Test 7: Finance

7-7 A borrower of a $50,000 interest-only loan makes annual interest payments $3,750. What interest rate is the borrower paying? a. 7.5% b. .75% c. 3.75% d. 8.5%

a. 7.5% MATH 3750 / 50000 = .075 x 100 = 7.5%

7-30 The difference between a balloon loan and an amortized loan is a. An amortized loan is paid off over the loan period b. A balloon loan always has a shorter loan term c. An amortized loan requires interest-payments d. A balloon loan must be retired in five years

a. An amortized loan is paid off over the loan period -amortized loans retired the principal balance over the loan period. If a loan does not do this, one must make a balloon payment at the end of the loan term to complete the loan payoff.

7-33 In addition to income, credit and employment data, a mortgage lender requires additional documentation, usually including a. An appraisal report b. A criminal record report c. A subordination report d. A default recourse waiver

a. An appraisal report -loan underwriting is the process of assessing the lenders risk and giving a loan. Mortgage underwriting includes: evaluating the borrowers ability to repay the loan; appraising the value of the property offered as security; and determining the terms of the loan.

7-45 The major organizations operating in the secondary mortgage market are a. Fannie Mae, Freddie Mac and Ginnie Mae b. Fannie Mae, GMAC and MGIC c. Freddie Mac, FHA and VA d. Fannie Mae, Freddie Mac and the Federal Reserve

a. Fannie Mae, Freddie Mac and Ginnie Mae

7-37 Lenders use an income ratio in qualifying to a. Insure a borrower has the earning power to make the loan payments b. Compare a borrower's earnings to the borrower's short-term debt c. Identify the highest possible interest rate that the borrower can afford d. Quantify the borrower's assets to the fullest extent

a. Insure a borrower has the earning power to make the loan payments

7-44 How does the secondary mortgage market aid borrowers seeking a mortgage loan? a. It cycles funds back to primary lenders so they can make more loans b. It issues second mortgages and sells them in the home equity market c. It lends funds to banks so they can make more loans d. It pays off defaulted loans made by primary mortgage lenders

a. It cycles funds back to primary lenders so they can make more loans -secondary mortgage market organizations buy pools of mortgages from primary lenders and sell securities backed by these pooled mortgages to investors. By purchasing loans from primary lenders, the secondary market returns funds to the primary lenders, thereby enabling the primary lender to originate more mortgage loans.

7-48 What is the role of the Veteran's Administration in the mortgage lending market? a. It guarantees loans made by approved lenders b. It insures loans made by approved lenders c. It purchases loans made by approved lenders d. It originates loans made by approved lenders

a. It guarantees loans made by approved lenders

7-13 The Equal Credit Opportunity Act prohibits a lender from a. Refusing a loan because the borrower does not match the lender's target market b. Including income from self-employment in the borrower's qualifying income c. Requiring both spouses to sign the loan application form d. Refusing a loan because a borrower has a defective credit report

a. Refusing a loan because the borrower does not match the lender's target market

7-41 Which laws or regulations prevent mortgage lenders from discriminating in extending credit to potential borrowers? a. The Equal Credit Opportunity Act b. Truth-in-Lending laws c. The Real Estate Settlement and Procedures Act d. Federal Fair Housing Laws

a. The Equal Credit Opportunity Act

7-25 Which of the following correctly describes the flow of money and documents in a mortgage loan transaction? a. The borrower gives the lender a note and a mortgage in exchange for loan funds b. The lender gives the borrower a mortgage and receives a note in exchange for loan funds c. The borrower receives a note in exchange for a mortgage from the lender d. The lender gives the borrower a note, loan funds and a mortgage

a. The borrower gives the lender a note and a mortgage in exchange for loan funds -when a borrower gives a note promising to repay the borrowed money and execute the mortgage on the real estate for which the money is being borrowed as security, the financing method is called mortgage financing

7-27 A lender lends money to a homeowner and takes legal title to the property as collateral during the payoff period. They are in a a. Title-theory state b. Lien-theory state c. State allowing land trusts d. Stater where hypothecation is illegal

a. Title-theory state

7-3 When homebuyer Henry pledges his newly purchased home as collateral for a mortgage loan, the evidence of the pledge is the a. Trust deed or mortgage b. Promissory note c. Loan commitment d. Loan receipt

a. Trust deed or mortgage -The mortgage or trust deed is evidence of the collateral pledge of the purchase property as security for the loan.

