Real Estate Prelicensing Unit 6
All of the following are characteristics of VA loans, EXCEPT: Choose only ONE best answer. A the lender determines the loan amount a veteran can obtain. B the VA guarantees the full loan amount in the event of default. C the veteran must apply for a certificate of eligibility that establishes the maximum entitlement of the veteran. D the VA loan is assumable by non-veterans, however the original borrower remains liable for the loan.
B)the VA guarantees the full loan amount in the event of default. The correct answer is 'B' The VA does guarantee the lender against loss but it is according to a sliding scale.
Which of the following clauses result in a loan that is not assumable? Choose only ONE best answer. A Take Out Clause B Defeasance Clause C Alienation Clause D Acceleration Clause
C Alienation Clause The alienation / due on sale clause means that the loan must be paid in full if the property is sold. The defeasance clause requires the bank to return legal/actual title once the mortgagor/borrower has made final payment. The acceleration clause triggers when the borrower defaults and the lender calls the full balance due. A take out commitment is the requirement to have permanent financing to pay off the construction loan.
Willie owns a construction and development firm which has received approval for a 50-unit condo property. The units will be fully furnished when sold. What type of loan will be used? Choose only ONE best answer. A Construction Loan B Take Out Commitment C Package Mortgage D Blanket Mortgage
C) Package Mortgage The correct answer is 'C' A package loan is used to finance both real and personal property. A construction loan is typically interest only and temporary financing. The take out commitment is for permanent financing once a new construction home has been completed. A blanket mortgage is used to finance multiple properties or lots, typically for new subdivisions.
All of the following are characteristics of an FHA 203b loan, EXCEPT: Choose only ONE best answer. A the borrower is required to pay an upfront mortgage insurance premium. B the borrower can purchase a 1-4 unit owner occupied property. C the borrower can be charge loan origination, discount points and prepayment penalties. D the borrower must make a minimum down payment.
C) the borrower can be charge loan origination, discount points and prepayment penalties. FHA loans cannot contain a prepayment penalty. FHA loans are also assumable by qualified borrowers.
Which of the following best describes a borrower obtaining a loan where the payment includes principal, interest, taxes and insurance? Choose only ONE best answer. A Fully Amortizing Loan B Package Loan C Budget Loan D Growing Equity Loan
C)Budget Loan A lender prefers a budget mortgage as real property taxes have a higher priority over other liens and the collateral for the loan is protected when it is insured. A fully amortizing loan means that the loan will have a zero balance at the end of the loan repayment term. A package loan includes both real and personal property. A growing equity loan provides for increases in the mortgage payment so that the borrower is paying down the principal borrowed.
Which of the following transactions would be required to comply with the Real Estate Settlement Procedures Act? Choose only ONE best answer. A Purchase of a 30-acre family farm. B Purchase of a 5-unit apartment building. C Purchase of a triplex with partial seller financing. D Purchase of 4-tenant office building.
C)Purchase of a triplex with partial seller financing. RESPA applies to consumer transactions. The purchase of a farm over 25 acres, a building with more than 4 units and an office building would all be considered commercial transactions. Seller financing is exempt in most situations, however the answer states only partial seller financing is being obtained.
Jaime is purchasing a home where the seller is not paid off the mortgage as it transfers with the property. The seller will be relieved of liability in the event that Jamie defaults on the loan. The release of further liability is obtained through: Choose only ONE best answer. A a purchase subject to the mortgage. B a take out commitment. C a non-recourse loan. D novation.
D) novation. The correct answer is 'D' Novation is used to release liability when a mortgage is assumed. A purchase money mortgage is seller financing. A take out commitment is permanent financing once a new home has been built. A non-recourse loan means that the borrower cannot be sued for a deficiency judgement.
Which of the following is a function that is performed by the Federal Reserve? Choose only ONE best answer. A They are the primary buyer of mortgage loans on the secondary market. B They establish the limit that a bank can charge for discount points. C They establish the interest rates for consumer loans. D They require banks to hold back money and not loan it out.
D)They require banks to hold back money and not loan it out. The correct answer is 'D' The Federal Reserve can set lender reserves which means that those funds cannot be loaned. They can change the discount rate, which is the rate of interest charged to member banks when they borrow money. This has an indirect impact on consumer lending rates. The primary lending market is typically the local bank or credit union. They then package and sell the loans to the secondary market which refills the primary lenders available funds.
