Lesson 11: Applying for a Residential Loan: Pop Quiz

Bob is applying for a mortgage. Which type will require him to pay principal and interest at regular intervals until the debt is satisfied? A.Term B.Amortized C.Second D.Option

B.Amortized This is a definition of amortization.

Which of the following loans would result in the borrower paying the least interest over the life of the loan term? A.15-year loan at 10% interest B.15-year loan at 11% interest C.20-year loan at 10% interest D.20-year loan at 11% interest

A.15-year loan at 10% interest The shorter the loan term is, the less interest a borrower will pay. A shorter loan may not always be the best option for a borrower, though, as a shorter loan for the same loan amount will mean higher payments and may limit what properties the borrower can afford.

XYZ Lending needs some paperwork before it can give final approval to Karen's loan. Which document is XYZ least likely to request from Karen? A.A copy of the listing agreement B.Termite inspection results C.The results of a boundary survey D.Title report

A.A copy of the listing agreement A loan underwriter will not be concerned with the listing agreement.

Which of the following loans would be subject to the Truth in Lending Act? A.A loan to a first-time home buyer B.A loan to a homeowners association C.A loan to a residential subdivision developer D.A loan to buy a 20-unit apartment complex

A.A loan to a first-time home buyer The Truth in Lending Act applies to consumer loans. It doesn't cover loans for business, commercial, or agricultural purposes, or loans to corporations or other organizations.

Which is true regarding a standard 203(b) FHA loan? A.An FHA appraisal is required B.No downpayment is required C.Secondary financing from an institutional lender may be used for the downpayment D.The maximum loan term is 20 years

A.An FHA appraisal is required FHA loans require an appraisal by an appraiser who has met the educational and certification requirements for inclusion on the FHA's roster of approved appraisers. Secondary financing provided by a close family member is allowed, but secondary financing from an institutional lender is not allowed.

Kelly is trying to buy a property from Ed, but only has 10% of the purchase price and is trying to avoid paying private mortgage insurance. One way this could happen is if: A.Ed will finance a portion of the sales price and accept second lien position, so that Kelly only has to borrow 80% from the lender, who will keep first lien position B.Ed will co-sign Kelly's loan C.Ed gives Kelly a reverse equity mortgage D.It's impossible; private mortgage insurance is always required if the borrower has less than 20% for a downpayment

A.Ed will finance a portion of the sales price and accept second lien position, so that Kelly only has to borrow 80% from the lender, who will keep first lien position If Ed gives Kelly a purchase money mortgage for the portion of the downpayment she doesn't have, and accepts second lien position, Kelly will only need to borrow 80% of the sales price from the lender, thereby avoiding private mortgage insurance.

A loan is set up so that the borrower's payments are the same size each month. Each payment is partly interest and partly principal, and the loan's balance at the end of the loan term will be zero. Which type of loan is this? A.Fully amortized B.Partially amortized C.Reverse annuity D.Straight note

A.Fully amortized The regular payments on a fully amortized loan include both principal and interest and will pay off the entire amount owed by the end of the loan term, so no balloon payment will be necessary.

An advertisement for a house includes only the following phrase about financing: "Assume the owner's original loan with only a $1,000 downpayment!" What is wrong with this advertisement? A.It doesn't also include the loan's annual percentage rate and other financial terms B.It doesn't also include the loan's original balance C.It doesn't give the brokerage firm's name as advertised D.Nothing, so long as it is the real estate licensee's own property

A.It doesn't also include the loan's annual percentage rate and other financial terms Under the Truth in Lending Act, if an advertisement contains a triggering term, such as the amount of a downpayment, then it must disclose all of the other information concerning the loan. This includes the loan's annual percentage rate.

A builder plans to construct a single-family home on spec, which he will then sell himself. He needs to borrow $60,000 to do so, and he approaches the local bank for a construction loan. Is this loan subject to Truth in Lending Act disclosure laws? A.No, because no disclosure is required for business loans B.No, because TILA applies to loans of $54,600 or less C.Yes, because the loan concerns a single-family residence D.Yes, because TILA applies to loans of $51,800 or more

A.No, because no disclosure is required for business loans The Truth in Lending Act applies to consumer loans (those made for personal, family, or household purposes); it would not apply to a business loan, even if it will be used to construct a single-family residence.

