Lesson 2: Evaluation and Financing

Question 1

What is an “appraisal” in real estate?

Answer 1

An appraisal is a professional assessment of the value of a property, often required for financing purposes. It helps determine the market value based on comparable sales, income potential, and replacement cost factors.

Question 2

Define “comparative market analysis” (CMA).

Answer 2

A CMA is an informal estimate of a property’s market value, compared to similar properties, used by real estate agents to establish a reasonable asking price when selling or leasing properties.

Question 3

What is the “loan-to-value ratio” (LTV)?

Answer 3

LTV is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. It is used by financial institutions to assess the risk of lending money for a mortgage.

Question 4

What are “points” in a mortgage context?

Answer 4

Points are fees paid directly to the lender at closing in exchange for a reduced interest rate. Each point equals 1% of the loan amount.

Question 5

Define “amortization”.

Answer 5

Amortization is the process of spreading out a loan into a series of fixed payments over time. The payments cover both principal and interest.

Question 6

What does “closing costs” include?

Answer 6

Closing costs include fees associated with finalizing a real estate transaction, such as loan origination fees, appraisal fees, title searches, title insurance, taxes, and realtor fees.

Question 7

Explain what a “fixed-rate mortgage” is.

Answer 7

A fixed-rate mortgage has a constant interest rate and monthly payments that never change over the life of the loan, providing predictable payments and protection against interest rate increases.

Question 8

What is a “variable-rate mortgage”?

Answer 8

A variable-rate mortgage, also known as an adjustable-rate mortgage (ARM), has an interest rate that may change periodically depending on changes in a corresponding financial index that’s associated with the loan.

Question 9

Define “foreclosure”.

Answer 9

Foreclosure is a legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it.

Question 10

What is “equity” in real estate?

Answer 10

Equity is the difference between the market value of a property and the amounts owed on mortgages or other liens. It represents the owner’s actual ownership stake in the property.

Question 11

Define “debt-to-income ratio” (DTI).

Answer 11

DTI is a personal finance measure that compares an individual’s monthly debt payment to his or her monthly gross income, used by lenders to determine loan affordability.

Question 12

What is “mortgage insurance”?

Answer 12

Mortgage insurance is an insurance policy designed to protect the mortgage lender from the risk of default by the borrower, typically required for down payments below 20%.

Question 13

Explain “balloon payment”.

Answer 13

A balloon payment is a large, lump-sum payment scheduled at the end of a series of considerably smaller periodic payments, typically associated with mortgage loans.

Question 14

What is “capitalization rate”?

Answer 14

The capitalization rate, or cap rate, is a rate of return on a real estate investment property based on the income that the property is expected to generate.

Question 15

Define “refinancing”.

Answer 15

Refinancing is the process of replacing an existing loan with a new loan, typically with better terms, such as a lower interest rate or a different loan duration.

Question 16

What is “pre-approval” in a mortgage context?

Answer 16

Pre-approval is a lender’s preliminary assessment of a borrower’s eligibility for a loan, which indicates a firm commitment to lend a specified amount under certain terms.

Question 17

Explain the importance of “credit score” in securing a mortgage.

Answer 17

A credit score is a numerical expression based on a level analysis of a person’s credit files, representing the creditworthiness of an individual. A higher credit score often results in more favorable mortgage terms.

Question 18

What is a “second mortgage”?

Answer 18

A second mortgage is a type of subordinate mortgage made while an original mortgage is still in effect. The second mortgage takes priority over the first in terms of repayment if the loan goes into default.

Question 19

Define “home equity line of credit” (HELOC).

Answer 19

A HELOC is a line of credit secured by the equity in a homeowner’s property, allowing the homeowner to borrow sums of money against the home up to a prescribed limit.

Question 20

What is “escrow” in the context of real estate financing?

Answer 20

In real estate, escrow is an arrangement in which a third party holds and regulates payment of the funds required for two parties involved in a given transaction, ensuring a secure transaction.

