Chapter 13

Question 1

All of these are roles of the Federal Reserve System EXCEPT

a. help counteract inflationary trends.
b. create a favorable economic climate.
c. maintain sound credit conditions.
d. make direct loans to buyers.

Answer 1

d. make direct loans to buyers.

Feedback
d. The Federal Reserve helps counteract inflationary trends, creates a favorable economic climate, and maintains sound credit conditions, but it does not make direct loans to consumers.

Question 2

A lender who collects payments, processes them, and follows up on loan delinquencies is said to

a. increase the yield to the lender.
b. service the loan.
c. insure loan payments.
d. underwrite the loans.

Answer 2

b. service the loan.

Feedback
b. In addition to the income directly related to making loans, some lenders derive income from servicing loans for other mortgage lenders or investors who have purchased the loans.

Question 3

The primary mortgage market lenders that have most recently branched out into making mortgage loans are

a. credit unions.
b. endowment funds.
c. insurance companies.
d. savings associations.

Answer 3

a. credit unions.

Feedback
a. Credit unions were known for short-term consumer loans but have more recently branched out into originating mortgage loans.

Question 4

The Federal Deposit Insurance Corporation (FDIC) does which of these?

a. Administers Freddie Mac and Ginnie Mae
b. Administers Freddie Mac only
c. Insures deposits in participating institutions up to $250,000 per depositor, per account
d. Services loans

Answer 4

c. Insures deposits in participating institutions up to $250,000 per depositor, per account

Feedback
Deposits in participating institutions are covered up to the specified limit, which is currently $250,000 per depositor, per account. The FDIC does not service loans. The FDIC does not administer Freddie Mac or Ginnie Mae.

Question 5

One way a borrower can obtain a conventional mortgage loan with a lower down payment than 20% of the purchase price is by

a. obtaining a package loan.
b. obtaining a blanket loan.
c. obtaining private mortgage insurance.
d. obtaining permission from the FDIC.

Answer 5

c. obtaining private mortgage insurance.

Feedback
c. Private mortgage insurance provides the lender with funds in the event that the borrower defaults on the loan. This allows the lender to assume more risk so that the LTV can be higher than for other conventional loans.

Question 6

A package loan includes

a. real and personal property.
b. private mortgage insurance.
c. multiple parcels or lots.
d. cash for the construction of improvement on real estate.

Answer 6

a. real and personal property.

Feedback
a. Package loans usually include items such as drapes, refrigerator, dishwasher, and other appliances as part of the sales price of the home. A blanket loan covers more than one parcel or lot. A construction loan finances the construction of improvements on real estate.

Question 7

To qualify for most conventional loans, the borrower’s monthly housing expenses and total other monthly obligations cannot exceed what percent of the total gross monthly income?

a. 28%
b. 36%
c. 41%
d. 45%

Answer 7

b. 36%

Feedback
b. To be considered a conforming loan that can be sold in the secondary market, the borrower’s monthly housing expenses and total other monthly obligations must not exceed 36% of total monthly gross income.

Question 8

What does private mortgage insurance cover?

a. Pays the lender if the borrower dies
b. Reimburses the cosigner if the borrower defaults
c. Protects the top 20 to 30% of the loan against borrower default
d. Pays the borrower if the borrower loses the house to a title claim

Answer 8

c. Protects the top 20 to 30% of the loan against borrower default

Feedback
c. Private mortgage insurance, usually required for loans more than 80% of value, provides security to the lender if the borrower defaults.

Question 9

Regulation Z generally applies to

a. a credit transaction secured by a residence.
b. business loans.
c. commercial loans.
d. agricultural loans of more than $25,000.

Answer 9

a. a credit transaction secured by a residence.

Feedback
The truth-in-lending law, implemented by Regulation Z, generally applies to a credit transaction secured by a residence, but it does not apply to commercial, business, or agricultural loans of more than $25,000.

Question 10

The amount of the loan a veteran can obtain under the VA’s loan guarantee program is determined by

a. the VA, which set a dollar limit on the loan.
b. the lender and the qualification of the buyer.
c. the appraised value of the property purchased.
d. loan qualification criteria established by the VA.

