Unit 13: Real Estate Financing

What is the PITI payment on a $209,000 20-year mortgage loan at 5% interest with a mortgage factor of $5.84 per $1,000? The annual taxes are $2,345, and homeowners insurance is $789 annually. A) $1,678.59 B) $1,415.98 C) $1,481.73 D) $1,220.56

C) $1,481.73 Explanation: 209,000 ÷ 1,000 = 209 209 × 5.84 = $1,220.56 PI 2,345 + 789 = 3,134 ÷ 12 = 261.17 TI 1,220.56 + 261.17 = $1,481.73

The loan origination fee may NOT increase from the Loan Estimate to the actual debit to the buyer on the Closing Disclosure at settlement. True False

True Explanation: Due to abuses of the yield spread premiums in the lending industry, RESPA now requires that the loan originator give the borrower a credit against the loan origination fees for the full amount of any yield spread premium. This credit must appear in the loan origination section of the Loan Estimate.

The Loan Estimate must be given by the lender to the borrower within three business days of loan application on all owner-occupied, one- to four-family unit, federally related loans. True False

True Explanation: The lender must provide the Loan Estimate to the prospective borrower within three business days unless the consumer withdraws the application or the lender determines it can't approve the loan as requested and so notifies the consumer.

Which of the following ads would NOT trigger full disclosure under Regulation Z? A) "HOA dues $350 per year" B) "Below market interest rate only 2%" C) "100% financing with easy terms" D) "Low down payment only $500"

A) "HOA dues $350 per year" Explanation: HOA dues, property tax amounts, sales price, and APR do not trigger full disclosure.

Which of the following is NOT true of discount points? A) The points are always paid by the buyer. B) Each point equals 1% of the loan amount. C) A point increases the yield on a 30-year loan by about ¹⁄8%. D) The points are used to increase the yield to lender.

A) The points are always paid by the buyer. Explanation: Discount points can be paid by the buyer or the seller based on tradition or on the terms of the purchase agreement

A builder has purchased 50 lots, which are being used as collateral in a loan that contains a partial-release clause. The type of loan the builder obtained is A) a blanket loan. B) a purchase money mortgage. C) a reverse loan. D) a package loan.

A) a blanket loan. Explanation: A blanket mortgage covers two or more parcels of real estate.

A document used in real estate to create a lien and give security for a note is A) a deed of trust. B) a note. C) a deed. D) a bill of sale.

A) a deed of trust. Explanation: A deed of trust or a mortgage pledges real property to secure a debt (a loan), whereas a deed transfers title to real property from one owner to another.

Charging an interest rate that exceeds the legal maximum ceiling is known as A) usury. B) defeasance. C) a violation of Regulation Z. D) subordination.

A) usury. Explanation: A loan in which the interest rate exceeds the legal ceiling is said to be usurious.

The typical ratios used to qualify buyers are A) 26% and 36%. B) 28% and 36%. C) 28% and 37%. D) 27% and 39%.

B) 28% and 36%.

A 100% loan-to-value ratio is a feature of many A) FHA-insured loans. B) VA-guaranteed loans. C) conventional guaranteed loans. D) conventional loans.

B) VA-guaranteed loans. Explanation: The VA-guaranteed loan program is one of only a few that allows a 100% loan-to-value ratio.

The fee that is charged by a lender as part of processing and is similar to a commission is A) subordination. B) loan origination. C) PMI. D) discount points.

B) loan origination.

The Truth in Lending Act is also known as A) Megan's Law. B) RESPA. C) Regulation Z. D) ECOA.

C) Regulation Z.

Interest charged on mortgage loans is typically A) compound. B) floating. C) simple. D) discounted.

C) simple. Explanation: Simple interest is charged on most mortgage loans, not compounded, floating, or discount.

Interest rates are MOST likely to be impacted by A) government loan insurance programs such as FHA. B) government guarantees on loans to veterans. C) depreciation and capital gains law. D) policies set by the Federal Reserve.

D) policies set by the Federal Reserve. Explanation: The Federal Reserve policies have the most impact on interest rates.

