Real Estate Financing Practice
What is the lowest possible down payment on an FHA loan?
3.5% Correct Explanation: FHA loans are insured by the Federal Housing Administration and allow for a down payment as low as 3.5%. For this reason, FHA loans are favored by many first-time home buyers
A loan for a new house has an origination fee of one point. If the loan is for $275,000, what would the cost of that point be? A) $2,750 B) $275 C) $1375 D) $1000 Correct
A) $2,750 Explanation: One point is equal to 1% of the total loan amount. If the loan is $275,000, than the amount would be: $275,000 * .01= $2,750
How does an ARM mortgage differ from a fixed rate mortgage? A) ARM stands for adjustable rate mortgage, whose rate may vary with changes in interest rates. B) The fixed rate will always be the most fiscally smart choice. C) Upon default, the borrower must give up his/her left or right arm. D) There is no difference.
A) ARM stands for adjustable rate mortgage, whose rate may vary with changes in interest rates. Explanation: Fixed rate mortgages are locked in at the same rate for the life of the loan, while ARM mortgages have a rate that can "float" or "ride" market rates.
Which government entity was created to encourage low-income housing? A) GNMA (Ginnie Mae) B) FmHA C) FNMA (Freddie Mac) D) FNMA (Fannie Mae)
A) GNMA (Ginnie Mae) Explanation: While all of these are second mortgage markets and Freddie Mac does have multiple low-income housing programs, only Ginnie Mae was created to encourage low-income housing.
Over the life of a fixed-rate, fully amortizing loan, the portion of each payment that goes toward principal will gradually ____. A) increase B) decrease C) not change; the ratio of principal to interest is fixed be unpredictable, as the ratio of principal to interest is erratic Incorrect
A) increase Explanation: At the start of a fixed-rate, fully amortizing loan, a higher share of each payment is interest. As principal is paid down the interest paid decreases, and a larger proportion of the principal is paid off in each payment.
A chattel loan would be used to purchase ____. A) a single-family residence B) a mobile home C) a duplex D) a condominium
B) a mobile home Explanation: A chattel loan is a loan made on a movable piece of property. A chattel loan might be used on a car, or in this case, a mobile home.
Who is the typical reverse mortgage customer? A) someone elderly B) all of these C) someone without a lot of liquid capital D) someone with a lot of equity in their home
B) all of these Explanation: In a reverse mortgage, the lender gives money to the borrower using the home itself as collateral. The loan typically does not require repayment until death or until the homeowner moves out. Reverse mortgages are popular options for those with all three of these attributes: elderly and who are "house rich and cash poor," meaning they have a lot of equity in their home but not a lot of liquid cash.
Gradual liquidation through periodic payments of principal and interest is called ____. A) a HELOC B) an amortized loan C) a take-out loan D) a reverse annuity mortgage
B) an amortized loan Explanation: Amortized loans are the norm in most residential Real Estate and gradually lower the owed amount through monthly payments to principal and interest.
Amortization refers to the process by which ____. A) interest is paid monthly, and principal payments are made on an as-needed basis B) monthly payments are calculated so that the principal is paid off over the life of the loan C) monthly payments are calculated so that the interest paid is the same every month D) a balloon payment is calculated to pay off the principal that remains at the end of the loan
B) monthly payments are calculated so that the principal is paid off over the life of the loan Explanation: Amortization of a loan ensures that the principal is paid off over the life of a loan, as opposed to a balloon payment loan, where there is remaining principal at the end of the loan that must be paid off.
If a borrower puts down 10% on their home loan, what is the loan-to-value ratio? A) 20% B) 80% C) 90% D) 10%
C) 90% Explanation: If a loan has a 90% loan-to-value ratio, the borrower is responsible for putting down 10%. Most conventional home loans have a loan-to-value ratio of 80%.
How does a home equity line of credit differ from a second mortgage? A) The interest accrued on a home equity line of credit is not tax deductible. B) The terms can be used interchangeably. C) A home appraisal is not necessary for a home equity line of credit. D) With a home equity line of credit the borrower can draw money as they need it.
D) With a home equity line of credit the borrower can draw money as they need it. Explanation: In a traditional second mortgage, a borrower would take all of the money loaned to them at one time. In a home equity line of credit the borrower may take up to a specified amount, but they do not need to take that amount in full or all at one time.
What financial instrument is given by a borrower to the lender as promise to repay a debt? A) a trust deed B) a mortgage C) a lien D) a note
D) a note Correct Explanation: A note, or promissory note, is evidence of a debt that can be resold.
