PA RE Practice Quiz #7

Regulation Z generally applies when a credit transaction is secured by a. a residence. b. a business. c. a commercial property. d. an agricultural loan.

A. A RESIDENCE. Regardless of the amount, however, Regulation Z generally applies when a residence is used to secure the credit transaction. The regulation does not apply to business, commercial, or agricultural loans of any amount.

Under the Truth in Lending Act, although the borrower may rescind a number of transactions within three days, the borrower is NOT permitted to rescind a a. loan to purchase of a single-family dwelling. b. home equity loan. c. home mortgage refinancing loan. d. commercial loan.

A. LOAN TO PURCHASE OF A SINGLE-FAMILY DWELLING. The three-day right of rescission does not apply to owner-occupied residential purchase-money or first mortgages used to buy the property. The right does apply to refinancing a home mortgage or to a home equity loan.

What is the effect of choosing a 15-year mortgage over a 30-year mortgage? a. Lower interest rate b. More interest paid over the term c. Higher interest rate d. Lower income needed to qualify

A. LOWER INTEREST RATE. Lenders typically charge a lower interest rate if the money will be repaid in a shorter time (i.e., in 15 years instead of 30 years). The disadvantage is that more income is necessary to qualify.

A lender may protect its interest in a conventional mortgage loan by asking the buyer to obtain additional security from a. private mortgage insurance. b. title insurance. c. the borrower's note. d. escrow accounts.

A. PRIVATE MORTGAGE INSURANCE. If the down payment is less than 20 percent, lenders frequently require private mortgage insurance (PMI) to cover deficiencies in case of default.

Which characteristic is TRUE of a fixed-rate home loan that is amortized according to the original payment schedule? a. The amount of interest to be paid is predetermined. b. The loan cannot be sold in the secondary market. c. The monthly payment amount will fluctuate each month. d. The interest rate change may be based on an index.

A. THE AMOUNT OF INTEREST TO BE PAID IS PREDETERMINED. A fixed-rate, fully amortized loan has a predetermined amount of interest that is due from the point of origination to the time the loan is fully paid. Mortgage loan factors are used to make this determination.

The lender's pledge to lend a certain amount of money to an explicitly named borrower under specific terms, for a specified length of time, and using a particular property as collateral is known as a loan commitment. a. True b. False

A. TRUE A loan commitment is the lender's pledge to lend a certain amount of money to an explicitly named borrower (or borrowers) under specific terms and for a specified length of time, using a particular property as collateral.

Property purchased with a VA loan must be owner-occupied and meet certain requirements. a. True b. False

A. TRUE For eligible veterans and their spouses, VA-guaranteed loans are another alternative for financing the purchase of homes with little or no down payment at competitive interest rates. Property purchased with a VA loan must be owner-occupied and meet certain requirements.

The application for credit gathers certain basic information about the property that will be used for collateral. a. True b. False

A. TRUE The application for credit (typically, the Fannie Mae/Freddie Mac Uniform Loan Application) gathers certain basic information about the prospective borrower and the property that will be used for collateral.

The information provided in a loan application must be verifiable. a. True b. False

A. TRUE The information provided in a loan application must be accurate and verifiable. There are serious legal consequences when people obtain loans as a result of false statements made in loan applications. No one, licensees included, should participate in falsifying any information. These are criminal offenses.

Because the loan-to-value ratio is lowest, conventional loans are viewed as the MOST secure loans. a. True b. False

A. True Conventional loans are viewed as the most secure loans because the loan-to-value ratio is lowest. Usually the ratio is 80 percent of the value of the property or less.

If a buyer obtains a $50,000 home equity loan with 4 points, how much will the lender charge at closing? a. $200 b. $2,000 c. $6,000 d. $40,000

B. $2,000 $50,000 × 4% = $2,000

By law, private mortgage insurance must be terminated when the equity in the home reaches a. 20 percent of the current appraised value. b. 22 percent of the purchase price. c. 25 percent of the purchase price. d. 30 percent of the current appraised value.

B. 22 PERCENT OF THE PURCHASE PRICE. On loans originating after July 1999, federal law requires that PMI automatically terminate if a borrower has accumulated at least 22 percent equity in the home and is current on mortgage payments. The 22 percent of equity is based on the purchase price of the home.

Which of the following is an example of a conventional loan? a. A mortgage loan insured by the Federal Housing Administration b. A 60 percent loan-to-value ratio first mortgage loan secured through a credit union c. A loan obtained through a private lender with a VA guarantee d. An installment sale

B. A 60 PERCENT LOAN-TO-VALUE RATIO FIRST MORTGAGE LOAN SECURED THROUGH A CREDIT UNION. A conventional loan relies solely on the ability of the borrower to repay the debt and the security provided by the mortgage. This is generally considered the most secure loan because it has the lowest loan-to-value ratio. A 60 percent LTV would be an example of a conventional loan.