A buyer is unfamiliar with the concept of discount points and asks a licensee to explain. The licensee responds "Discount points are used to replace funds that are being held by the Federal Reserve, so that more funds are available to lend." Is this description correct? A.No, discount points are used to increase the yield for lenders who will sell the loans on the secondary market B.No, discount points are used to pay brokers' commissions C.Yes, banks hold discount points in escrow until sufficient funds have been accumulated to make more loans D.Yes, discount points lower interest rates, which make loans more affordable for everyone

A.No, discount points are used to increase the yield for lenders who will sell the loans on the secondary market Discount points are paid to a lender in order to increase the lender's upfront yield on a loan. Typically, the lender will compensate for this by charging a below-market interest rate.

A buyer is purchasing a home using a VA loan. Which of the following is true? A.The VA sets the loan's guaranty limit B.The VA will determine the loan's terms C.The VA will determine the loan's interest rate D.The VA will require a 3.5% downpayment

A.The VA sets the loan's guaranty limit The VA guaranty covers only part of a loan amount, up to a maximum set by the government. VA loan terms and interest rates are negotiable between the borrower and the lender.

Which type of government-backed loan is guaranteed against loss to the lender? A.VA mortgage B.FHA mortgage C.Conventional mortgage D.Subprime mortgage

A.VA mortgage VA loans are government-backed loans that guarantee lenders against default. While FHA loans are similar in that regard, an FHA loan insures (rather than guarantees) a lender against loss.

Income, net worth, and credit history are all factors involved in determining the: A.buyer's qualifications B.seller's qualifications C.sale price for a property D.loan-to-value ratio

A.buyer's qualifications These three factors comprise the basic analysis of whether a buyer is a good risk for a loan.

The interest rate on an adjustable-rate mortgage (ARM) is calculated using an index as well as a margin. The margin: A.remains constant throughout the loan term B.changes yearly or half-yearly C.follows changes in the index D.decreases as the loan is paid off

A.remains constant throughout the loan term The interest rate of an ARM will change in response to changes in the particular index selected by the lender. The margin itself is fixed at the time the loan is made.

A borrower obtains a home equity loan on a property he already owns. The Truth in Lending Act allows the borrower to rescind the loan transaction within: A.three days after signing the agreement or receiving the disclosure statement B.three days after receiving the funds C.one week after signing the agreement or receiving the disclosure statement D.one week after receiving the funds

A.three days after signing the agreement or receiving the disclosure statement The Truth in Lending Act gives home equity loan borrowers the right of rescission for three days after the loan agreement has been signed, the disclosure statement has been received, or the notice of the right of rescission has been received, whichever occurs last.

The usual debt to income ratio in a conventional loan is: A.25 percent B.31 percent C.36 percent D.41 to 43 percent

C.36 percent 36% is standard. Note that this ratio also is sometimes called the debt service to income ratio.

If the lender charges three points on a $100,000 loan, the borrower will be required to pay: A.$300 B.$3,000 C.$30,000 D.$300,000

B.$3,000 Three points equals 3% of the loan amount. On a $100,000 loan, that's $3,000 ($100,000 × 3% = $3,000).

Monica has been preapproved for a loan of up to $250,000 to buy her first house. She has good credit, and plans to make a downpayment of at least 20%. Which type of loan is she most likely to use? A.Blanket mortgage B.Conventional loan C.Swing loan D.Wraparound mortgage

B.Conventional loan A conventional loan is typically used for purchase of a first home. While conventional loans can have downpayments smaller than 20%, no private mortgage insurance is required if the buyer puts down 20% or more.

Which of the following is a primary market lender? A.Federal Housing Administration B.Mortgage banking company C.Mortgage broker D.Veterans Administration

B.Mortgage banking company A mortgage banker is a primary market lender, meaning that it originates loans directly to property buyers. Under the traditional distinction between a mortgage banker and a mortgage broker, a mortgage broker negotiates loans, bringing borrowers and lenders together for a fee, but (unlike a mortgage banker) is not a lender.