If the loan-to-value ratio is 80% and a property appraises for $195,000 with a sales price of $198,000, what will be the loan amount? A) $156,000 B) $175,000 C) $164,500 D) $158,400

A) $156,000 Explanation: 195,000 × 0.80 = $156,000

What is the loan's balance after the first monthly payment is made on a $200,000 sale if the buyer puts 20% down and the interest rate is 5% on a 30-year loan with an amortization factor of 5.37? (Round to the nearest dollar.) A) $159,807 B) $159,933 C) $160,000 D) $159,141

A) $159,807 Explanation: 160,000 × 0.05 = 8,000 ÷ 12 = 666.67. (PI) 859.20 - (I) 666.67 = (P) 192.53. 160,000 - 192.53 = $159,807.47, rounded to $159,807

The buyer is going to assume the sellers' 5% loan with a loan balance of $95,000 as of the day of settlement, which will be May 14. Which would be the correct settlement statement entries for the interest proration? A) $184.72 debit seller, credit buyer B) $211.10 credit seller, debit buyer C) $211.10 debit seller, credit buyer D) $184.72 credit seller, debit buyer

A) $184.72 debit seller, credit buyer Explanation: $95,000 × 0.05 = $4,750 annual interest ÷ 360 days = $13.194/daily interest; May 1 to May 14 = 14 days × $13.194 = $184.72 seller's interest portion

Which pair of terms are closest in meaning? A) Lender—mortgagee B) Borrower—lender C) Mortgagee—borrower D) Mortgagor—lender

A) Lender—mortgagee Explanation: The lender is the mortgagee; the borrower is the mortgagor.

Interest only and term are other descriptors for which type of loan? A) Straight B) Partially amortized C) Blanket D) Construction

A) Straight Explanation: Another name for a term loan or interest-only loan is straight loan.

A mortgage that is tied to an economic index and may have interest rate or payment caps is A) an adjustable-rate mortgage. B) a variable payment mortgage. C) a renegotiable-rate mortgage. D) a partially amortized mortgage.

A) an adjustable-rate mortgage. Explanation: The interest rate on an adjustable-rate mortgage (ARM) is subject to change based on increases or decreases in a specific economic index.

The acceleration clause in the note and deed of trust A) can be used if the borrower has not maintained the property and therefore is in default. B) automatically accelerates the loan payments if the borrower's payment is a couple of days late. C) is used to stop assumption of the loan. D) allows the lender to demand full payment and changes the terms of the loan.

A) can be used if the borrower has not maintained the property and therefore is in default. Explanation: The acceleration clause may be used anytime the borrower is in default, such as not maintaining the property and committing waste. The acceleration clause does not allow the lender to change the terms of the loan or arbitrarily call the note due.

The formula of mortgage amount divided by sales price or appraised value of the property being purchased determines all of the following EXCEPT A) interest. B) down payment. C) loan to value. D) discount points.

A) interest. Explanation: The formula for LTV (loan to value) determines discount points, loan origination, and down payment but not the interest rate charged.

The buyer is getting a 95% loan. The amount the lender will give the buyer is determined by A) the lower of the sales price or the appraised value. B) the appraised value only. C) the sales price only. D) the higher of the sales price or the appraised value.

A) the lower of the sales price or the appraised value. Explanation: LTV is determined by the lower of the sales price or appraisal.

Principal can be defined as A) the total amount of the loan. B) the total of interest and loan amount. C) the total amount paid to the lender over the life of the loan. D) the amount each payment is applied to first.

A) the total amount of the loan. Explanation: Principal is the total or original amount of the loan. Payments are first applied to interest and then to principal.

What is the total interest paid over the life of a $260,500, 15-year loan at 5.25% (the loan factor for this loan is 8.04)? (Round to the nearest dollar.) A) $258,105 B) $116,496 C) $260,500 D) $493,491

B) $116,496 Explanation: Principal borrowed ÷ 1,000 (to translate into thousands) × loan factor × payments made = total principal and interest paid - principal borrowed $260,500 ÷ $1,000 = 260.5 × $8.04 = $2,094.42 (PI) $2,094.42 × 180 payments = $376,995.60 376,995.60 (total principal and interest) − $260,500 (principal borrowed) = $116,495.60, rounded to $116,496

The seller is closing on the sale of his home on August 15. His interest rate is 7% and the principal balance after August 1 is $130,000. How much would the seller owe for his payoff on the day of closing? A) $133,379.17 B) $130,379.17 C) $129,620.83 D) $130,000.00

B) $130,379.17 Explanation: $130,000 × 7% = $9,100 annual interest ÷ 360 days = $25.277/daily interest; August 1 to August 15 = 15 days × $25.277 = $379.17 + $130,000 = $130,379.17

A lender charges three discount points on a new 30-year home loan. The home sold for $100,000 and the buyer made a $20,000 down payment. What is the amount of money paid in points? A) $600 B) $2,400 C) $3,000 D) $20