A borrower obtains a 30-year fixed mortgage with a monthly payment of $1,200. All of the following statements are true regarding financing, EXCEPT: Choose only ONE best answer. A payments made in excess of the amount due on a fully amortizing fixed mortgage will lower the period of time the loan will be outstanding. B the payment of discount points will result in a lower rate on the note as well as lower monthly payments. C a borrower signs a deed of trust so that a trustee can hold the legal title to a property until full payment is made. D additional payments that are made on an amortized loan will result in a reduction in the monthly loan payment for the remaining term of the loan.
D)additional payments that are made on an amortized loan will result in a reduction in the monthly loan payment for the remaining term of the loan. When a borrower makes additional payments on the loan it will reduce the principal balance and will reduce the number of remaining payments on the loan (decreasing the loan term). It does not impact the dollar amount of future payments.
Loan to value ratio is determined by: Choose only ONE best answer. A multiplying the loan amount by the factor. B dividing the purchase price by the down payment. C subtracting the purchase price from the appraised value. D dividing the mortgage amount by the purchase price.
D)dividing the mortgage amount by the purchase price. Loan to value is calculated by taking the mortgage and dividing by the purchase price. LTV decreases as the amount of down payment increases. The VA loan has the highest loan to value as the borrower can obtain 100% financing, thus having 100% loan to value. When a borrower obtains a conventional mortgage with 20% down payment, they will have an 80% LTV.
A borrower purchased a property 25 years ago and has just made the final payment on the loan under a title theory state. Which of the following clauses is triggered? Choose only ONE best answer. A Defeasance B Alienation C Acceleration D Subrogation
A) Defeasance The lender must return the rights conveyed by the deed of trust once the borrower/mortgagor has made final payment. The borrower has "defeated" the mortgage triggering the defeasance clause. The due on sale / alienation clause requires the loan to be paid in full when ownership is transferred. The acceleration clause is triggered when the borrower defaults on the mortgage and the lender calls the full balance due and payable. Subrogation is the signing away the right to sue..
The Truth in Lending Act / Regulation Z permits a three business day right of rescission for all of the following loans, EXCEPT: Choose only ONE best answer. A a first mortgage. B a refinance mortgage. C a home equity loan. D a reverse mortgage.
A) a first mortgage. There is no right of rescission for a first mortgage, however a borrower has the right to rescind refinances, home equity loans and reverse mortgages.
Kyle and Trina, a recently married couple, are purchasing a property located in a title theory state. The contract specifies that Kyle and Trina will take the title as tenancy by the entirety, however only Trina will be signing the mortgage note. Which of the following statements is FALSE? Choose only ONE best answer. A Kyle and Trina must both sign the promissory note for it to be valid. B Kyle and Trina are permitted to own property under tenancy by the entirety when only one spouse is obtaining the financing. C Kyle and Trina must both sign the deed of trust in order for the bank to legally seek the property in foreclosure. D Kyle and Trina will hold equitable title in the property until the mortgage note is paid in full and the trustee reconveys the legal title.
A)Kyle and Trina must both sign the promissory note for it to be valid. One spouse can purchase the property, qualifying for the mortgage and only that spouse would be required to sign the promissory note. In a title theory state, the married couple would need to sign the deed of trust in order for it to be enforceable. When property is taken tenancy by the entirety both spouses own 100% of the property. The ownership cannot be defeated by a debt where only one spouses has signed for. In a title theory state the borrower/mortgagor retains equitable title while the lender/mortgagee retains legal or actual title through the trustee. This makes foreclosure action faster in a title theory state.
Regulation Z would NOT apply to which of the following purchases assuming that the buyer sought financing? Choose only ONE best answer. A Purchase of a 5-unit owner occupied property B Purchase of a residential property owned by an LLC C Purchase of a duplex that is being sold For Sale by Owner D Purchase of personal property for less than $25,000
A)Purchase of a 5-unit owner occupied property Regulation Z applies to consumer financing. A 5-unit property would be considered commercial property and therefore would be exempt from advertising disclosures.
The foreclosure process most often used in a title theory state is considered: Choose only ONE best answer. A a foreclosure by advertisement. B a judicial foreclosure. C a strict foreclosure. D an equitable foreclosure.