Does this radio ad comply with TILA's Regulation Z? "Qualified borrowers can get fixed-rate mortgages with an annual percentage rate of only 5.55 percent. Better hurry--first come, first served!" A.Yes, because TILA doesn't regulate radio advertising B.Yes, this ad meets Truth in Lending requirements C.No, lenders can't advertise interest rates on the radio D.No, the APR is a trigger item that requires full disclosure

B.Yes, this ad meets Truth in Lending requirements The Truth in Lending Act includes rules governing advertising of consumer credit. Mention of the APR is okay, but mention of other specific financing terms in an ad "triggers" the full disclosure requirement. Stating that the loan is fixed-rate does not constitute a specific claim about cost, which is what the law regulates.

The Truth in Lending Act's Regulation Z covers: A.industrial loans B.home mortgage loans made to an individual C.commercial loans under $10,000 D.seller financing

B.home mortgage loans made to an individual The Truth in Lending Act applies to consumer loans that are secured by real property. It does not apply to commercial or industrial loans, or to seller financing (unless extending credit is part of the seller's ordinary business).

The requirements of the Truth in Lending Act would apply to a: A.construction loan used by a builder to build a model home B.loan for the purchase of a mobile home and lot for use as a principal residence C.loan to purchase an airplane D.loan to plant soybean and corn crops

B.loan for the purchase of a mobile home and lot for use as a principal residence The Truth in Lending Act applies to consumer loans (for family, personal, or household purposes), including the purchase of mobile homes and the land they're on. It does not apply to commercial loans, such as a construction loan for a developer.

Carol is buying a home using a loan that requires her to make monthly payments of principal and interest for ten years, at which time she will have to make a final balloon payment of the remaining loan balance. This describes a/an: A.fully amortized loan B.partially amortized loan C.term loan D.interest-only loan

B.partially amortized loan A loan that requires regular payments of both principal and interest is an amortized loan. A fully amortized loan will pay off the entire loan balance by the end of the loan's term. Payments under a partially amortized loan, the one described here, will not fully pay off the loan balance by the end of the loan's term, and will require a balloon payment at the end.

A VA loan buyer arranges for a loan to purchase a house for $300,000, using no downpayment. However, when the appraisal comes back, the certificate of reasonable value says that the property is worth only $295,000. The buyer may: A.not withdraw from the sale B.purchase the property by making a $5,000 downpayment C.purchase the property by making a $1,250 downpayment D.withdraw from the sale, but only after paying a $5,000 penalty

B.purchase the property by making a $5,000 downpayment If the appraisal comes back low, the buyer may withdraw from the sale (assuming that the purchase and sale agreement included a financing contingency), or may continue with the sale. The lender will only loan up to the house's appraised value, though, meaning the buyer will need to provide $5,000 in cash to make up the difference.

A veteran's guaranty benefits may be restored by a: A.simple loan assumption B.substitution of eligibility/entitlement by another veteran assuming the loan C.wraparound mortgage D.refinance to a lower rate

B.substitution of eligibility/entitlement by another veteran assuming the loan If another veteran substitutes his eligibility, a veteran's guaranty may be restored.

A mortgage company charges three points on a $250,000 loan. How much is the charge? A.$750 B.$2,250 C.$7,500 D.$22,500

C.$7,500 A point equals one percent of the loan amount. Three percent of $250,000 is $7,500 ($250,000 × 0.03 = $7,500).

If the mortgage amount is $80,000 and the borrower paid $4,800 in discount points, how many discount points were charged? A.4 B.5 C.6 D.8

C.6 Divide the points paid by the loan amount to find what percentage was paid in points ($4,800 ÷ $80,000 = 0.06). Since one discount point is the same as one percent of the loan amount, the borrower paid six discount points.

A home buyer can seek an FHA loan from which of the following? A.Ginnie Mae B.Fannie Mae C.A qualified Federal Housing Administration lender (such as a bank) D.Federal Home Loan Mortgage Corporation

C.A qualified Federal Housing Administration lender (such as a bank) Prospective borrowers do not apply to the FHA itself for a loan; rather, they make the application to an FHA-approved lender, such as a commercial bank, savings bank, or mortgage company.