B) $2,400 Explanation: Sales price - down payment = loan amount Loan amount × points = $ amount of points $100,000 (sales price) − 20,000 (down payment) = $80,000 (loan amount) $80,000 × 0.03 = $2,400

Settlement is scheduled for August 9 and the seller has already received and paid the HOA yearly dues of $1,350.00. Based on a 365-day calendar, which would be the appropriate closing disclosure statement entries for the HOA dues? A) $532.66 debit seller, credit buyer B) $532.66 credit seller, debit buyer C) $822.33 credit seller, debit buyer D) $822.33 debit seller, credit buyer

B) $532.66 credit seller, debit buyer Explanation: $1,350.00 yearly HOA dues ÷ 365 days = $3.69; August 10 to December 31 = 144 days × $3.69 = $527.67

A couple would like to buy a home with a PITI of $1,875 a month. The PMI will be $55 a month; the homeowners association fee will be $850 a year. They have other recurring debt of $1,250 a month (less housing expenses). What is the minimum monthly income needed for this couple to qualify using ratios of 28% and 36%? (Round to the nearest dollar.) A) $7,146 B) $9,030 C) $5,558 D) $6,696

B) $9,030 Explanation: $1,875 (PITI) + $55 (PMI) + $70.83 (HOA monthly) = $2,000.83 $2,000.83 ÷ 0.28 = $7,145.82 $2,000.83 + $1,250 = $3,250.83 $3,250.83 ÷ 0.36 = $9,030.08 The higher of the two results is the income needed: $9,030.08

TRID requires disclosure of all settlement costs for what type of property? A) Residential and small commercial B) Consumer mortgage loans C) All types D) Residential only

B) Consumer mortgage loans

A borrower who wants to use a VA or FHA loan would go to which entity to obtain the funds? A) VA or FHA, depending on which loan is chosen B) VA- or FHA-approved lender C) HUD D) Any local bank or mortgage broker

B) VA- or FHA-approved lender

A form of financing in which the seller retains title but the buyer has the right of possession is A) a purchase money mortgage. B) a contract for deed. C) an option. D) a participation loan.

B) a contract for deed. Explanation: The seller retains legal title under a contract for deed; the buyer has equitable title.

A court-supervised foreclosure resulting from a lender's lawsuit is known as A) nonjudicial foreclosure. B) judicial foreclosure. C) cancellation. D) strict foreclosure.

B) judicial foreclosure. Explanation: If a lender files a lawsuit to foreclose on a mortgage under the supervision of the court, it is a judicial foreclosure.

The right of the trustor to pay off all the debt and stop the foreclosure proceedings after the auction sale is called A) deed in lieu of foreclosure. B) statutory redemption. C) equitable redemption. D) redemption by action.

B) statutory redemption. Explanation: Statutory redemption is the right to pay off the loan after the sale; equitable redemption is the right to redeem the property before the sale.

The primary function of the secondary market is to A) grant new loans. B) supply funds to the primary market. C) purchase contracts for deed. D) insure mortgages.

B) supply funds to the primary market. Explanation: The primary purpose of the secondary market is to provide funding to the primary market.

The clause that appears in both the promissory note and the deed of trust and allows the lender to call the balance due and payable in full upon default is known as A) the alienation clause. B) the acceleration clause. C) the satisfaction clause. D) the due-on-sale clause.

B) the acceleration clause. Explanation: The acceleration clause allows the lender to "call the note" upon default.

The clause in a mortgage that requires the loan to be repaid when the property is sold is A) the acceleration clause. B) the alienation clause. C) the subordination clause. D) the defeasance clause.

B) the alienation clause. Explanation: The alienation clause is also known as the due-on-sale clause.

FHA insurance is designed to protect A) the seller. B) the lender. C) the broker. D) the mortgagor.

B) the lender. Explanation: The lender's unpaid balance is insured by the FHA against losses resulting from the borrower's default.

What is the total interest paid over the life of the loan on a $200,000 sale if the buyer puts 20% down and the interest rate is 5% on a 30-year loan with an amortization factor of 5.37? A) $160,000 B) $340,000 C) $149,312 D) $309,312

C) $149,312 Explanation: 859.20 × 360 = 309,312 - 160,000 = $149,312

If the loan-to-value ratio on a home listed for $70,000 is 80%, how much would a buyer's down payment be on a conventional loan if the home is appraised at $65,000? A) $13,000 B) $5,000 C) $18,000 D) $19,000