Answer 10

b. the lender and the qualification of the buyer.

Feedback
b. There is no VA dollar limit on the amount of the loan a veteran can obtain; the limit is determined by the lender and the qualification of the buyer. The VA does limit the amount of the loan it will guarantee.

Question 11

The VA-approved property appraisal is stated in the

a. certificate of reasonable value.
b. broker’s price opinion.
c. certificate of eligibility.
d. guarantee certificate.

Answer 11

a. certificate of reasonable value.

Feedback
a. The certificate of reasonable value (CRV) states the property’s current market value based on a VHA-approved appraisal. The certificate of eligibility establishes the veteran’s right to obtain a VA-guaranteed loan.

Question 12

All of these are lenders in the primary mortgage market EXCEPT

a. endowment funds.
b. mortgage brokers.
c. insurance companies.
d. credit unions.

Answer 12

b. mortgage brokers.

Feedback
b. Mortgage brokers do not loan their own money; they are intermediaries who bring borrowers and lenders together.

Question 13

The Homeowner’s Protection Act of 1998 (HPA) requires that the lender automatically

a. lower the interest rate on a mortgage.
b. terminate the private mortgage insurance payment if the borrower has accrued at least 22% equity in the home.
c. provide for a home equity line of credit.
d. allow for refinancing terms if requested by the borrower.

Answer 13

b. terminate the private mortgage insurance payment if the borrower has accrued at least 22% equity in the home.

Feedback
The borrower must also be current on mortgage payments.

Question 14

A house sold for $240,000 and thee buyer obtained a loan for $220,000. If the lender charges three points, how much will the buyer pay in points?

a. $5,335
b. $6,600
c. $6,950
d. $7,540

Answer 14

b. $6,600

Feedback
b. The buyer will pay $6,600: $220,000 × 3% = $6,600. Points are charged on the loan amount, not the sale price.

Question 15

On which type of loan can the borrower prepay without penalty?

a. Loans sold to Fannie Mae and Freddie Mac
b. FHA loans
c. VA loans
d. All of these

Answer 15

d. All of these

Feedback
d. Prepayment penalties are fairly unusual in today’s market.

Question 16

The Equal Credit Opportunity Act prohibits discrimination in the lending process based on

a. race.
b. religion.
c. marital status.
d. all of these.

Answer 16

d. all of these.

Feedback
The ECOA prohibits discrimination in granting credit based on race, color, religion, national origin, sex, marital status, age, and receipt of public assistance.

Question 17

The asking price for a home was $585,000; the buyer offered $565,000 and the seller accepted. The appraised value of the home is $560,000. The buyer plans to pay $94,600 in cash and take out a mortgage for the remainder. What is the LTV for this property?

a. 82%
b. 83%
c. 84%
d. 85%

Answer 17

c. 84%

Feedback
c. The LTV on the loan amount is 84%. LTV = loan amount ÷ appraised value or sale price (whichever is lower), thus: $565,000 – $94,600 = $470,400; $470,400 ÷ $560,000 = 84%.

Question 18

A buyer is purchasing property from a seller who bought the property on December 20, 2012, with an FHA loan and has lived there ever since. Because of its favorable terms, the buyer would like to assume the seller’s mortgage. Is this possible?

a. Yes, there are no restrictions on the assumption of this mortgage.
b. Yes, but the buyer will have to undergo the complete buyer qualification process.
c. Yes, but the buyer will have to undergo a creditworthiness review only.
d. No, this FHA loan is not assumable.

Answer 18

b. Yes, but the buyer will have to undergo the complete buyer qualification process.

Feedback
b. Because the loan was made after December 15, 1989, an assumption is not permitted without complete buyer qualification.