A)a foreclosure by advertisement. The process of foreclosure in a title theory state is known as a foreclosure by advertisement, where notice is publicly posted, the property is sold at auction, and the property is transferred to the winning bidder by trustee deed. There is a 10-day upset bid period, where the sale amount can increase, which resets the 10-day period. Judicial foreclosure occurs in lien theory states where the mortgagee/lender has to sue for a judgement before foreclosure can occur. In a strict foreclosure state the court established the amount due under the mortgage and order the borrower to pay the amount in a set time period. If the borrower fails to pay they will lose the equitable right of redemption.
A buyer asks her agent to explain the basic elements of the various types of loans that are available. Which of the following statements would NOT be true? Choose only ONE best answer. A A widow/widower that has not remarried may be able to obtain a VA loan. B A conventional loan will be insured by the government when the borrower makes less than a 20% down payment. C The interest rates charged on VA loans are determined by the bank making the loan. D A lender cannot charge a prepayment penalty on FHA or VA loans that they originate.
B)A conventional loan will be insured by the government when the borrower makes less than a 20% down payment. The government does not insure or guarantee conventional mortgages. When a borrower does not have 20% to put down on the purchase of the home, the lender will require the borrower to pay for private mortgage insurance (PMI). The name says it all, it is private. VA loans are guaranteed, according to a sliding scale. Only a veteran with an entitlement or qualifying un-remarried widow or widower is permitted to originate a VA loan. The interest rate and fees for both FHA and VA are determined by the bank, although banks can only charge up to 1% origination. FHA and VA loans cannot charge a prepayment penalty. Private loans of $150,000 or less are not allowed to charge a prepayment penalty.
Which of the following statements regarding adjustable rate mortgages is NOT true? Choose only ONE best answer. A Adjustable rate mortgages generally have a low start rate that is fixed for a certain period of time. B Adjustable rate mortgages generally include a cap on the interest rate, however never contains a cap on the payment. C The rate of interest paid by the borrower is determined by adding the margin to the index. D The clause in the note that permits the interest rate to change is called the escalation clause.
B)Adjustable rate mortgages generally include a cap on the interest rate, however never contains a cap on the payment. This answer is incorrect. The correct answer is 'B' Adjustable rate mortgages may contain interest rate caps and payment caps. The payment caps can cause negative amortization.
Which of the following statements in NOT correct regarding equity? Choose only ONE best answer. A Equity increases when additional payments are made toward the principal. B Equity is the difference between the current value of the home and its purchase price. C Equity may decrease if the borrower takes out additional loans secured by the home. D Equity will increase, even with a term loan, should the fair market value appreciate.
B)Equity is the difference between the current value of the home and its purchase price. Equity is the difference between the fair market value of the property and the amount owned. Equity increases when additional payments are made towards principal or when the fair market value of the property increases. When additional debt is taken against a property it decreases the equity.
Which of the following are NOT a characteristic of an FHA 203b loan? Choose only ONE best answer. A The lender cannot charge a prepayment penalty. B Loans made post 1989 contain an alienation clause. C The maximum amount of the loan varies by region. D The borrower must occupy the property upon purchase.
B)Loans made post 1989 contain an alienation clause. An FHA 203b loan is the standard loan offered, which is assumable and therefore cannot contain a due on sale or alienation clause. The due on sale or alienation clause would make not permit assumption by a new borrower. FHA loans are assumable and cannot contain a prepayment penalty. There are FHA loan limits that are established by region so it is best to have the borrower meet with a lender for pre-qualification. In order to qualify for an FHA loan, the borrower must owner occupy, however can purchase a multi-unit property (up to 4 units).
Jeffrey obtains an FHA 203b loan for $180,000 from Shady Tree Bank for 30 years with the payment of 1% origination and 2 discount points. The payments for this loan will be made in arrears with the final payment resulting in reconveyance of the title held by the trustee. Jeffery would be considered which party in this transaction? Choose only ONE best answer. A Mortgagee B Obligor C Administrator D Beneficiary
B)Obligor The obligor/promisor/mortgagor/borrower grants the bank an interest in the property until final payment is made while the obligee/promisee/mortgagee/lender receives the rights that have been granted. The way to remember this is that borrower has "or's" and the lender has "ee's". An administrator is appointed by the court to administer the state of a deceased person that died intestate (without a will). A beneficiary is an individual that receives property or assets from a deceased person. A will would define what the beneficiary would be entitled to receive.