7-14 A loan applicant has an annual gross income of $72,000. How much will a lender allow the applicant to pay for monthly housing expense to qualify for a loan if the lender uses an income ratio of 28%? a. $2,160 b. $1,680 c. $1,068 d. $840

b. $1,680

7-6 If a borrower's monthly interest payment on an interest-only loan at an annual interest rate of 6% is $500, how much was the loan amount? a. $72,000 b. $100,000 c. $120,000 d. $50,000

b. $100,000 MATH $500 x 12 = $6,000 $6,000 / 6% = $100,000

7-8 Maria borrows $100,000 and pays two points for the loan. How much does she pay in points? a. $200 b. $2,000 c. $1,200 d. It depends on the interest rate

b. $2,000 MATH $100,000 x 2% = $2,000

7-1 What is a lien-theory state? a. A state in which a mortgagee holds legal title to a secured property b. A state in which a mortgagee has equitable title to a secured property c. A state that allows a real estate owner's creditors to record liens against the owner's property d. A state in which a lien is considered a conveyance

b. A state in which a mortgagee has equitable title to a secured mortgage

7-15 AMC Bank discovers, in considering buyer Bob's application for a mortgage loan, that Bob has borrowed the down payment from an uncle and has to repay that loan. Bob should expect that AMC Bank will a. Refuse the application b. Adjust the applicant's debt ratio calculation and lower the loan amount c. Increase the loan amount to enable the borrower to pay off the loan to the relative d. Require the borrower to make payments to an escrow account for repayment of the relative's loan

b. Adjust the applicant's debt ratio calculation and lower the loan amount -If someone is lending an applicant a portion of the down payment with a provision for repayment, a lender will consider this another debt obligation and adjust the debt ratio accordingly. This can lower the amount a lender is willing to lend.

7-18 Under the Equal Credit Opportunity Act, a lender, or a real estate agent who assists a seller in qualifying a potential buyer, may not a. Tell a rejected loan applicant the reasons for the rejection b. Ask the buyer/borrower about his/her religion or national origin c. Ask the buyer/borrower to explain unconventional sources of income d. Use a credit report that has not been provided to the borrower

b. Ask the buyer/borrower about his/her religion or national origin

7-43 Which of the following are methods used by the Federal Reserve System to regulate the money supply? a. Selling securities, printing money, and controlling lending underwriting requirements b. Buying securities, changing the discount rate, and controlling banking reserves c. Printing money, changing interest rates, and selling t-bills d. Controlling the prime rate, trading securities, and purchasing loans

b. Buying securities, changing the discount rate, and controlling banking reserves -The federal reserve system regulates the money supply by means of three methods: selling or re-purchasing government securities, primarily treasury bills, changing the reserve requirements for member banks; changing the interest rate, or discount rates, the system charges member institutions for borrowing funds from the federal reserve system.

7-36 The Equal Credit Opportunity Act (ECOA) requires lenders to a. Extend equal credit to all prospective borrowers b. Consider the income of a spouse in evaluating a family's creditworthiness c. Discount the income of a person involved in child-rearing or child-bearing d. Specialize lending activity by geographical area for improved customer service

b. Consider the income of a spouse in evaluating a family's creditworthiness

7-47 What is the role of the Federal Housing Authority in the mortgage lending market? a. It guarantees loans made by approved lenders b. It insures loans made by approved lenders c. It purchases loans made by approved lenders d. It originates loans made by approved lenders

b. It insures loans made by approved lenders -The FHA does not lend money, but ensures permanent long-term loans made by others. The lender must be approved by the FHA, and the borrower must meet certain FHA qualifications.

