CH -11
A loan is amortized over 30 years, but comes due in 10 years. This would be a: A. 10-year balloon payment loan B. fully amortized loan C. straight loan D. reverse mortgage with balloon payment
A. 10-year balloon payment plan Explanation: A partially amortized loan requires regular payments of principal and interest, but those payments are not enough to repay all of the principal. The borrower will be responsible for a balloon payment of the remaining principal balance at the end of the loan term.
For most ARMs, the monthly mortgage payment is: A. adjusted each time the interest rate is adjusted B. adjusted more often than the interest rate C. adjusted only once every five years D. not increased or decreased during the loan term
A. adjusted each time the interest rate is adjusted Explanation: With an ARM, it is most common for the monthly mortgage payment to be adjusted each time the interest rate is adjusted. This prevents negative amortization.
The interest rate on an adjustable-rate mortgage (ARM) changes when: A. changes occur in a specified index B. the lender's current interest rates are at least 2% above the original rate C. the lender changes its margin D. the Federal Reserve Bank changes its key rates
A. changes occur in a specified index Explanation: The interest rate of an ARM will change in response to changes in the particular index selected by the lender. The lender's margin does not change after the loan is made.
What best describes a VA loan? A. A lender makes it, the VA insures it B. A lender makes it, the VA guarantees it C. The VA makes it, a lender insures it D. The VA makes it, a lender guarantees it
B. A lender makes it, the VA guarantees it Explanation: A VA loan is originated by an institutional lender, such as a bank or mortgage company. The Department of Veterans Affairs guarantees the loan, reducing the lender's risk in the event of default.
The Truth in Lending Act covers: A. a commercial loan for $1 million B. any loan to purchase a principal residence C. an industrial loan for $100,000 D. a loan for $80,000 to buy personal property
B. any loan to purchase a principal residence Explanation: The Truth in Lending Act applies to smaller consumer loans and any consumer loan secured by real property regardless of loan size. It does not apply to commercial or industrial loans.
Points paid at closing to increase the lender's upfront yield on the loan are called: A. the origination fee B. discount points C. index points D. the margin
B. discount points Explanation: Discount points increase the lender's immediate yield, in that the lender receives a sum of money upfront. In exchange, the lender will typically offer a lower interest rate than it would if no points were paid.
28. In a typical residential loan transaction, the borrower's annual percentage rate will be higher than the nominal rate because: A. the nominal rate is the minimum the lender can charge B. it reflects loan fees and miscellaneous financing costs C. it reflects the interest rate as well as the credit report and appraisal fees D. it includes the financing costs plus other closing costs incidental to the transaction
B. it reflects loan fees and miscellaneous financing costs Explanation: The nominal rate is the interest rate stated in the promissory note. Calculation of the annual percentage rate takes into account the nominal rate plus all other financing charges the borrower will pay. It does not reflect most third-party charges (such as the credit report and appraisal fees) or closing costs unrelated to the loan.
TILA places limitations on: A. closing costs B. maximum number of days for borrower's right of rescission C. kickbacks and referral fees D. predatory practices in high-cost home equity loan transactions
B. maximum number of days of borrower's right of recission Explanation: The Truth in Lending Act creates a right of rescission for home equity borrowers, but limits this right to three days after signing the loan agreement or receiving disclosures.
A conforming loan with a 90% loan-to-value ratio would require the purchase of: A. life insurance B. private mortgage insurance c. title insurance D. disability insurance
B. private mortgage insurance Explanation: Private mortgage insurance is usually required on conventional loans with downpayments of less than 20%.
Which of the following statements is TRUE of discount points? A. They represent a discount on private mortgage insurance. B. They increase the borrower's monthly payments. C. They result in an increased upfront yield for the lender. D. They form part of the loan origination fee.
C. They result in an increased upfront yield for the lender Explanation: Discount points are paid at closing, and they increase the lender's upfront yield (profit) on the loan. Because a lender charging discount points is generally offering an interest rate below the market rate, discount points result in lower monthly payments for the borrower, not higher payments.
A home buyer can apply for an FHA loan at: A. the local FHA office B. an approved mortgage insurance agency c. an approved commercial bank D. the national HUD office
C. an approved commercial bank Explanation: 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 and loan, or mortgage company.
Private mortgage insurance is generally required for: A. all conventional loans B. no conventional loans C. conventional loans with LTVs over 80% D. conventional loans with LTVs under 80%
C. conventional loans with LTVs over 80% Explanation: Private mortgage insurance is usually required for higher LTV loans because of the greater risk to the lender.
A loan origination fee: A. is refunded to the borrower at closing B. must not exceed 1% of the loan amount C. is charged in most residential loan transactions D. All of the above
C. is charged in most residential loan transactions Explanation: To obtain a residential mortgage loan from an institutional lender, a borrower usually must pay the lender an origination fee.
ARMs are desirable for borrowers when interest rates are: A. falling B. rising C. staying flat D. none of the above; the direction of rates is irrelevant
A. falling Explanation: If rates are falling, an ARM borrower gets the advantage of the decrease, unlike a borrower with a fixed-rate loan. However, the opposite is true with rising rates.
The primary function of the Federal Housing Administration is: A. insuring mortgage loans B. funding mortgage loans C. arranging mortgage loans D. building affordable housing
A. insuring mortgage loans Explanation: The Federal Housing Administration's primary function is to insure mortgage loans.
The downpayment required in connection with an FHA loan: A. is typically less than the downpayment required for a comparable conventional loan B. iS typically less than the downpayment required for a comparable VA loan C. must be at least 20% of the property's appraised value D. must be at least 25% of the property's appraised value
A. is typically less than the downpayment required for a comparable conventional loan Explanation: An FHA loan typically requires a smaller downpayment than a comparable conventional loan.