Which of the following persons could be eligible to receive a VA loan? A.A veteran or a deceased veteran's children B.A veteran or a deceased veteran's children or unremarried spouse C.A veteran or a deceased veteran's unremarried surviving spouse D.Only a veteran him or herself

C.A veteran or a deceased veteran's unremarried surviving spouse A veteran's surviving spouse may be eligible for a VA loan if he or she has not remarried, and the veteran was killed in action or died of service-related injuries.

Marta signs a loan agreement for a home equity loan. She may rescind this agreement within three days, according to: A.Regulation A B.HUD C.Regulation Z D.RESPA

C.Regulation Z When the security used for a loan is the borrower's principal residence, as with a home equity loan, TILA allows the borrower three days to rescind the loan agreement.

A buyer's agent has repeatedly seen sales collapse at the last minute because the buyers weren't able to obtain financing. How could he best limit this in the future? A.Qualify all prospects himself B.Refer buyers to a specific lender C.Require prospects to be approved first D.Show lower-priced properties

C.Require prospects to be approved first Getting preapproved for a loan before beginning the house hunting process is now standard procedure; this way, the buyer knows in advance the maximum amount he can count on from the bank.

The interest rate on Mike's loan can fluctuate, based on an index, causing a periodic adjustment in the monthly principal and interest payment. Mike's loan is most likely: A.interest-only B.unconventional C.adjustable-rate D.fixed-rate

C.adjustable-rate An adjustable-rate mortgage (ARM) ties the interest rate (and, therefore, the size of the monthly payment) to the fluctuations in a chosen index.

Sam is applying for a loan from XYZ Lending. The lender must disclose all of the following, except the loan's: A.origination fee B.interest rate C.appraisal fee D.total finance charge

C.appraisal fee TILA requires lenders to disclose a loan's total finance charge and annual percentage rate. The origination fee, discount points paid by the borrower, a finder's fee, a mortgage broker's fee, service fees, and mortgage insurance premiums must be disclosed as part of the total finance charge. For real estate loans, the appraisal fee, the credit report fee, and points paid by the seller are not included in that figure.

When a borrower makes payments on a fully amortized loan, her debt service payments will cover: A.only principal on the loan B.only interest on the loan C.both principal and interest on the loan D.principal, interest, taxes, and insurance

C.both principal and interest on the loan A fully amortized loan is repaid through regular payments that include both a portion of the principal and interest. The final payment will pay off the principal balance, leaving no need for a balloon payment. (Most home purchase loans are budget mortgages, which include taxes and insurance in each payment, but this is not a characteristic of all fully amortized loans. Note also that the question refers to debt service payments only.)

Lenders frequently refer to a borrower's monthly payment of principal and interest as the: A.income ratio B.loan-to-value ratio (LTV) C.debt service D.debt ratio

C.debt service Debt service refers to the monthly repayment of a loan.

The primary purpose of the Truth in Lending Act (Regulation Z) is to require the lender to: A.provide the borrower with a statement showing its aggregate interest charge for similar properties in today's marketplace B.include in any advertisement about available financing the annual percentage rate, plus the applicable finance charges C.disclose the complete cost of credit to consumer loan applicants D.reveal the true cost of all real estate loans, except purchase money loans

C.disclose the complete cost of credit to consumer loan applicants The Truth in Lending Act requires lenders to disclose financing costs to applicants for consumer loans, including consumer loans secured by real estate.

Once a lender issues a veteran a VA-guaranteed loan, the veteran: A.can never receive another VA loan B.cannot prepay the principal on the loan C.immediately becomes liable for the guaranteed amount D.must purchase private mortgage insurance

C.immediately becomes liable for the guaranteed amount A VA loan borrower who later defaults may be liable to the VA in some situations; in all situations, his guaranty entitlement (which he could use to obtain another VA loan) won't be restored until he reimburses the VA.