Which of these is a tool the Federal Reserve can use to control/influence monetary policy and supply? A) raising and lowering reserve requirements for banks B) buying and selling securities on the open market C) setting the discount rate D) all of them
D) all of them Correct Explanation: All three are used by the Fed to establish the monetary supply.
Mortgage lenders make their money by ____. A) charging loan application fees B) charging loan origination fees C) charging annual loan servicing fees D) all of these
D) all of these Correct Explanation: All three of these are common processing and maintenance fees lenders charge.
Which is not one of the "three c's" of underwriting? A) capacity B) collateral C) credit D) conformity
D) conformity Explanation: Capacity is the cash reserve and debt ratio of the borrower. Collateral includes their down payment and property types. Credit includes their credit score and accounts. Conformity is not one of the three c's of underwriting.
Under lien theory, the mortgagee receives ____. A) legal title and the right to place a lien on the property B) legal title and equitable title C) equitable title only D) the right to place a lien on the property
D) the right to place a lien on the property Explanation: Under lien theory, the mortgagor (borrower) receives legal and equitable title to the real property, and the mortgagee (lender) receives the right to place a lien on the property.
A borrower in a title theory state repays his loan in full, and fulfills any other obligations of the loan. The lender now holds ____. A) simple title B) no title C) legal title D) equitable title B) no title
Explanation: At the start of a loan under title theory, the lender holds legal title and the borrower holds equitable title. When the loan is paid in full, and all other conditions of the loan are fulfilled, the lender transfers legal title to the borrower through a Deed of Reconveyance. The borrower now holds legal AND equitable title, and the lender holds no title.
Most Real Estate loans deal with simple interest, the formula for which is ____.
Rate x Loan Balance = Annual Interest Explanation: The annual interest in a simple interest setup is the balance of the loan multiplied by the interest rate. Note from our real estate expert: When taking the Real Estate exam, you may need to choose from a group of answers in which none of them is the answer you might have in mind. When this happens, find an answer that is correct and choose that one. In this case, you might have been thinking that I = PRT (I = Principal x Rate x Time), and that would be correct, but it is not one of the choices. Be ready for confusing questions like this one when you take this test.
A mortgage lien is placed on real estate by ____.
a lender in exchange for funds to buy the real estate Explanation: A mortgage lien secures the lender's interest in the real property and provides recourse in the event of default.
A foreclosure sale is ____.
an auction sale to the highest bidder Explanation: A foreclosure sale occurs when the owner cannot sell the property via short sale. If it doesn't sell in a foreclosure auction, it becomes property of the lending institution.
A mortgage broker's primary role is to ____.
bring borrowers and lenders together Correct Explanation: The mortgage broker is an intermediary and does not create, sell, or underwrite loans (which is the job of the lender)
What is the primary advantage of a biweekly mortgage?
faster loan payoff
Fannie Mae is ____.
one of the largest corporations in the U.S. Explanation: Fannie Mae was founded to expand the secondary mortgage market in the United States. It is one of the largest corporations in the U.S. when measured by asset
Subprime loans are usually an option for ____.
people with subpar credit and come with a higher interest rate Explanation: Subprime loans carry a higher interest rate because the bank/lender feels they carry greater risk of full repayment.
When a property is released from a mortgage because it has been paid off by the borrower, what document does the lender provide to prove this to be true?
satisfaction piece
A homeowner is buying a new home but hasn't sold their old one. Which type of loan would they obtain in the short term and pay back as soon as their old house is sold?
swing Explanation: A swing loan (also sometimes referred to as a "bridge" or "gap" loan) is a short term loan that allows borrowers to borrow against their current property in order to buy a new one. They are typically taken out when the borrower wants to buy a bigger home but hasn't sold their current property.
A promissory note must contain the following three things: ____.
the amount of the loan, the term of the loan, and the interest rate of the loan Explanation: The amount of the loan, the term of the loan, and the interest rate are all essential to understanding the loan and determining monthly payments, and therefore must be included in the promissory note.
What is the purpose of underwriting?
to determine the risks of making a loan Explanation: Mortgage lenders use a process called underwriting to assess the risks of making a loan. To assess a potential borrower's risk, they look at factors such as salary, credit history, and terms of employment.
A mortgage is a ____.
type of loan used to purchase real property Explanation: A mortgage is a type of loan used to purchase real property. To collateralize a mortgage, the lender places a lien on the mortgaged property. This gives the lender recourse if the borrower defaults. The written agreement that specifies the details of the mortgage and contains a promise to repay is called a promissory note. This is not the mortgage itself, but provides evidence of the mortgage.