Financing Flashcards
A release clause associated with a blanket mortgage is a provision which:
A) - causes the first loan to become subordinate to junior loans.
B) - bridges the interim financing.
C) - releases a portion of property covered by the blanket encumbrance when certain conditions are met.
D) - All of the above
C) - releases a portion of property covered by the blanket encumbrance when certain conditions are met.
Answer: C—This is referring to a partial release clause which enables the mortgagor to obtain partial releases of specific parcels from the mortgage upon a payment larger than the pro rata portion of the loan.
Which of the following would most likely charge the highest interest rate?
A) - commercial banks
B) - savings and loan associations
C) - insurance companies
D) - individual lenders for cash
D) - individual lenders for cash
Answer: D—This type of loan is referred to as a “hard money loan.” It is a mortgage loan given to a borrower in exchange for cash, as opposed to a mortgage given to finance a specific real estate purchase. Hard money loans often involve more risk for the lender and thus carry a higher interest rate.
When comparing mortgage bankers and mortgage brokers, which of the following is true?
A) - Both deal exclusively in the primary mortgage market
B) - Mortgage bankers usually lend their own funds while mortgage brokers arrange loans
C) - Both are corporations
D) - All of the above
B) - Mortgage bankers usually lend their own funds while mortgage brokers arrange loans
Answer: B—A mortgage banker is a person, corporation or firm that normally provides its own funds for mortgage financing. A mortgage broker is a person or firm that acts as an intermediary between borrower and lender who negotiates, sells or arranges loans and sometimes continues to service the loans (also called a loan broker).
Which of the following requires a CRV?
A) - VA
B) - FHA
C) - Cal-Vet
D) - All of the above
A) - VA
Answer: A—A Certificate of Reasonable Value (CRV) is issued by the Department of Veterans Affairs setting forth a property’s current market value estimate, based on a VA appraisal. The CRV places a ceiling on the amount of a VA guaranteed loan allowed for a particular property.
When lenders use the term “mortgage yield,” they are describing:
A) - an increase in the value of a property which has a mortgage.
B) - the effective interest return obtained from a first trust deed by an investor.
C) - all of the money received by a lender after deducting closing costs and loan fees.
D) - what the lender receives when a mortgage is paid off.
B) - the effective interest return obtained from a first trust deed by an investor.
Answer: B—The mortgage yield is the return on an investment or the amount of profit stated as a percentage of the amount invested-the rate of return. In real estate, yield refers to the effective annual amount of income that is being accrued on an investment. The yield or profit to a lender is the spread of differential between the cost of acquiring the funds lent and the interest rate charged.
All of the following are characteristics of FHA loans EXCEPT:
A) - for housing only
B) - guarantees loans
C) - insures loans
D) - high loan-to-value ratio
B) - guarantees loans
Answer: B—The FHA does not guarantee loans, rather it insures loans on real property.
The ratio of a loan’s principal to the property’s appraised value is called the:
A) - income-to-value ratio.
B) - loan-to-value ratio.
C) - loan-to-appraisal ratio.
D) - payment-to-loan ratio.
B) - loan-to-value ratio.
Answer: B—The loan-to-value ratio is the percentage of a property’s value that a lender can or may loan to a borrower. For example if the ratio is 80%, this means that a lender may loan 80% of the property’s appraised value to the borrower.
The government actually lends the money for a(n):
A) - FHA loan.
B) - Cal-Vet loan.
C) - VA loan.
D) - All of the above
B) - Cal-Vet loan.
Answer: B—The Department of Veteran’s Affairs buys the property and then sells it to the veteran on a Land Contract of Sale.
Why would a lender be interested in making a government-insured or government-guaranteed loan over a traditional conventional loan?
A) - faster repayment
B) - lower risk
C) - easier qualification
D) - faster foreclosure
B) - lower risk
Answer: B—A government guarantee or government insurance lowers the risk for the lender.
The Federal National Mortgage Association (FNMA) was primarily created to:
A) - increase the availability of secondary financing.
B) - standardize construction guidelines.
C) - serve as a secondary mortgage market.
D) - subsidize low income housing.
C) - serve as a secondary mortgage market.
Answer: C—The Federal National Mortgage Association (Fannie Mae) was originally organized to create a secondary market in mortgage loans.
A disadvantage for the buyer under a Land Contract is:
A) - If the seller dies during the contract term, litigation may be necessary to obtain clear title.
B) - Financial institutions consider land contracts unsatisfactory collateral.
C) - Transfer of vendee’s interest may be restricted by covenants.