Which of the following is required for a veteran to receive a VA loan? a. An appraisal that matches the purchase price b. A certificate of reasonable value c. Mortgage insurance premium d. Private mortgage insurance

B. A CERTIFICATE OF REASONABLE VALUE. The VA issues a certificate of reasonable value (CRV) for the property purchased by the veteran. The CRV places a ceiling on the amount of a VA loan allowed for the property. If the purchase price is greater than the amount cited in the CRV, the veteran may pay the difference in cash.

A couple purchased a summer home in a new resort development. The house was completely equipped, and the couple qualified for a loan that covered the purchase price of the residence, including furnishings and appliances. This kind of financing is a. a wraparound loan. b. a package loan. c. a blanket loan. d. an unconventional loan.

B. A PACKAGE LOAN. A loan that uses personal property and appliances installed on the premises as well as the real estate as security for the debt is a package mortgage. Package mortgages are not permitted in Pennsylvania.

A developer received a loan that covers five parcels of real estate and provides for the release of the mortgage lien on each parcel when certain payments are made on the loan. This type of loan arrangement is called a a. purchase-money mortgage. b. blanket loan. c. package loan. d. wraparound loan.

B. BLANKET LOAN. When multiple parcels of real estate are financed using one note and mortgage, the loan is known as a blanket loan or blanket mortgage. Generally, the lien can be released on individual parcels as the loan is repaid.

A developer has a mortgage loan on his entire housing development. When he sells a lot to a buyer, he is able to deliver title to that lot free of the mortgage lien by obtaining a partial release. What type of loan does the developer have? a. Purchase-money mortgage b. Blanket mortgage c. Package mortgage d. Open-end mortgage

B. BLANKET MORTGAGE. A blanket loan covers more than one parcel or lot and is often used to finance subdivision developments. However, it can be used to finance the purchase of improved properties or to consolidate loans as well.

A builder has only two homes left to sell in the development. While maintaining current values, the builder can assist the last two buyers by offering them a a. reduced sale price. b. buydown. c. reverse mortgage. d. construction loan.

B. BUYDOWN. A buydown is a way to temporarily (or permanently) lower the interest rate on a mortgage loan. A lump sum is paid in cash to the lender at closing. The payment offsets (and so reduces) the interest rate and monthly payments during the loan's first few years.

A home is purchased using a fixed-rate, fully amortized mortgage loan. Which of the following is TRUE regarding this mortgage? a. A balloon payment will be made at the end of the loan. b. Each payment amount is the same. c. Each payment reduces the principal by the same amount. d. The principal amount in each payment is greater than the interest amount.

B. EACH PAYMENT AMOUNT IS THE SAME. Each loan payment is the same for a fixed-rate, fully amortized loan. However, the amount attributed to principal and interest changes with each payment. This is because the amount of money owed after each payment is less, while the interest rate remains the same. More money is attributed to interest rather than principal in the early stages of the loan.

A home equity loan is an alternative to refinancing in which the original mortgage loan is paid off and replaced by a new loan. a. True b. False

B. FALSE A home equity loan is an alternative to refinancing. The original mortgage loan remains in place; the home equity loan is junior to that lien. If the homeowner refinances, the original mortgage loan is paid off and replaced by a new loan.

Mortgage loans are generally classified based on their sales price or the appraised value, whichever is less. a. True b. False

B. FALSE Mortgage loans are generally classified based on their loan-to-value ratio. For mortgage lending purposes, value is the sale price or the appraised value, whichever is less. The lower the ratio of debt to value means a higher down payment by the borrower.

The penalty for violation of an administrative order enforcing Regulation Z is $1,000 for engaging in an unfair or deceptive practice. a. True b. False

B. FALSE Regulation Z provides penalties for noncompliance. The penalty for violation of an administrative order enforcing Regulation Z is $10,000 for each day the violation continues. A fine of up to $10,000 may be imposed for engaging in an unfair or deceptive practice. Willful violation is a misdemeanor punishable by a fine of up to $5,000, one year's imprisonment, or both.

Interest on consumer loans is deductible up to a loan limit of $100,000. a. True b. False

B. FALSE The statement is FALSE. Interest on a home equity loan secured by a mortgage on the borrower's residence is deductible up to a loan limit of $100,000. Interest on consumer loans is no longer deductible.

Under Regulation Z, the disclosure of finance charges must include actual costs for closing expenses. a. True b. False

B. FALSE Under Regulation Z, a consumer is entitled to the disclosure of finance charges and the true interest rate before a transaction is completed. Actual costs for title fees, legal fees, appraisal fees, credit reports, survey fees, and closing expenses are not considered part of this disclosure.