Question 21

Explain “loan origination”.

Answer 21

Loan origination is the process by which a borrower applies for a new loan, and a lender processes that application. Origination generally includes all the steps from taking a loan application up to disbursal of funds.

Question 22

What is a “reverse mortgage”?

Answer 22

A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash. The loan is called a reverse mortgage because the traditional mortgage payment stream is reversed.

Question 23

Define “subprime mortgage”.

Answer 23

A subprime mortgage is typically issued to borrowers with lower credit ratings. It carries a higher interest rate than loans offered to borrowers with higher credit scores.

Question 24

What does “underwriting” involve in mortgage processing?

Answer 24

Underwriting in mortgage processing involves assessing the risk of lending money to a potential home buyer based on credit, capacity, and collateral. This determines whether a loan application will be approved.

Question 25

Explain the term “adjustment period” in an ARM.

Answer 25

The adjustment period is the interval at which the interest rate on an adjustable-rate mortgage is recalculated and adjusted. This can be monthly, quarterly, annually, or longer, depending on the terms of the loan.

Question 26

What is a “jumbo loan”?

Answer 26

A jumbo loan is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Unlike conventional mortgages, a jumbo loan is not eligible to be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac.

Question 27

Define “construction loan”.

Answer 27

A construction loan is a short-term loan used to finance the building of a home or another real estate project. The builder or home buyer takes out a construction loan to cover the costs of the project before obtaining long-term funding.

Question 28

What is “mezzanine financing”?

Answer 28

Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally after venture capital companies and other senior lenders are paid.

Question 29

Explain “loan servicing”.

Answer 29

Loan servicing includes the administrative aspects of a loan from the time the proceeds are dispersed until the loan is paid off. This includes sending monthly payment statements, collecting monthly payments, managing escrow accounts, and handling delinquencies.

Question 30

What is “private mortgage insurance” (PMI)?

Answer 30

PMI is a type of insurance that protects the lender—not the borrower—against losses if the borrower defaults on the mortgage. It’s generally required if the down payment is less than 20% of the home’s purchase price.

Question 31

Define “loan commitment”.

Answer 31

A loan commitment is a lender’s promise to offer a mortgage loan up to a specified amount for a particular period. It implies that the lender has approved the borrower’s application and credit information.

Question 32

What is a “credit report” in real estate financing?

Answer 32

A credit report is a detailed report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a loan applicant’s creditworthiness.

Question 33

Explain “loan assumption”.

Answer 33

Loan assumption is a process whereby a new borrower is allowed to take over the payments of an existing loan under the terms of the original loan, avoiding the need for a new loan.

Question 34

What does “annual percentage rate” (APR) indicate?

Answer 34

The APR represents the annual cost of borrowing once the additional fees and costs associated with the loan are factored in. It provides borrowers with a comprehensive measure of the cost of a loan.

Question 35

Define “bridge loan”.

Answer 35

A bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. It allows the user to meet current obligations by providing immediate cash flow.

Question 36

What is “down payment”?

Answer 36

A down payment is an initial upfront portion of the total amount due and is typically given in cash at the time of finalizing the transaction. It is often expressed as a percentage of the total purchase price.

Question 37

Explain “interest-only loan”.

Answer 37

An interest-only loan is a loan where the borrower pays only the interest for some or all of the term, with the principal balance unchanged during the interest-only period.

Question 38

What is a “commercial loan”?

Answer 38

A commercial loan is a debt-based funding arrangement between a business and a financial institution, typically used to fund major capital expenditures and/or cover operational costs that the company may otherwise be unable to afford.

Question 39

Define “loan modification”.

Answer 39

Loan modification is a change made to the terms of an existing loan by a lender. It may involve reducing the interest rate, extending the length of time for repayment, and/or changing other terms of the loan agreement.

Question 40

What is “land financing”?

Answer 40

Land financing refers to a loan that allows the borrower to purchase a parcel of land. As with other real estate loans, the land itself serves as collateral for the loan.