D) - All of the above
D) - All of the above
Answer: D—The disadvantages of a Land Contract to the buyer are several, chiefly:
Covenants or restrictions of assignment or transfer of the land contract may hamper or prevent the transfer of buyer’s interest therein. The buyer may not be aware of these problems until the time to transfer title.
A prevailing opinion among financial institutions that a Land Contract is poor collateral because it is subject to a more rapid termination in the event of default.
After full performance, the buyer may receive defective title or no title at all, although normally the contract will require delivery of a policy of title insurance. The buyer may have to pay the premium for this.
Lack of assurance that the seller has good title at the time the contract is made, coupled with the fact that prior to full performance by the buyer, the buyer may not rescind the contract on these grounds.
If during the contract term the seller should go bankrupt or die and title passes to heirs or be declared incompetent or have a conservator appointed, the buyer can at the very least anticipate time consuming, frustrating, and expensive litigation before obtaining a deed and policy of title insurance.
From which of the following could you most likely secure the greatest amount of money for the longest period of time?
A) - private lender
B) - insurance company
C) - savings and loan
D) - commercial bank
B) - insurance company
Answer: B—Insurance companies lend the largest amounts for the longest time.
Which of the following is TRUE with regard to a “beneficiary statement?”
A) - The lender may charge up to $60 for preparing the statement.
B) - Upon the request of the borrower, the beneficiary must furnish the statement within 21 days.
C) - Failure to provide the statement in time can result in $300 damages.
D) - All of the above
D) - All of the above
Answer: D—Upon the written request of an authorized person, the beneficiary must furnish a beneficiary statement within 21 days. There may be a $300 penalty for failing to comply. Although the beneficiary must provide an annual statement at no charge, additional statements may carry a maximum $60 charge.
Which of the following would NOT be illustrative of an institutional lender?
A) - insurance company
B) - savings and loan
C) - commercial bank
D) - mortgage company
D) - mortgage company
Answer: D—Institutional lenders are those lenders who lend their own money. A mortgage company usually does not lend its own money, but rather acts in most cases as the representative of an institutional lender. They are sometimes referred to as “loan correspondents” or “loan brokerage firms.”
All of the following are considered advantages of FHA financing EXCEPT:
A) - low down payment.
B) - long-term loans with lower payments.
C) - easy to qualify for.
D) - buyer is protected with FHA insurance.
D) - buyer is protected with FHA insurance.
Answer: D—The FHA neither builds homes nor lends money directly, rather it insures loans on real property. Should the homeowner default on the mortgage, the lender is protected, not the buyer.
Title I FHA loans are for:
A) - purchases of homes only.
B) - property improvement loans.
C) - purchases of multiple units.
D) - None of the above
B) - property improvement loans.
Answer: B—Title I FHA guidelines authorize insurance of repair and improvement loans.
Which of the following is a general difference between individual and institutional lenders?
A) - Individual lenders make larger loans than institutional lenders.
B) - Individudal lenders charge lower interest rates.
C) - Individual lenders give loans for shorter terms.
D) - Individual lenders do not undertake foreclosure proceedings.
C) - Individual lenders give loans for shorter terms.
Answer: C—Loans made by individual lenders are usually for a shorter loan term. Private individuals are the primary source of secondary financing.
From the lender’s perspective, a large down payment:
A) - reduces the possibility of default.
B) - makes it more likely that the property will be properly maintained.
C) - streamlines the loan qualification process.
D) - All of the above
D) - All of the above
Answer: D—Most lenders realize that the greater the equity a borrower has in a property, the less inclined he/she will be to default and lose the property through foreclosure. This should also encourage the borrower to keep the property in good shape. A large down payment usually streamlines the loan qualification process.
A request for notice of default would be of most help to the:
A) - beneficiary of a second trust deed.
B) - trustor.
C) - beneficiary of a first trust deed.
D) - trustee.
A) - beneficiary of a second trust deed.
Answer: A—Since foreclosure wipes out all junior liens, the holder of a junior lien should request the recording of a request for notice of default announcing that a default has occurred.
In an adjustable-rate loan, the amount added to the index rate that represents the lender’s cost of doing business is called the:
A) - marginal rate.
B) - margin.
C) - discount.
D) - overage.
B) - margin.
Answer: B—The margin is the amount added to the interest rate of an adjustable-rate loan that represents the lender’s cost of doing business (includes costs, profits and risk of loss of the loan). Generally, the margin stays constant during the life of the loan.
The seller (vendor) under a real property sales contract CANNOT:
A) - sell his or her interest.
B) - encumber the property.
C) - use something other than a legal description.