Which of the following statements is FALSE regarding the Real Estate Settlement Procedures Act? Choose only ONE best answer. A The lender must provide a Loan Estimate within 3 days of mortgage application. B The buyer's agent is not permitted to pay a referral to another agent unless the agent resides out of state. C The listing agent is prohibited from accepting a referral fee from the attorney preparing the deed. D The lender is not permitted to collect an excessive amount to fund the escrow account.
B)The buyer's agent is not permitted to pay a referral to another agent unless the agent resides out of state. RESPA does not apply to agent commission or the payment of referral fees. It does not permit kickbacks among settlement service providers. The way to recall what RESPA applies to is KEUBDL - "Kids Eat Up Boogers Dirt and Lead). K - no kickbacks, E - escrow limits, U - uniform settlement statement, B - booklet amount financing, D - disclosure of loan servicing and L - loan estimate within 3 days of mortgage application.
Which of the following best describes the purpose of paying discount points to a lender? Choose only ONE best answer. A They encourage a lender to originate a loan to a less qualified borrower. B They reduce the monthly payment for the borrower. C They provide an additional incentive to the secondary mortgage market. D They decrease the yield to the lender.
B)They reduce the monthly payment for the borrower. Discount points are paid to reduce the stated interest rate on the note and lower the monthly payment to the borrower. It is prepaid interest and a sunk cost which may be charged on conventional, FHA and VA loans. Discount points increase the yield on the loan.
A seller provides a purchase money mortgage to a buyer as the sole method of financing. The buyer lives in the property for 5 years before defaulting on the mortgage. Which of the following statements would NOT be true? Choose only ONE best answer. A In a title theory state a trustee holds legal title to the property making it easier to foreclose. B Upon foreclosure and sale, the seller is permitted to sue the buyer for a deficiency judgment if the proceeds recovered will not satisfy the debt and foreclosure fees. C Upon completion of the auction and the 10-day statutory right of redemption the property will be transferred by trustees deed to the highest bidder. D The mortgagor is entitled to any funds that are in excess of the amount owed and the foreclosure fees.
B)Upon foreclosure and sale, the seller is permitted to sue the buyer for a deficiency judgment if the proceeds recovered will not satisfy the debt and foreclosure fees. When a seller provides financing they are not permitted to sue for a deficiency judgment. In a title theory state, the trustee hold legal title which allows foreclosure to occur faster. Foreclosure is by advertisement and the property is sold at auction to the highest bidder. The borrower has an equitable and statutory right of redemption. E comes before S; the equitable right of redemption is before the auction and the statutory right of redemption is after the foreclosure auction has occurred. The mortgagor is the borrower and they are entitled to the excess after all debts and fees have been satisfied.
A loan where the balance may not be reduced when monthly payments are made by the borrower and may result in negative amortization is best defined as a/an: Choose only ONE best answer. A Growing Equity Mortgage. B adjustable rate mortgage. C term-only mortgage. D budget mortgage.
B)adjustable rate mortgage. The correct answer is 'B' An adjustable rate mortgage may contain rate caps and payment caps. The payment cap may result in negative amortization, where the payment does not cover the amount of interest due. A growing equity mortgage results in the payment to principal causing the balance to more rapidly reduce. A term only mortgage is interest only with no resulting payments to principal. A budget mortgage includes principal, interest, taxes and insurance.
Brandon purchased a home by obtaining a VA loan 5 years ago. Due to an economic setback, Brandon is significantly behind on the mortgage. The lender has tried multiple workouts, however Brandon continues to breach the agreement. The lender has now sued Brandon to obtain a judgment. Based on the above, Brandon has: Choose only ONE best answer. A triggered the alienation clause. B purchased the property in a lien theory state. C triggered the pay to stay clause. D purchased the property in a title theory state.
B)purchased the property in a lien theory state. The correct answer is 'B' When a lender must sue before foreclosing on a property the property was purchased in a lien theory state. In a title theory state the mortgagor/borrower grants the mortgagee/lender a deed of trust securing the debt to the home. It is faster to foreclose in a title theory state. Alienation/due on sale clause requires the mortgagor/borrower to pay of the loan when ownership has been transferred to another party, which means that the loan is not assumable. The deed of trust requires the borrower to repay the debt in order to keep the property and may be referred to as the "pay to stay" however there is not a pay to stay clause.