C) $18,000 Explanation: Lender uses either the sales price or the appraised value (whichever is less) to calculate the loan amount that will be lent. Because appraised value is less in this problem, Appraised value × LTV percentage = loan amount $65,000 (appraised value) × 80% = $52,000 (loan amount) Sales price - loan amount = down payment $70,000 (sales price) − $52,000 (loan amount) = $18,000 (down payment)

A buyer has agreed to purchase a home for $175,000 and pay a 1% origination fee and 2.5 discount points. If the lender agrees to make a 90% loan, how much will the origination fee and points cost the buyer? (Round to the nearest dollar.) A) $427 B) $1,575 C) $5,513 D) $3,938

C) $5,513 Explanation: Sales price × loan rate = loan amount × origination percentage = loan origination fee $175,000 (sales price) × 90% (LTV) = $157,500 (loan amount) × 0.01 = $1,575 for loan origination $157,500 × 0.025 = $3,937.50 for points 1,575 + 3,937.50 = $5512.50, rounded to $5,513

Joan just found out that she cannot assume the loan on the property she is buying. What clause told Joan that the loan was NOT assumable? A) Prepayment B) Acceleration C) Alienation D) Defeasance

C) Alienation Explanation: The alienation (due-on-sale) clause will determine whether a loan is assumable.

If a borrower is refused a loan because of being retired and receiving public assistance, the lender is in violation of A) RESPA. B) HUD. C) ECOA. D) FHA.

C) ECOA. Explanation: ECOA (Equal Credit Opportunity Act) does not allow discrimination in lending based on age or receiving public assistance. If the person receiving assistance qualifies, the loan needs to be made.

An instrument used to pledge real property as security for a loan is A) a bill of sale. B) a chattel agreement. C) a mortgage. D) a promissory note.

C) a mortgage. Explanation: The document that pledges real property as security or collateral for a debt is the mortgage or deed of trust.

A borrower might choose to pay private mortgage insurance in order to A) have a lower LTV (loan to value). B) reduce the monthly payment. C) bring a smaller down payment to closing. D) have more equity.

C) bring a smaller down payment to closing. Explanation: A borrower would choose to pay private mortgage insurance in order to have a higher loan-to-value ratio and a lower down payment.

The figure used by the lender in determining the maximum loan it will make is A) the assessed value. B) the appraised value minus the purchase price. C) the purchase price or appraised value, whichever is less. D) the purchase price.

C) the purchase price or appraised value, whichever is less. Explanation: The loan-to-value ratio is based on the purchase price or the appraised value, whichever is less.

The document that is recorded to give notice that a deed of trust has been paid in full is A) the subordination agreement. B) the note. C) the reconveyance deed. D) the defeasance

C) the reconveyance deed. Explanation: The document is called a reconveyance deed of trust, which will release the lien that was created by the original deed of trust.

When using a contract for deed form of seller financing, all of the following are true EXCEPT A) the buyer takes possession and is responsible for maintaining the property. B) if the buyer defaults, the buyer may lose all equity and credit for payments made. C) this form of financing is typically most beneficial to the buyer. D) the seller holds the deed and legal title until the buyer makes the final payment.

C) this form of financing is typically most beneficial to the buyer. Explanation: Contracts for deed or installment land contracts are typically most advantageous for the seller, not the buyer, because the buyer does not have title to the property but is in possession and must maintain it. Also, if the buyer defaults, state laws tend to favor the seller and the buyers can lose the right to any equity earned.

Using a 365-day year, prorate the interim interest on a residential loan amount of $240,000 at 6% closing on July 25. A) $197.25 B) $236.70 C) $11,863.50 D) $276.15

D) $276.15 Explanation: 240,000 × 0.06 = 14,400 annual interest ÷ 365 = 39.45 × 7 days = $276.15

What is the monthly principal and interest payment on a $200,000 sale if the buyer puts 20% down and the interest rate is 5% on a 30-year loan with an amortization factor of 5.37? A) $1,600.00 B) $1,074.00 C) $864.00 D) $859.20

D) $859.20 Explanation: $200,000 × 0.80 = 160,000 ÷ 1,000 = 160 × 5.37 = $859.20

Which of the following loans would be subject to a right of rescission? A) Construction loan for a new home B) Purchase of a second home C) Purchase of a new home D) A home improvement loan

D) A home improvement loan Explanation: Home improvement and home equity loans must provide the borrower with a three-day right of rescission, but not loans for the building of new construction or primary loans for the purchase of a home.

The TILA/RESPA Integrated Disclosure legislation requires lenders to supply what document with confirmed delivery three business days before settlement? A) Truth in Lending Disclosure B) HUD-1 C) Loan Estimate D) Closing Disclosure

D) Closing Disclosure Explanation: TRID requires that lenders provide borrowers with a Closing Disclosure of settlement costs three business days to closing.