D) - All of the above
C) - use something other than a legal description.
Answer: C—A land contract must contain the names of the buyer and seller, the sales price, the terms of payment, a full legal description and a lengthy statement of the rights and obligations of the parties.
The nominal rate of interest is the:
A) - legal rate.
B) - rate set forth in the note.
C) - maximum rate allowed by law.
D) - discount rate.
B) - rate set forth in the note.
Answer: B—The nominal rate of interest is the rate set forth in the promissory note.
Which of the following would be security for a note and deed of trust?
A) - credit of borrower
B) - value of property
C) - stability of the money market
D) - All of the above
B) - value of property
Answer: B—The value of the property serves as security for a note and deed of trust.
Most real estate loans charge the following kind of interest rate:
A) - simple.
B) - compound.
C) - usurious.
D) - Any of the above.
A) - simple.
Answer: A—Interest is termed “simple” or “compound”. Simple interest is interest paid only on the principal owed. Compound interest is interest paid on accrued interest as well as on the principal owed. Most real estate loans charge simple interest rates.
Funds for Cal-Vet loans come from:
A) - state bonds.
B) - property taxes.
C) - surplus funds.
D) - federal grants.
A) - state bonds.
Answer: A—Funds for Cal-Vet loans come from voter-approved State General Obligation Bonds and Revenue Bonds issued by the legislature.
During periods of tight money:
A) - interest rates go down.
B) - interest rates stay the same.
C) - interest rates go up.
D) - None of the above
C) - interest rates go up.
Answer: C—A tight money market is an economic situation in which the supply of money is limited and the demand for money is high. Due to the economic forces of supply and demand, interest rates typically go up during a period of tight money.
The beneficiary of a trust deed is usually a:
A) - Realtor.
B) - borrower.
C) - bank.
D) - trustee.
C) - bank.
Answer: C—In a trust deed, the beneficiary is the lender (usually a bank).
With a mortgage, who signs the note?
A) - trustee
B) - beneficiary
C) - mortgagor
D) - mortgagee
C) - mortgagor
Answer: C—The mortgagor (borrower) signs the note.
The trustor under a trust deed is the party who:
A) - signs the note as maker.
B) - holds the title to the property in trust.
C) - acknowledges the note for recording.
D) - lends the money.
A) - signs the note as maker.
Answer: A—The trustor is the borrower under a deed of trust and is the one who signs the note and deed of trust.
What distinguishes VA loans from FHA and other loans?
A) - no points
B) - maximum loan of $100,000
C) - down payment determined by CRV
D) - no down payment
D) - no down payment
Answer: D—VA loans can be made with no down payment.
Upon receiving notification of default on the first trust deed, the holder of a second trust deed would most likely:
A) - wait until the sale to buy the property at a bargain price.
B) - redeem the first mortgage and foreclose under the second.
C) - foreclose on the first to eliminate the second.
D) - None of the above
B) - redeem the first mortgage and foreclose under the second.
Answer: B—In the event of default under the first trust deed, the holder of a second trust deed can elect to make the trustor’s payments and thereby stop foreclosure. The junior liens holder may then foreclose on his or her own lien and take title subject to prior liens. If the junior lienholder does nothing, he/she will have to bid cash for the purchase price at the foreclosure sale or risk losing out completely, since foreclosure wipes out all junior lien. This is an inherent risk associated with junior loans.
They asked about FICO credit scores. We don’t have this exact question yet. See answer.
A) -
B) -
C) -
D) -
C) -
Answer: C—A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Default in a mortgage may be caused by:
A) - failure to pay taxes.
B) - failure to maintain insurance.
C) - failure to make payments.
D) - All of the above
D) - All of the above
Answer: D—A default is generally defined as nonperformance of a duty or obligation that is part of a contract.
Which of the following lenders invest more heavily in single-family home loans?
A) - savings and loan associations
B) - commercial banks
C) - insurance companies
D) - individuals
A) - savings and loan associations
Answer: A—Savings and loan associations, also known as “thrifts,” fomerly accounted for more home loans than any other source. The distinction between banks and S&L’s has almost disappeared since deregulation, and a great many S&L’s have become banks.
A home sold for $210,000 but appraised for only $203,000. The lender is willing to finance up to 80%. How much will the buyer need to pay as a down payment?
A) - ($210,000 - $203,000) + ($210,000 x 20%)
B) - ($210,000 - $203,000) + ($203,000 x 20%)
C) - ($203,000) + ($210,000 x 80%)
D) - ($210,000) + (210,000 x 20%)
B) - ($210,000 - $203,000) + ($203,000 x 20%)
Answer: B—The lender always uses the appraised value, not purchase price. Since the lender is willing to finance 80% of the appraised value, the down payment calculation is ($210,000 - $203,000) + ($203,000 x 20%) or $47,600 down payment. This question appears in many different forms so know the calculation.