A mortgagor refinances their first mortgage, however since the second mortgage is near maturity, elects to continue to pay the second note as agreed. The new lender wants to be the superior lien over the second mortgage. What will the second lender do to accomplish this? Choose only ONE best answer. A Hypothecation B Subrogation C Subordination D Novation
C)Subordination The correct answer is 'C' Subordination is trading places which allows a lender with a higher priority to change to a lower position. Subrogation occurs when a party signs over the right to sue, which occurs when an insurance company pays a claim and then will seek recovery from the party at faulty. Hypothecation is pledging an asset as security, allowing the borrower to use the property while payments are made. Novation allows a new party to take over a debt through assumption releasing the original debtor.
Bob is building a home and closes on a construction loan with Speedy Close Bank. The lender will be providing temporary financing, thus requiring B to refinance into a more permanent loan. Which of the following best describes the new loan? Choose only ONE best answer. A Balloon B Wraparound C Take Out Commitment D Acceleration
C)Take Out Commitment A take out commitment relates to new construction property and is permanent financing once the home has been completed. Construction loans are typically interest only and temporary financing used while the property is built. When a loan does not fully amortize the final payment is known as a balloon payment. A wraparound mortgage does not disturb initial financing. A second loan is obtained and the borrower will make one payment which pays both loans.
Jane's property, which she has owned for over 10 years, was recently foreclosed on. Which of the following statements is FALSE? Choose only ONE best answer. A Subsequent to the foreclosure, all liens will be extinguished whether they have been paid in full. B The lender may be entitled to recover insurance proceeds if Jane obtained an FHA mortgage. C The lender may be entitled to recover insurance proceeds if Jane obtained a VA mortgage. D The lender will be entitled to sue for a deficiency judgment in the event that the proceeds were not sufficient to cover the debt and foreclosure expense unless the borrower signed a non-recourse note.
C)The lender may be entitled to recover insurance proceeds if Jane obtained a VA mortgage. FHA loans are insured. VA loans are guaranteed. In the event of a default and foreclosure, the lender will be compensated according to a sliding scale. When foreclosure has taken place, proceeds may not be enough to pay all lien holders. Costs of sale are paid first, the liens according to recordation date and time. Typically there will not be enough proceeds to pay all lien holders. The lien is removed from the property and the lender may then seek a deficiency judgement.
All of the following statements regarding VA loans are true, EXCEPT: Choose only ONE best answer. A the veteran must have an entitlement. B an un-remarried widow or widower may be entitled to obtain a loan. C for a buyer to assume a veterans loan they must have an entitlement. D an entitlement may be restored upon final payment of the loan.
C)for a buyer to assume a veterans loan they must have an entitlement. The correct answer is 'C' VA loans are assumable by veterans and non-veterans regardless of entitlement. When a veteran with an entitlement assumes a VA mortgage from another veteran, the mortgagor veteran that originally borrowed the money will have his/her entitlement restored. When a non-veteran assumes the mortgage it must be paid in full before the veteran's entitlement is restored. A qualifying un-remarried widow or widower may obtain a VA loan. A veteran can only have one VA loan at a time.
Kristi and Isaac are purchasing a property located at 2517 Red Mountain Rd by obtaining a VA loan. The contract price is $215,000, however the certificate of reasonable value was issued at $210,000. The veteran may: Choose only ONE best answer. A withdraw from the sale upon payment of the real estate commission due to their agent. B withdraw from the sale as the VA will not permit a buyer to purchase a home above the CRV. C purchase the property by paying the $5,000 as a down payment. D purchase the property to avoid the seller prevailing in a suit for specific performance.
C)purchase the property by paying the $5,000 as a down payment. The correct answer is 'C' A VA loan cannot exceed the CRV - certificate of reasonable value. The borrower can elect to purchase the property by paying the difference or terminate the contract under the FHA/VA financing addendum.
A developer has obtained financing for a new subdivision with 100 salable lots. When a buyer purchase a property a portion of the proceeds will be paid to the lender so that they will remove any lien they have in that lot. What type of loan does the developer have? Choose only ONE best answer. A Construction B Take Out C Package D Blanket
D) Blanket A blanket loan allows the borrower/mortgagor to finance multiple lots under one loan. The agreement outlines how much must be paid to remove the lien against each individual property is sold. A construction loan is the riskiest form of financing, which is often temporary. Permanent financing obtained for when construction is completed is known as a take out commitment. A package loan is used to finance both real and personal property.