) the interest rate and monthly payments during the loan's first few years.
Which of the following may a lender use when evaluating an application for a loan? A) Religion B) Marital status C) Neighborhood where the property to be mortgaged is located D) Credit history
The answer is credit history. Lenders may consider an applicant's past payment performance, credit use, credit history, types of credit in use and credit report inquiries. Lenders may not base lending decisions of any of the protected classes, including age, marital status, source of income, or the neighborhood in which the property is located.
In an adjustable-rate mortgage loan, the interest rate is tied to an objective economic indicator called A) a reserve requirement. B) a discount rate. C) an index. D) a mortgage factor.
The answer is index. An adjustable-rate loan (ARM) is originated at one rate of interest, with provisions for the rate to fluctuate in the future based on some identified, objective economic indicator. This indicator is called an index.
Under the Truth in Lending Act, although the borrower may rescind a number of transactions within three days, the borrower is NOT permitted to rescind a A) loan to purchase of a single-family dwelling. B) home equity loan. C) home mortgage refinancing loan. D) commercial loan.
The answer is loan to purchase of a single-family dwelling. The three-day right of rescission does not apply to owner-occupied residential purchase money or first mortgages used to buy the property. The right does apply to refinancing a home mortgage or to a home equity loan.
The amount of a loan expressed as a percentage of the value of the real estate offered as collateral is the A) debt-to-equity ratio. B) loan-to-value ratio. C) amortization ratio. D) capital-use ratio.
The answer is loan-to-value ratio. The loan-to-value (LTV) ratio is the ratio of the debt to the sale price or appraised value, whichever is less. The greater the borrower's stake in the collateral, the lower the lender's risk.
In an adjustable-rate mortgage, what represents the lender's cost of doing business? A) Rate cap B) Conversion options C) Margin D) Index
The answer is margin. The margin represents the lender's cost of doing business and consists of the index rate plus a premium.
The process by which the lender determines the upper loan limit for which the buyer will qualify is A) preliminary commitment. B) conditional approval. C) prequalification. D) preapproval.
The answer is prequalification. Prospective buyers can obtain a loan preapproval based on a preliminary credit application. Prequalification is the process by which the lender determines the upper loan limit for the borrower.
In determining LTV, value is A) appraisal value or price, whichever is higher. B) 80% of the sale price or less. C) price or appraised value, whichever is less. D) 95% of the appraised value.
The answer is price or appraised value, whichever is less. Loan-to-value ratio is the amount of the loan expressed as a percentage of either the sales price or the appraised value of the property, whichever is lower.
A lender may protect its interest in a conventional mortgage loan by asking the buyer to obtain additional security from A) the borrower's note. B) private mortgage insurance. C) escrow accounts. D) title insurance.
The answer is private mortgage insurance. If the down payment is less than 20%, lenders frequently require private mortgage insurance (PMI) to cover deficiencies in case of default.
A woman purchased her home for cash 30 years ago. Today, she receives monthly checks from the bank that supplement her income. The woman MOST likely has obtained A) a shared-appreciation mortgage. B) an overriding deed of trust. C) an adjustable-rate mortgage. D) a reverse annuity mortgage.
The answer is reverse annuity mortgage. The term annuity refers to a stream of payments. Normally, payments flow from a borrower to a lender. In a reverse annuity mortgage, the payments flow in reverse—from lender to borrower. This arrangement often allows people on fixed incomes to benefit from the equity in their home without having to sell it.
Regulation Z requires that all lending details be included in the ad that refers to mortgage financing details. If the ad mentions an attractive, low-interest rate, the ad must also include A) the fact that the loan may be rescinded within three days. B) a truth in lending statement. C) a statement that all borrowers will be considered based on source of income. D) the annual percentage rate (APR).
The answer is the annual percentage rate (APR). Regulation Z of the Truth in Lending Act provides strict regulation of real estate advertising in all media; if specific the interest rate is advertised, then the annual percentage rate (APR) must be calculated, based on all charges rather than the interest rate alone, and also be included in the ad.
Under the provisions of the Truth in Lending Act (Regulation Z), the annual percentage rate (APR) of a finance charge includes all of the following components EXCEPT A) the broker's commission. B) the loan interest rate. C) discount points. D) the loan origination fee.
The answer is the broker's commission. The Truth in Lending Act requires certain disclosures so that the consumer knows the true cost of obtaining a loan. Disclosures include loan fees, finance charges, and discount points in addition to the stated interest rate. This information is used to calculate the annual percentage rate (APR). Broker compensation is not a component of APR.
A lender takes certain factors into consideration when deciding whether to grant a borrower a mortgage loan. All of the following are legitimate factors EXCEPT A) the marital status of the borrower. B) the amount of the borrower's income. C) credit report inquiries. D) credit use.
The answer is the marital status of the borrower. The Equal Credit Opportunity Act prohibits using the marital status of the borrower when determining creditworthiness. In addition to income, five other factors are analyzed: past payment performance, credit use, credit history, types of credit in use, and credit report inquiries.