Upon full repayment of a Cal-Vet loan, the borrower receives a:
A) - new loan commitment.
B) - reconveyance deed.
C) - grant deed.
D) - quitclaim deed.
C) - grant deed.
Answer: C—The CDVA holds title until the veteran has repaid the amount owed. Upon repayment, title is conveyed to the veteran in the form of a grant deed.
A buyer has monthly gross income of $5,000; total mortgage payments of $1,171; and total long-term debts of $325 per month. The back-end ratio is:
A) - 23%
B) - 28%
C) - 30%
D) - 36%
C) - 30%
Answer: C—Lenders also take into account the borrower’s long-term debt for loan qualification purposes. This is the relationship between the borrower’s long-term debt payments and the monthly income called the “back-end” ratio. The formula is: total monthly expense / gross income = back-end ratio. In this question, long-term debts total $325 per month which added to the mortgage payment of $1,171, gives us the total monthly expense of $1,496. $1,496 / 5,000 = 30%.
A first trust deed can be distinguished from a second trust deed by:
A) - the way the documents look.
B) - the specifics of the note.
C) - the time and date of recording.
D) - None of the above
C) - the time and date of recording.
Answer: C—The time and date of recording establishes the priority of the lien. The first trust deed would have an earlier time and date of recording.
Which of the following would have the least impact on evaluating a man’s income for a loan?
A) - his spouse’s income
B) - stock investments
C) - overtime earnings
D) - salary from second job
C) - overtime earnings
Answer: C—Since overtime is typically sporadic, it is of least concern to the lender.
Which of the following acts by the trustor requires the beneficiary’s consent?
A) - establishing land use restrictions
B) - creating an easement on the property
C) - settle a property line dispute
D) - All of the above
D) - All of the above
Answer: D—The trustor cannot perform acts pertaining to the securing property without the consent of the beneficiary.
A low loan-to-value ratio indicates:
A) - use of government financing.
B) - a low down payment.
C) - a large down payment.
D) - the presence of government insurance.
C) - a large down payment.
Answer: C—A large down payment by the borrower would lower the loan-to-value ratio.
The Real Estate Settlement Procedures Act provides for violation penalties of:
A) - a fine of up to $10,000.
B) - up to one year in jail.
C) - loss of real estate license.
D) - both (a) and (b).
D) - both (a) and (b).
Answer: D—Violation of RESPA may result in a monetary fine and/or jail time.
Mutual Mortgage Insurance is paid for by:
A) - the buyer under an FHA loan.
B) - the buyer under a VA loan.
C) - the buyer under a Cal-Vet loan.
D) - All of the above
A) - the buyer under an FHA loan.
Answer: A—MMI is paid for by the purchaser (buyer) under an FHA loan.
After a trustee’s sale, there is money left over after paying the beneficiary of the first trust deed. This money would go first to the:
A) - trustor.
B) - beneficiary of the second.
C) - state.
D) - beneficiary of the first.
B) - beneficiary of the second.
Answer: B—A deficiency occurs when the foreclosure sale of a property produces less than the amount needed to pay the costs and expenses of the action and to pay off the balance of the loan. The parties to the transaction are paid in order of their priority.
Regarding a promissory note:
A) - a promissory note secures the deed of trust.
B) - the deed of trust secures the promissory note.
C) - the promissory note is not part of the deed of trust.
D) - the grant deed secures the promissory note.
B) - the deed of trust secures the promissory note.
Answer: B—The deed of trust secures the promissory note and the property. If payment is not made according to the terms of the note and deed of trust, the beneficiary may instruct the trustee to foreclose as set forth in the deed of trust.
Under the Truth-in-Lending Act (Regulation Z), which of the following need NOT be included in the total “finance charge” required as part of the disclosure statement?
A) - commissions or finder’s fees to lenders
B) - cost of a credit report and appraisal fee
C) - premium for FHA life insurance
D) - loan origination fee
B) - cost of a credit report and appraisal fee
Answer: B—Fees for a credit report or appraisal are excluded from the costs which must be included in the finance charge.
Deregulation of financial institutions most nearly means:
A) - government controls no longer apply to financial institutions.
B) - the amount of interest paid on savings accounts is no longer regulated.
C) - financial institutions can no longer respond to market conditions.
D) - examining the enforcement responsibilities of regulators have been relaxed.