Question 19

A veteran served for six months on active duty in Vietnam in 1967. In 1998, the veteran was killed in a skiing accident. The veteran’s surviving spouse wishes to make a down payment on a condominium and wants to obtain aVA-guaranteed loan. Is the surviving spouse entitled to a VA-guaranteed loan?

a. Yes, the unremarried spouse of a qualified veteran is entitled to a VA-guaranteed loan.
b. Yes, whether or not the surviving spouse remarries, the surviving spouse is entitled to the same VA benefits that the veteran was during the veteran’s lifetime.
c. No, the veteran’s death was not service-related.
d. No, the veteran did not meet the time-in-service criteria for qualified veterans.

Answer 19

c. No, the veteran’s death was not service-related.

Feedback
c. Only the surviving spouse of a veteran whose death is service-related may use the veteran’s entitlements.

Question 20

Which of these makes direct loans to qualified borrowers?

a. VA
b. FSA
c. Fannie Mae
d. FHA

Answer 20

b. FSA

Feedback
b. The Farm Service Agency will guarantee loans made and serviced by private lenders and guaranteed for a specific percentage; the FSA will also make loans directly to the borrower.

Question 21

A buyer is purchasing a fully furnished condominium unit. In this situation, the buyer would be MOST likely to use a

a. package loan.
b. blanket loan.
c. wraparound loan.
d. buydown.

Answer 21

a. package loan.

Feedback
a. A loan secured by a fully furnished condominium unit is secured by both real and personal property. A blanket loan is secured by several properties.

Question 22

Foreclosure sales of FHA-insured homes are conducted by:

a. FHA.
b. HUD.
c. VA.
d. the lender.

Answer 22

b. HUD.

Feedback
b. HUD is responsible for conducting foreclosures of FHA-insured homes..

Question 23

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants on the basis of all of these factors EXCEPT

a. religion.
b. past credit history.
c. income from public assistance.
d. marital status.

Answer 23

b. past credit history.

Feedback
b. Lenders may deny a loan request because of the borrower’s previous credit history. Otherwise, lenders may not discriminate on the basis of race, color, religion, national origin, sex, receipt of public assistance, age, or marital status.

Question 24

Lenders that make conventional loans to sell in the secondary mortgage market follow the standardized forms and guidelines issued by Fannie Mae and

a. the FSA.
b. the FHA.
c. Ginnie Mae.
d. Freddie Mac.

Answer 24

d. Freddie Mac.

Feedback
d. Freddie Mac and Fannie Mae are the dominant participants in the secondary mortgage market.

Question 25

Which of these may lawfully be used as part of a loan application evaluation process?

a. The applicant’s religious beliefs
b. The fact that the borrower is over 40 years old
c. A credit score
d. None of these

Answer 25

c. A credit score

Feedback
c. A credit score is one factor that can be lawfully considered in evaluating a loan application. The Equal Credit Opportunity Act prohibits consideration of age or religion.

Question 26

The real estate financing market is comprised of

a. the primary and secondary mortgage markets.
b. Fannie Mae and Ginnie Mae.
c. the primary and secondary mortgage markets, plus government influences such as the Federal Reserve system.
d. none of these.

Answer 26

c. the primary and secondary mortgage markets, plus government influences such as the Federal Reserve system.

Feedback
c. These are the three basic components of the real estate financing market.

Question 27

A 16-year-old female applied for a conventional loan in order to purchase a condominium. The lender denied the application, citing the applicant’s age as the reason for the denial. Which of these is TRUE?

a. The lender violated the ECOA because the applicant is female and sex cannot be a lending consideration.
b. The lender violated the ECOA because lending decisions cannot be based on age.
c. The lender lawfully denied the application because the applicant was under 18 and therefore was too young to legally sign a contract.
d. None of these.

Answer 27

The lender lawfully denied the application because the applicant was under 18 and therefore was too young to legally sign a contract.

Feedback
c. A lender may not consider age unless the applicant is too young to legally sign a contract.

Question 28

What helps lenders reduce the risk on a conventional mortgage loan with a high LTV?

a. Private mortgage insurance
b. Flood insurance
c. Sale-and-leaseback arrangement
d. Home equity

Answer 28

a. Private mortgage insurance

Feedback
Private mortgage insurance provides lenders with funds in case of borrower default and encourages lenders to make higher LTV loans.