7-20 The assumability of an FHA-insured loan is a. Unrestricted b. Limited by when the loan was originated c. Limited to owner-occupied properties d. Prohibited on all existing loans under current regulations

b. Limited by when the loan was originated -Rules for assumability vary according to when the FHA insured loan was originated and whether the original loan was for an investment property or an owner occupied principle residence loans originated before December 1, 1986, are generally assumable without restrictions. Loans originated after December 1, 1986, required that the assumed show credit worthiness. Some mortgages execute it from 1986 through 1989 contain language that is not enforced as a result of later congressional action. Mortgages from that. Are now freely assumable, despite any restrictions stated in the mortgage.

7-4 The borrower in a mortgage loan transaction is known as the a. Mortgagee b. Mortgagor c. Lienor d. Trustee

b. Mortgagor -borrower = mortgagor (two o's) -lender = mortgagee (two e's)

7-9 Which of the following is true of an amortizing loan? a. The amount of annual interest paid is the same for every year of the loan term b. Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears c. Except for any points that may be paid, the interest on the loan balance is usually paid in advance d. The interest rate is reduced each year to maintain equal payments even though the outstanding loan balance is smaller

b. Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears -arrears is money that is owed and should have been paid earlier -amortize gradually write off the initial cost of an asset. -In an amortizing loan, part of the principal is repaid periodically along with interest, so that the principal balance decreases over the life of the loan. The annual interest is never the same, since the principal balance to which the interest rate applies changes every year. Interest on a loan is always paid in arrears, not in advance.

7-10 For a loan that is not backed by the Federal Housing Administration or Veterans Administration, and for which the borrower is making a down payment of less than 20%, the lender is likely to require the borrower to obtain a. A subrogation agreement b. Private mortgage insurance c. A letter of credit d. A co-signer on the note

b. Private mortgage insurance -mortgage insurance protects the lender against the loss of portion of the loan (typically 20 to 25%) in case of borrower default.

7-50 In a buy down, a. the lender lowers the interest rate on a loan in exchange for a prepayment of principal b. The borrower pays additional interest at the onset in order to obtain a lower interest rate c. The lender requires the borrower to buy down the price of the property by increasing the down payment d. The borrower pays the lender additional funds to buy down the term of the loan

b. The borrower pays additional interest at the onset in order to obtain a lower interest rate -A buy down loan entails a pre-payment of interest on a loan. The pre-payment affectively lowers the interest rate and the periodic payments for the borrower. By downs typically occur in a circumstance where a builder wants to market a new development to a buyer who cannot quite qualify for the necessary loan at market rates.

7-23 Which of the following describes a purchase money mortgage financing arrangement? a. A bank gives a buyer a senior mortgage loan that fully covers the cost of purchasing the property b. The buyer gives the seller a mortgage and note as part of the purchase price of the property c. A land trust holds title to the property while the buyer makes periodic installment payments to the seller d. The seller uses the purchase money obtained from the buyer's mortgage loan to repay the seller's outstanding loan balance

b. The buyer gives the seller a mortgage and note as part of the purchase price of the property -with a purchase money mortgage, the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to "take back" a note, or to "carry paper", on the property.

7-35 The reason lenders consider the loan-to-value ratio important in underwriting is that a. They don't want to lend borrowers any more money than necessary b. They want to ensure there is more than enough collateral to cover the loan amount c. Borrowers can only afford to borrow a portion of the entire purchase price d. The higher the loan-to-value ratio, the more profitable the loan

b. They want to ensure there is more than enough collateral to cover the loan amount

7-40 Which laws or regulations require mortgage lenders to disclose financing costs and annual percentage rate to a borrower before funding a loan? a. The Equal Credit Opportunity Act b. Truth-in-Lending laws and Regulation Z c. The Real Estate Settlement and Procedures Act d. Federal Fair Housing Laws

b. Truth-in-Lending laws and Regulation Z -It does not apply to commercial loans or agricultural loans over $25000. It prescribes requirements to lenders regarding the disclosure of cost, the right to rescind the credit transaction, advertising credit offers, and penalties for noncompliance with the truth in lending act.