B) - the amount of interest paid on savings accounts is no longer regulated.
Answer: B—Under deregulation, financial institutions may now pay any amount of interest on deposits.
When a loan is fully amortized by equal monthly payments of principal and interest, the amount applied to principal:
A) - and interest remain constant.
B) - decreases while the interest payment increases.
C) - increases while the interest payment decreases.
D) - increases by a constant amount.
C) - increases while the interest payment decreases.
Answer: C—With an amortized loan, the amount allocated to interest decreases while that applied to reduction of principal increases.
A loan to be completely repaid, principal and interest, by a series of regular equal installments is a:
A) - straight note.
B) - balloon payment loan.
C) - fully amortized note.
D) - variable rate mortgage loan.
C) - fully amortized note.
Answer: C—Amortization is the gradual repayment or retiring of a debt by means of systematic payments of principal and/or interest over a set period so that at the end there is a zero balance. The principal is thus directly reduced or amortized over the life of the loan.
A promissory note that provides for payment of interest only during the term of the note is a(n):
A) - straight note.
B) - installment note.
C) - amortized note.
D) - non-negotiable note.
A) - straight note.
Answer: A—A straight note is defined as one in which payments of interest only are made periodically during the term of the note with the principal payment due in one lump sum upon maturity.
A loan that requires a balloon payment at its maturity is called a(n):
A) - partially amortized loan.
B) - fully amortized loan.
C) - amortized loan.
D) - hard money loan.
A) - partially amortized loan.
Answer: A—Under a partially amortized loan, the balance at maturity has only been partially reduced. The remaining balance due at maturity is referred to as a balloon payment .
A mortgage is a:
A) - loan secured by collateral of real property.
B) - loan secured by the credit rating of the borrower only.
C) - loan without collateral to secure the loan.
D) - three party instrument with power of sale.
A) - loan secured by collateral of real property.
Answer: A—A mortgage is an instrument recognized by law by which property is pledged as security for the loan without the necessity of giving up possession of it.
The term mortgage warehousing refers to:
A) - long-term loans.
B) - selling loans.
C) - low interest rate loans.
D) - unsecured loans.
B) - selling loans.
Answer: B—Mortgage warehousing is the process by which a mortgage banker or mortgage broker assembles mortgages that he/she has made and prepares the mortgages to be sold in the secondary market.
Mortgages and deeds of trust differ in every respect EXCEPT:
A) - security.
B) - parties.
C) - statute of limitations.
D) - title.
A) - security.
Answer: A—The property is security for a loan under both a mortgage and deed of trust. A mortgage has two parties while a trust deed has three. A mortgage promises the title - a trust deed conveys legal title from the trustor to trustee.
A homeowner would be least likely to obtain a $50,000 home improvement loan from a(n):
A) - savings and loan association.
B) - credit union.
C) - commercial bank.
D) - insurance company.
D) - insurance company.
Answer: D—In general, life insurance companies make conventional loans on most types of properties, but usually not on single-family homes.
Which of the following describes the term “beneficiary statement?”
A) - A statement of the unpaid balance of a loan.
B) - A statement designating the one who will receive the property if the borrower dies.
C) - An itemization of the amount paid to the policy holder for insurance purposes.
D) - A description of the beneficial features of an assumable loan.
A) - A statement of the unpaid balance of a loan.
Answer: A—A beneficiary statement is a statement of the unpaid balance of a loan and the condition of the indebtedness, as it relates to a deed of trust transaction.
A broker negotiated a loan for a buyer. He will need to prepare a:
A) - Mortgage Loan Disclosure Statement.
B) - Real Estate Transfer Disclosure Statement.
C) - Good Faith Estimate.
D) - Natural Hazard Disclosure Statement.
A) - Mortgage Loan Disclosure Statement.
Answer: A—A person who acts as a Mortgage Loan Broker and negotiates a loan for which a license is required and for compensation which is secured directly or collaterally by a lien on real property regardless of the size of the loan, must deliver a written disclosure statement to the borrower. The statement must be delivered within three business days of receipt of the borrower’s written loan application or before the borrower becomes obligated to the loan, whichever is earlier. This is true whether the loan is being processed manually or electronically.
If a real estate licensee sells a real property sales contract for a seller (vendor), the licensee is responsible for making sure the contract is recorded:
A) - immediately.
B) - as soon as practical.
C) - within 10 working days.
D) - within one year.
C) - within 10 working days.
Answer: C—If a real estate broker negotiates the sale of a land contract, he/she is responsible for making sure it gets recorded within 10 working days.