The amount of a loan expressed as a percentage of the value of the real estate offered as collateral is the a. amortization ratio. b. loan-to-value ratio. c. debt-to-equity ratio. d. capital-use ratio.

B. LOAN-TO-VALUE RATIO. The loan-to-value (LTV) ratio is the ratio of the debt to the sale price or appraised value, whichever is less. The greater the borrower's stake in the collateral, the lower the lender's risk.

The buyers were turned down for a mortgage loan. By law, the lender a. must immediately explain the reasons in the denial letter. b. must inform the rejected applicants in writing the reasons within 30 days. c. is not obligated to state any reasons for the denial. d. may verbally discuss the negative reasons, but may not put these in writing.

B. MUST INFORM THE REJECTED APPLICANTS IN WRITING THE REASONS WITHIN 30 DAYS. Lenders and other creditors must inform all rejected credit applicants of the principal reasons for the denial or termination of credit. The notice must be provided in writing, within 30 days.

Who gets the BEST interest rates? a. Investors b. Owner occupants c. Tenants d. Landlords

B. OWNER OCCUPANTS. Lenders reserve the best interest rates for owners who occupy the property because these owners are least likely to default.

The type of mortgage loan that uses both real and personal property as security is a a. blanket mortgage. b. package mortgage. c. purchase-money mortgage. d. wraparound mortgage.

B. PACKAGE MORTGAGE. A package loan includes real and personal property. In recent years, these kinds of loans have been very popular with developers and purchasers of unfurnished condominiums.

The process by which the lender determines the upper loan limit for which the buyer will qualify is a. preapproval. b. prequalification. c. preliminary commitment. d. conditional approval.

B. PREQUALIFICATION. Prospective buyers can obtain a loan preapproval based on a preliminary credit application. Prequalification is the process by which the lender determines the upper loan limit for the borrower.

Under the provisions of the Truth in Lending Act (Regulation Z), the annual percentage rate (APR) of a finance charge includes all of the following components EXCEPT a. discount points. b. the broker's commission. c. the loan origination fee. d. the loan interest rate.

B. THE BROKER'S COMMISSION. The Truth in Lending Act requires certain disclosures so that the consumer knows the true cost of obtaining a loan. Disclosures include loan fees, finance charges, and discount points in addition to the stated interest rate. This information is used to calculate the annual percentage rate (APR). Broker compensation is not a component of APR.

If a lender agrees to make a loan based on an 80 percent LTV, what is the amount of the loan if the property appraises for $114,500 and the sales price is $116,900? a. $83,200 b. $91,300 c. $91,600 d. $92,900

C. $91,600 The LTV is based on the appraised value or the sale price, whichever is less. $114,500 × 80% = $91,600.

A woman purchased her home for cash 30 years ago. Today, she receives monthly checks from the bank that supplement her income. The woman MOST likely has obtained a. a shared-appreciation mortgage. b. an adjustable-rate mortgage. c. a reverse annuity mortgage. d. an overriding deed of trust.

C. A REVERSE ANNUITY MORTGAGE. The term annuity refers to a stream of payments. Normally, payments flow from a borrower to a lender. In a reverse annuity mortgage, the payments flow in reverse—from lender to borrower. This arrangement often allows people on fixed incomes to benefit from the equity in their home without having to sell it.

In an adjustable-rate mortgage loan, the interest rate is tied to an objective economic indicator called a. a mortgage factor. b. a discount rate. c. an index. d. a reserve requirement.

C. AN INDEX. An adjustable-rate loan (ARM) is originated at one rate of interest, with provisions for the rate to fluctuate in the future based on some identified, objective economic indicator. This indicator is called an index.

A borrower obtains a mortgage loan to make repairs on her home. The mortgage document secures the amount of the loan as well as any future funds advanced to the borrower by the lender. This borrower has obtained a. a wraparound mortgage. b. a blanket loan. c. an open-end loan. d. a growing equity mortgage.

C. AN OPEN-END LOAN. An open-end mortgage loan secures not only the original amount borrowed but also future advances made to the borrower. This allows the borrower to "open" the mortgage and increase the amount of debt to the lender.

An FHA-insured mortgage loan would be obtained from a. the Federal Housing Administration. b. the Department of Housing and Urban Development. c. any qualified lending institution. d. Fannie Mae.

C. ANY QUALIFIED LENDING INSTITUTION. The common term FHA loan refers to a loan that is insured by the agency. FHA-approved lending institutions make these loans. The FHA insurance provides security to the lender in addition to the real estate. Fannie Mae purchases these loans.