7-28 A lender who charges a rate of interest in excess of legal limits is guilty of a. Redlining b. Usury c. Profit-taking d. Nothing; There are no legal limits to interest rates

b. Usury -Charging of excessive interest rates on loans. Such states have a maximum rate that is either flat or variable rate tied to an index such as prime lending rate.

7-29 A lender is charging 2 points on a $60,000 loan. The borrower must therefore pay the lender an advance amount of a. $120 b. $300 c. $1,200 d. $3,000

c. $1,200 MATH $60,000 x 2% = $1,200

7-16 The Federal Reserve's Regulation Z applies to which loans? a. All loans b. All loans secured by real estate c. All loans secured by a residence d. All loans over $25,000

c. All loans secured by a residence -regulation Z applies to all loan secured by residence. It does not apply to commercial loans or two agricultural loans over $25,000. Its provisions cover the disclosure of cost, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the act

7-12 The difference between what a borrower has to pay to purchase a property and the amount a lender will lend on the property is the a. Mortgage insurance coverage amount b. Lender's profit margin c. Buyer's down payment d. Origination fee

c. Buyer's down payment

7-21 A VA certificate of eligibility determines a. How long an individual served in the military b. The maximum loan amount an approved lender can give to veterans c. How much of a loan the VA will guarantee d. Whether a lender is approved to issue VA-guaranteed loans

c. How much of a loan the VA will guarantee

7-24 A homeowner borrows money from a lender and gives the lender a mortgage on the property as collateral for the loan. The homeowner retains title to the property. This is an example of a. Intermediation b. Forfeiture c. Hypothecation d. Subordination

c. Hypothecation -The process of securing a loan by pledging a property without giving up ownership of the property.

7-31 A distinctive feature of a promissory note is that a. It is not assignable b. It must be accompanied by a mortgage c. It is a negotiable instrument d. It may not be prepaid

c. It is a negotiable instrument -A promissory note is a negotiable instrument, which means the payee may assign it to a third-party. The signee would then have the right to receive the borrowers periodic payments.

7-46 What is the role of Fannie Mae in the secondary mortgage market? a. It guarantees FHA-backed and VA-backed loans b. It insures FHA-backed and VA-backed loans c. It purchases FHA-backed and VA-backed loans d. It originates FHA-backed and VA-backed loans

c. It purchases FHA-backed and VA-backed loans -gives banks mortgage-backed securities in exchange for blocks or mortgages; and sells bonds and mortgage-backed securities. It does not guarantee, insure or originate loans.

7-42 Which laws or regulations require mortgage lenders to provide an estimate of closing costs to a borrower and forbid them to pay kickbacks for referrals? a. The Equal Credit Opportunity Act b. Truth-in-Lending laws c. The Real Estate Settlement and Procedures Act d. Federal Fair Housing Laws

c. The Real Estate Settlement and Procedures Act

7-34 The three overriding considerations of a lender's mortgage loan decision are a. Points, interest rate and loan term b. The location of the mortgaged property, the borrower's cash, and the amount of the borrower's equity c. The ability to re-pay, the value of the collateral, and the profitability of the loan d. The amount of the loan, the borrower's income and the down payment

c. The ability to re-pay, the value of the collateral, and the profitability of the loan

7-49 In a graduated payment mortgage loan a. Loan funds are disbursed to the borrower on a graduated basis b. The interest rate periodically increases in graduated phases c. The loan payments gradually increase d. The loan payments gradually increase and the loan term gradually decreases

c. The loan payments gradually increase

7-39 At the closing of a mortgage loan a. The borrower pays off the note and receives clear title b. The lender issues a firm loan commitment c. The parties complete all loan origination documents and the loan is funded d. The borrower's loan application is complete and the file closed

c. The parties complete all loan origination documents and the loan is funded -closing of a mortgage loan normally occurs with the closing of the real estate transaction. At the real estate closing, the lender typically has deposited defined it amount with an escrow agent, along with instructions for dispersing the funds. The borrower deposit necessary funds with the escrow agent, executes final documents, and receives signed copies of all relevant documents.