Which statement about the annual percentage rate is TRUE? A) It is the interest rate stated on the note. B) It shows that the true cost of financing is always lower than the note rate. C) It is the disclosure of the note rate as required by Regulation Z. D) It includes the nominal interest rate and finance charges.

D) It includes the nominal interest rate and finance charges. Explanation: The APR includes the nominal (note) rate, plus other finance charges.

Which of the following is NOT true regarding a deed in lieu of foreclosure? A) It is an alternative to foreclosure. B) It is sometimes called a friendly foreclosure. C) It may not be accepted by the lender. D) It will eliminate secondary liens.

D) It will eliminate secondary liens. Explanation: The lender may refuse a deed in lieu of foreclosure because any secondary liens are not extinguished.

Which of the following is TRUE related to FHA loans? A) The interest rates are set by the FHA. B) The loan has no insurance premium. C) Loan funds come from the FHA. D) The FHA insures the lender against loss due to borrower default.

D) The FHA insures the lender against loss due to borrower default. Explanation: FHA insures loans. Lenders set the terms of the loan.

If a foreclosure results in insufficient proceeds, the lender may file A) a declaration. B) a default judgment. C) a right cure. D) a deficiency judgment.

D) a deficiency judgment. Explanation: If the sale proceeds are insufficient to satisfy the debt, the lender may be able to claim a deficiency judgment.

A promissory note is A) security for the deed of trust. B) the same as a deed of trust. C) attached to a deed. D) a promise to pay.

D) a promise to pay. Explanation: The note establishes a promise to repay a debt.

The disadvantage to being highly leveraged is A) that a higher down payment will be required. B) that the borrower has more equity. C) lower monthly payments. D) that borrowers are more likely to default.

D) that borrowers are more likely to default. Explanation: The disadvantage to high leverage is that the borrower may default on the loan, especially if market values start to drop.

The owners' equity in their property is BEST described as A) the difference between the original purchase price and the amount owed. B) the current market value of the property. C) the total outstanding debt against the property. D) the difference between current market value and the amount owed.

D) the difference between current market value and the amount owed. Explanation: Today's value minus today's debt equals today's equity.

The right of the borrower to reclaim the property before the foreclosure sale is A) the statutory right of redemption. B) the riparian right. C) the right of first refusal. D) the equitable redemption.

D) the equitable redemption. Explanation The period before the foreclosure sale is known as the equitable redemption period.

All of the following are reasons for loan acceleration and foreclosure EXCEPT A) nonpayment of taxes. B) deferred maintenance that lowers value below what is owed. C) removal of improvements without lender permission. D) the owner borrows against the equity in the home.

D) the owner borrows against the equity in the home. Explanation: Loan acceleration occurs when the borrower is in default.

With an ARM loan, A) the interest changes are pre-set for the full term. B) the principal amount will automatically adjust so the loan cannot have a negative amortization. C) the payment amount is the same for the life of the loan. D) the total amount of interest paid cannot be determined.

D) the total amount of interest paid cannot be determined. Explanation: Because the interest adjusts in an ARM loan at various times over the loan term and is unknown, the total amount of interest paid over the life of the loan cannot be determined.

A lender charges three discount points on a new 30-year home loan. The home sold for $100,000 and the buyer made a $20,000 down payment. How much will the three points increase the yield to the lender on this loan? A) ¾% B) 1% C) 8⁄3% D) ³⁄8%

D) ³⁄8% Explanation: Points × yield percentage = yield (Each point on a 30-year loan increases the yield about ¹⁄8%.) 3 points × ¹⁄8= ³⁄8%

The Loan Estimate tolerance limit for the broker commission is 10%. True False

False Explanation: Broker commissions are not regulated by RESPA, and there are no tolerance limits.

The tolerance limit for the home inspection fees on the Loan Estimate is 10%. True False

False Explanation: If not required by the lender, there is no limit to increase the cost.

The tolerance limit for lender fees on the Loan Estimate is 10%. True False

False Explanation: Lender fees have 0% tolerance for increase.

There is 0% tolerance for an increase in any of the numbers when comparing the entries on the Loan Estimate to the entries on the Closing Disclosure. True False

False Explanation: There is 0% tolerance for lender-controlled fees such as loan origination fees and discount points. There is a 10% tolerance for lender-required items that the lender has no control over, and there are no tolerance limits for items paid for by the buyer that are not required by the lender.