B purchases a small commercial property, and he finances it with a 65% loan. The lender charges 9.25% annual interest and three discount points. The discount points: A.increase the mortgage payments B.decrease the annual percentage rate C.increase the lender's upfront yield D.increase the nominal interest rate

C.increase the lender's upfront yield Discount points are a percentage of the principal amount of a loan, collected by the lender at the time the loan is originated, to give the lender an immediate yield over and above the interest. While the discount points decrease the nominal (promissory note) interest rate, they don't decrease the annual percentage rate; the APR takes the discount points into consideration.

Carla is applying for a loan and the lender has guaranteed that the quoted interest rate will not change before closing. This kind of agreement is called a: A.fixed-rate B.discount rate C.lock-in D.rescission rate

C.lock-in Most lenders charge the borrower a fee to lock in an interest rate. Without a lock-in agreement, a lender can change the quoted interest rate at any time before closing.

Amortization is defined as: A.declaring an entire debt due in the event of default B.mutual withdrawal from a contract C.paying both principal and interest on a loan on an installment basis D.use of secondary financing to complete the purchase of real estate

C.paying both principal and interest on a loan on an installment basis An amortized loan includes payments for both principal and interest. A fully amortized loan will be entirely repaid at the end of the loan term, with the monthly payment remaining the same throughout.

A borrower is going to use a GI (a.k.a. VA) loan. The appraiser will issue a certificate of: A.eligibility B.deposit C.reasonable value D.appraisal

C.reasonable value A certificate of reasonable value is the documentation of an appraisal for a VA loan.

A buyers' purchase and sale agreement contained a financing contingency. The buyers applied for a loan with a local lender, who verbally informed them that their loan application was denied. The buyers' agent should: A.ask the sellers to provide a purchase money loan instead B.have the sellers extend the contingency deadline C.tell the buyers about their right to receive the denial in writing D.terminate the agency relationship

C.tell the buyers about their right to receive the denial in writing Under the Fair Credit Reporting Act, when a lender takes an adverse action on the basis of a credit report, the applicant or borrower must receive written notice of that action. The consumer should also be notified of which consumer reporting agency provided that information, so that the consumer can verify and, if necessary, contest that information.

Buyers who are looking at a variety of properties should only be shown homes that: A.are listed by the agent's firm B.are located in neighborhoods where the residents are of a similar race as the buyers C.they are qualified to purchase, based on preapproval or qualification D.will result in the highest commission for their agent

C.they are qualified to purchase, based on preapproval or qualification It is a waste of time and a source of frustration to show properties to buyers that they will not be able to afford. As a result, it's important to make sure buyers are preapproved or prequalified before showing properties.

A loan backed by the government, such as an FHA-insured or VA-guaranteed loan, is a/an: A.interest-only loan B.uninsured loan C.unconventional loan D.conventional loan

C.unconventional loan An institutional loan that's insured or guaranteed by a government agency is an unconventional loan.

The main difference between a conventional and unconventional loan is that: A.unconventional loans can't be sold on the secondary market B.conventional loans can't be sold on the secondary market C.unconventional loans are insured or guaranteed by the government D.conventional loans are insured or guaranteed by the government

C.unconventional loans are insured or guaranteed by the government The main difference between a conventional and unconventional loan is that conventional loans are not insured or guaranteed by a government agency. FHA and VA loans are unconventional loans.

Before a loan can be approved, it must go through a process that is used to determine the desirability and risk to the lender. This process is known as: A.processing B.qualification C.underwriting D.evaluation

C.underwriting Loan underwriting is the process of evaluating both the applicant and the property to determine whether they meet the lender's minimum standards.

Ben is applying for a loan. Of the following, which will the lender consider MOST important when evaluating the loan's risk? A.The sales price of other homes in the area B.The property's appraised value C.The loan's interest rate D.Ben's income and financial stability

D.Ben's income and financial stability Although the loan underwriting process will also consider the security property's appraised value, of the choices given Ben's income and financial stability are likely to be the MOST important factors the lender will take into consideration.

A buyer asks a long-time agent about the difference between mortgage brokers and mortgage bankers. The agent may give the buyer the traditional explanation that: A.mortgage brokers provide actual loan funds, mortgage banks do not B.mortgage brokers are merely loan agents who receive a commission C.mortgage bankers originate loans themselves D.Both B and C

D.Both B and C hese traditional distinctions have blurred and both mortgage brokers and mortgage bankers are often referred to simply as mortgage companies.

