Chapter 7 Lending Basics

Question 1

The two fundamental types of real estate loans are permanent financing and:

a. temporary financing
b. intangible financing
c. transient loans
d. construction loans

Answer 1

d. construction loans

Question 2

What is the debt service coverage ratio and how is it determined?

Answer 2

The debt service coverage ratio is a measure of the ability of a project to meet its debt service requirement. It is determined by dividing the net operating income during any given period by the debt service for the same period of time.

Question 3

When referencing the five Cs of credit, capacity refers to the:

a. ability of the borrower to repay the loan
b. fundamental financial strength of the borrower
c. value of assets pledged to the lender as protection from loss
d. borrowers moral commitment and willingness to repay the loan

Answer 3

a. ability of the borrower to repay the loan

Question 4

Your loan service constant is 14.36% for a $545,000 loan. What is the monthly debt service?

a. $5,434.86
b. $6,521.83
c. $23, 691.28
d. $65,218.33

Answer 4

b. $6,521.83

Question 5

What institution regulates the amount of credit available through its open market committee?

Answer 5

The federal reserve system

Question 6

What is the loan constant on a principal loan of $1,000,000 with an annual debt service of $40,000

Answer 6

4%

Question 7

What is the debt service coverage ratio on a gross income of $84,000 with a monthly debt service of $4000 and annual expenses of $30,000

Answer 7

1.13

Question 8

A debt service ration of 0.96 indicates that there is:

a. more than sufficient income to make debt service payments.
b. insufficient income to make debt service payments
c. exactly enough income to make debt service payments
d. enough income to make debt service payments if expenses are reduced.

Answer 8

b. insufficient income to make debt service payments

Question 9

What does a debt service coverage ratio of 1.13 indicate?

Answer 9

There is sufficient income after expenses to cover the debt.

Question 10

What is a construction loan?

Answer 10

A loan for the purpose of financing the construction or substantial renovation of building an other improvements.

Question 11

When are construction loans typically approved?

Answer 11

Only after a standby loan is obtained. A standby loan is a loan guarantees funds in the event that the permanent lender fails to provide the long term funds.

Question 12

What is the equation for the loan constant?

Answer 12

loan constant=annual debt service/loan origination amount

Question 13

What is GNMA?

Answer 13

The governmental National Mortgage Association. It sells packages of mortgages in the secondary investment market with the full faith and credit of the U.S. government.

Question 14

To reduce lender risk, a construction loan is often made with a:

a. lower interest rate
b. long-term payment schedule
c. leasing percentage requirement
d. standby loan commitment

Answer 14

d. standby loan commitment

Question 15

In which type of mortgage does the lender participate. in any value increase of the property?

Answer 15

shared appreciation mortgage

Question 16

What are the five Cs of credit?

Answer 16

character-borrowers moral commitment and willingness to repay the loan

capacity-ability of the borrower to repay the loan

capital-fundamental financial strength of the borrower

conditions-condition of the economy as a whole and the present condition of the borrowers industry

collateral-the value of assets pledged to the lender as protection from loss in the event of default or conditions not anticipated when the loan was made.

Question 17

If an escalation clause is contained in a mortgage agreement, the lender is entitled to increase the interest rate:

a. or change the due date on the basis of some established index
b. or decrease the interest rate on the basis of some established index
c. and/or hasten the due date upon the occurrence of some event
d. and/or postpone the due date upon the occurrence of some event

Answer 17

c. and/or hasten the due date upon the occurrence of some event

Question 18

What is an amortized loan?

Answer 18

In an amortized loan, debt service payments include both interest on the debt and principal reduction.