In a loan that requires periodic payments that do not fully amortize the loan balance by the final payment, what term BEST describes the final payment? a. Adjustment payment b. Acceleration payment c. Balloon payment d. Variable payment

C. BALLOON PAYMENT. When periodic payments do not fully satisfy the debt by the time the last payment is due, the final payment needed to satisfy the debt is known as a balloon payment.

Which federal law requires that borrowers be provided with a free credit report once a year? a. Equal Credit Opportunity Act b. Truth in Lending Act c. Fair and Accurate Credit Transactions Act d. Fair Housing Act

C. FAIR AND ACCURATE CREDIT TRANSACTIONS ACT. The Fair and Accurate Credit Transactions Act (FACTA) requires that annually, borrowers can ask for and receive a free credit report from each of the three major credit bureaus.

Funds for Federal Housing Administration (FHA) loans are usually provided by a. the Federal Housing Administration (FHA). b. the Federal Reserve. c. qualified lenders. d. the seller.

C. QUALIFIED LENDERS. The FHA is not a direct lender, but rather insures loans made by approved lending institutions. Qualified lenders make the loans; the FHA insures the lender's risk of loss.

An insurance company built a highrise office building for its offices. After completion, the company needed money for another project. To use the equity in the building, the company can use a a. buydown mortgage. b. reverse mortgage. c. sale and leaseback. d. growing equity mortgage.

C. SALE AND LEASEBACK. Sale-and-leaseback loans are used to finance large commercial or industrial projects, enabling a business to free up money tied up in real estate to be used as working capital.

The federal Equal Credit Opportunity Act allows lenders to deny loans to potential borrowers on the basis of a. race. b. sex. c. dependence on public assistance. d. amount of income.

D. AMOUNT OF INCOME. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against a borrower on the basis of race, color, religion, national origin, sex, marital status, age, and dependence on public assistance. The amount of income needed to qualify for a loan is a legitimate business reason for denying a loan.

A young professional couple expects that their salaries will nearly double in the next five years. They are excellent candidates for a a. purchase-money mortgage. b. reverse mortgage. c. a balloon payment loan. d. growing equity mortgage.

D. GROWING EQUITY MORTGAGE. A growing equity mortgage (GEM), also known as a rapid-payoff mortgage, uses a fixed interest rate (but payments of principal increase according to an index or a schedule) and is most frequently used when the borrower's income is expected to keep pace with the increasing loan payments.

In an adjustable-rate mortgage, what represents the lender's cost of doing business? a. Index b. Rate cap c. Conversion options d. Margin

D. MARGIN. The margin represents the lender's cost of doing business and consists of the index rate plus a premium.

In determining LTV, value is a. 80 percent of the sale price or less. b. 95 percent of the appraised value. c. appraisal value or price, whichever is higher. d. price or appraised value, whichever is less.

D. PRICE OR APPRAISED VALUE, WHICHEVER IS LESS. Loan-to-value ratio is the amount of the loan expressed as a percentage of either the sales price or the appraised value of the property, whichever is lower.

A couple purchased a residence for $195,000. They made a down payment of $25,000 and agreed to assume the seller's existing mortgage, which had a current balance of $123,000. The buyers financed the remaining $47,000 of the purchase price by executing a mortgage and note to the seller. This type of loan, by which the seller becomes the mortgagee, is called a a. wraparound mortgage. b. package mortgage. c. balloon note. d. purchase-money mortgage.

D. PURCHASE-MONEY MORTGAGE. When the seller finances all or part of the purchase price by accepting a note and mortgage from the buyer, the document that creates the seller's (mortgagee's) interest is a purchase-money mortgage. Title passes to the buyer, and the seller essentially becomes the lender.

A lender takes certain factors into consideration when deciding whether to grant a borrower a mortgage loan. All of the following are legitimate factors EXCEPT a. credit use. b. the amount of the borrower's income. c. credit report inquiries. d. the marital status of the borrower.

D. THE MARITAL STATUS OF THE BORROWER. The Equal Credit Opportunity Act prohibits using the marital status of the borrower when determining creditworthiness. In addition to income, five other factors are analyzed: past payment performance, credit use, credit history, types of credit in use, and credit report inquiries.

Which law requires that all advertising that references mortgage financing terms contain certain disclosures? a. Equal Credit Opportunity Act b. Fair Housing Act c. Community Reinvestment Act d. Truth in Lending Act (Regulation Z)

D. TRUTH IN LENDING ACT (REGULATION Z). The Truth in Lending Act (Regulation Z) provides strict regulation of real estate advertising in all media that refer to mortgage financing terms. When specific trigger terms are used, then the advertisement must include additional information including cash price, required down payment, annual percentage rate, and more.