What kind of property could a buyer purchase with a FHA 203(b) loan? A.Apartment building B.Commercial property C.Farm occupied by a tenant D.Four-unit dwelling where the buyer will occupy one of the units

D.Four-unit dwelling where the buyer will occupy one of the units A 203(b) loan is the standard type of FHA loan that most buyers will use. This type of loan may be used to purchase a property with up to four dwelling units, though it must be the borrower's primary residence.

Which of the following statements about prepayment penalties is true? A.Both the FHA and VA loan programs impose prepayment penalties B.FHA loans include prepayment penalties, but VA loans do not C.VA loans include prepayment penalties, but FHA loans do not D.Neither the FHA nor VA loan programs allow prepayment penalties

D.Neither the FHA nor VA loan programs allow prepayment penalties Prepayment penalties are not allowed by either the FHA or VA loan programs. Borrowers are allowed to prepay part or all of their loans at their own discretion.

An investor wants to invest $250,000 in the development of a shopping mall by taking out a loan secured by a residential property that he owns. Will the Truth in Lending Act apply to this transaction? A.Yes, because the loan is for less than $500,000 B.Yes, because the loan is secured by residential property C.No, because the loan is for more than $53,000 D.No, because this is a commercial transaction

D.No, because this is a commercial transaction The Truth in Lending Act covers consumer loans—loans used for personal, family, or household purposes. Since this borrower is going to use the proceeds for a commercial purpose, TILA does not apply, even if the loan is secured by owner-occupied residential property. (By contrast, if the proceeds of a loan against real property are used to send a child to college, for example, then TILA would apply.)

Which of the following characteristics apply to both FHA and VA loans? A.FHA and VA loans require a certificate of reasonable value B.FHA and VA loans carry mortgage insurance C.FHA and VA borrowers are not permitted to pay points D.Prepayment penalties are not permitted on FHA and VA loans

D.Prepayment penalties are not permitted on FHA and VA loans Prepayment penalties are not permitted on either FHA or VA loans.

Of the following, which is true? A.TILA applies to all seller financing B.TILA applies to loans made to corporations as well as to individuals C.TILA doesn't apply to real estate agents since they don't lend money D.TILA requires the disclosure of credit costs to borrowers and regulates the advertising of consumer loans

D.TILA requires the disclosure of credit costs to borrowers and regulates the advertising of consumer loans TILA is a federal consumer protection law that requires the disclosure of credit costs to borrowers and regulates the advertising of consumer loans (including the advertising of financing terms by a real estate agent).

A seller lists a 1.1 acre vacant residential lot, asking $10,000. His broker decides to offer the financing himself. The broker runs an ad saying, "A $3,000 downpayment will get you beautiful residential acreage." Is more credit information required? A.No, because Regulation Z doesn't apply to vacant land B.No, because the value was under $25,000 C.Yes, because a real estate broker is offering financing D.Yes, because the downpayment amount was given

D.Yes, because the downpayment amount was given Under the advertising requirements of the Truth in Lending Act and Regulation Z (which apply to consumer loans secured by real property, including vacant land), if an ad contains a specific triggering term such as the downpayment amount, then the annual percentage rate and the other terms of repayment must also be disclosed in the ad.

A lender will base a maximum loan amount on the property's: A.sales price B.appraised value C.appraised value or sales price, whichever is more D.appraised value or sales price, whichever is less

D.appraised value or sales price, whichever is less A property's LTV is based on the property's appraised value or sales price, whichever is less

A buyer is getting a loan to purchase a five-acre apple farm with no residence on it. The Truth in Lending Act requires: A.a three-day rescission period if the borrower changes her mind B.disclosure of all settlement charges on a uniform settlement statement C.disclosure of the finance charge D.no disclosure, because the land is agricultural

D.no disclosure, because the land is agricultural The Truth in Lending Act's disclosure requirements do not apply to loans made for business, commercial, or agricultural purposes.