7-26 In a deed of trust transaction, which of the following occurs? a. The beneficiary conveys title to a trustee in exchange for loan funds b. The trustee conveys title to a beneficiary in exchange for loan funds c. The trustor conveys title to a trustee in exchange for loan funds from the beneficiary d. The trustee conveys title to a trustor in exchange for loan funds from the beneficiary

c. The trustor conveys title to a trustee in exchange for loan funds from the beneficiary -A deed of trust conveys title to the property in question from the borrower (trustor) to a trustee as security from the loan. the trustee is the third party fiduciary to the trust. While the loan is in place, the trustee holds the title on behalf of the lender, who is the beneficiary of the trust.

7-5 If a borrower obtains an interest-only loan of $200,000 at an annual interest rate of 6%, what is the monthly interest payment? a. $1,200 b. $600 c. $500 d. $1,000

d. $1,000 MATH $200,000 x 6% = $12,000 $12,000 / 12 = $1,000

7-38 The debt ratio formula used to qualify borrowers is a. Total debt divided by debt payments b. Gross income divided by assets c. Gross income divided by debts d. Debt payments divided by gross income

d. Debt payments divided by gross income

7-2 What is the function of a note in a mortgage or trust deed financing arrangement? a. It is the lender's security instrument in the collateral property b. It is evidence of ownership of the mortgage or trust deed c. It contains the borrower's promise to maintain the value of the property given as collateral for a loan d. It is evidence of the borrower's debt to the lender

d. It is evidence of the borrower's debt to the lender

7-32 When the terms of the mortgage loan are satisfied, the mortgagee a. May retain any overage in the escrow account b. May inspect the property before returning legal title c. May be entitled to charge the borrower a small fee to close the loan d. May be required to execute a release of mortgage document

d. May be required to execute a release of mortgage document

7-19 A conventional mortgage loan is one that is a. Backed by the Federal National Mortgage Association b. Insured under Section 203(b) of the Federal Housing Administration loan program c. Guaranteed by the Government National Mortgage Association d. Not FHA-insured or VA-guaranteed

d. Not FHA-insured or VA-guaranteed -A conventional mortgage loan is a permanent long-term loan that is not FHA insured or VA guaranteed. FNMA does not "back" loans; FHA only ensures FHA loans; and the VA, not GNMA guarantees loans.

7-17 If a particular loan falls under Regulation Z's right of rescission provision, a. The lender has the right to change the terms of the loan within a certain period b. The lender has the right to accelerate repayment of the loan because of a change in the borrower's credit status c. The borrower has the right to pay off the loan ahead of schedule with no penalty d. The borrower has a limited right to cancel the transaction within a certain period

d. The borrower has a limited right to cancel the transaction within a certain period -A borrower has a limited right to cancel the credit transaction, usually within three days of completion of the transaction. The right of rescission does not apply to "residential mortgage transactions", that is, to mortgage loans used to finance the purchase or construction at the borrowers primary residence. It does, however, apply to refinancing of mortgage loans, and to home equity loans. State law may require a rescission. and notice on first mortgage loan transactions as well.

7-11 What is a loan-to-value ratio? a. The percentage of a lender's portfolio that is composed of mortgage loans b. The ratio of borrowed principal plus total interest to the appraised value of the collateral property c. The ratio of a lender's return on a mortgage loan to the value of the collateral property d. The fraction of the appraised value of the property offered as collateral which the lender is willing to lend

d. The fraction of the appraised value of the property offered as collateral which the lender is willing to lend -The relationship of the loan amount to the property value, expressed as a percentage, is called the loan-to-value ratio or LTV. If the lender's LTV ratio s 80%, the lender will lend only $80,000 on a home appraised at $100,000. The difference between what the lender will lend and what the borrower must pay for the property is the amount the borrower must provide in cash as a down payment. - So the buyer would have to pay $20,000 at closing in cash as the downpayment and the rest of the $80,000 throughout the year to pay it off.

7-22 A borrower obtains a 30-year, full amortizing mortgage loan of $50,000 at 8%. What is the principal balance at the end of the loan term? a. $2,000 b. $50,000 c. $220 d. Zero

d. Zero