In real estate financing, one point is one percent of the: A. loan amount B. sales price c. appraised value D. sales price or the appraised value, whichever is less
A. loan amount Explanation: One point means one percent of the loan amount.
A loan that does not meet the standards set by Fannie Mae and Freddie Mac is called a/an: A. nonconforming loan B. unconventional loan C. disamortized loan D. secondary market loan
A. nonconforming loan Explanation: A nonconforming loan is one that does not meet uniform underwriting standards used by Fannie Mae and Freddie Mac.
The VA guaranty: A. ensures that every veteran can obtain a loan B. reduces the lender's risk of loss in case of default C. protects the veteran from default D. All of the above
B. reduces the lender's risk of loss in case of default Explanation: The VA guaranty is a promise by the Department of Veterans Affairs to repay part of the loan amount in the event of a default, which reduces the lender's risk of loss.
The lower the loan-to-value ratio: A. the larger the loan amount and the smaller the downpayment B. the smaller the loan amount and the larger the downpayment C. the smaller the loan amount and the smaller the downpayment D. None of the above
B. the smaller the loan amount and the larger downpayment Explanation: A lower loan-to-value ratio means that the loan amount is smaller and the downpayment is larger. For instance, an 90% LTV on a $100,000 property would mean a $90,000 loan amount and a $10,000 downpayment. If it were lowered to an 80% LTV, the loan amount would be $80,000 and the downpayment would grow to $20,000.
18. Under the Truth in Lending Act, which of the following statements in an advertisement would trigger full disclosure? A. Low Monthly Payments B. FHA Financing Available C. Only 5% down D. Easy Terms
C. Only 5% down Explanation: Triggering terms are specific figures indicating the amount or percentage of the downpayment (as in option C), the repayment period or number of payments, or the amount of any payment or any finance charge. General statements, such as those in options A, B, and D, do not trigger the full disclosure requirement.
One distinguishing characteristic of VA loans is that: A. the loan amount cannot exceed $46,000 B. they cannot be assumed C. no downpayment is required D. the borrower does not have to pay interest
C. no downpayment is required Explanation: As a general rule, a VA loan does not require a downpayment. (For larger loan amounts the lender may require a downpayment so that the guaranty will cover at least 25% of the loan amount.)
Lenders use loan-to-value ratios to: A. increase the yield on their loans B. reduce the interest rate charged to the borrower set maximum loan amounts D. amortize their loan
C. set maximum loan amounts Explanation: Loan-to-value ratios are used to set maximum loan amounts. The higher the loan-to-value ratio, the greater the lender's risk.
comparison to a 30-year loan for the same amount, a 15-year loan: A. will require a higher monthly payment B. is likely to have a lower interest rate C. will save the borrower thousands of dollars in total interest charges over the life of the loan D. All of the above
D. All of the above Explanation: A 15-year loan requires a higher monthly payment than a 30-year loan for the same amount, but the 15-year loan will usually have a lower interest rate. The lower rate and the shorter repayment period will result in substantial interest savings for the borrower.
A buydown: A. involves a seller paying discount points B. lowers the buyer's monthly payment C. makes it easier to qualify for the loan D. All of the above
D. All of the above Explanation: It's called a buydown when the seller pays discount points for the buyer. A buydown lowers the buyer's interest rate, and that lowers the monthly payment. The lower monthly payment may enable the buyer to qualify for a loan he might not otherwise be able to afford.
In connection with an ARM, an index is: A. limit on the amount the payment can increase per year B. 2% to 3% of the loan amount C. the interval at which the loan's interest rate is adjusted D. a published statistical report that indicates changes in the cost of money
D. a published statistical report that indicates changes in the cost of money Explanation: An index is a statistical report that tracks changes in interest rates. A lender will choose a particular index (such as the one-year Treasury bill index) and an ARM's interest rate will rise and fall in accordance with changes in the index.
The property purchased with a VA loan: A. must be a single-family home that the veteran intends to occupy B. can be any single-family home, whether or not the veteran intends to occupy it C. can be any real estate that meets federal collateral standards D. can be any one to four-unit residence, as long as the veteran intends to occupy one of the units
D. can be any one-to four-unit residence, as long as the veteran intends to occupy one of the units Explanation: A VA loan may be used to purchase a multifamily residence with up to four units, as long as the veteran will occupy one of the units.
For a conventional loan: A. the borrower is not allowed to use any gift funds for the downpayment B. the borrower must have a stable monthly income of at least $3,000 C. owner-occupancy is required D. lenders often use stricter underwriting standards for investors than for owner-occupants
D. lenders often use stricter underwriting standards for investors than for owner-occupants Explanation: With a conventional loan, the borrower can be an investor instead of an owner-occupant, but lenders often impose stricter underwriting standards on investors, because they're more likely to default.
A loan's LTV expresses the relationship between the loan amount and the: A. sales price B. appraised value C. sales price or the appraised value, whichever is more D. sales price or the appraised value, whichever is less
D. sales price or the appraised value, whichever is less Explanation: The loan-to-value ratio is a percentage expressing the relationship between the loan amount and the lesser of the sales price or the appraised value. In other words, if a house sells for more than its appraised value, the LTV will be based on the appraised value. If it sells for less than the appraised value, the LTV will be based on the sales price.
One of the advantages of an FHA loan is that: A. mortgage insurance is not required B. the borrower is not required to occupy the home purchased with the loan C. the interest rate cannot exceed 8% D. the borrower needs to make only a minimum cash investment of 3.5% of the purchase price
D. the borrower needs to make only a minimum cash investment of 3.5% of the purchase price Explanation: An FHA borrower is required to make a minimum cash investment of 3.5% of the purchase price.