MLO-General Mortgage Knowledge Flashcards
- Every ARM includes a(n):
a. level payment plan.
b. biweekly payment.
c. index
d. capitalization rate.
c. index
Correct answer is (c).
A lender may offer a variety of ARMS, but they all share similar features—initial interest rate and payment, adjustment period, index, margin, and caps. These basic features are incorporated into every ARM loan.
- A borrower obtaining a 3/1 hybrid ARM will have a loan with a:
a. fixed rate for 3 years and an annual rate adjustment thereafter.
b. fixed rate for 1 year and a rate adjustment every 3 years thereafter.
c. cap on the interest rate for the first 3 years and an interim cap thereafter.
d. cap on the interest rate for the first year and an interim cap every 3 years thereafter.
c. cap on the interest rate for the first 3 years and an interim cap thereafter.
Correct answer is (c).
A lender may offer a variety of ARMS, but they all share similar features—initial interest rate and payment, adjustment period, index, margin, and caps. These basic features are incorporated into every ARM loan.
“CRV” is a common phrase used in the financing of real estate. The CRV is issued by the:
a. Federal National Mortgage Association.
b. Federal Housing Administration.
c. Government National Mortgage Association
d. Veteran’s Administration.
d. Veteran’s Administration.
Correct answer is (d).
Certificate of reasonable value is the VA appraisal.
Hard money loans are usually offered by __________ who want to earn a return on their investment.
a. city officials b. credit unions c. private lenders d. savings and loans
c. private lenders
Correct answer is (c).
Hard money loans are typically offered by private investors who are seeking to earn a return on their investment through the interest rates on the loan.
On an ARM, what limits the amount an interest rate moves up or down from one period to the next after the first adjustment?
a. Credit percentage cap b. Initial interest cap c. Periodic adjustment cap d. Prime loan cap
c. Periodic adjustment cap
Correct answer is (c).
The periodic adjustment cap limits the amount the interest rate can adjust up or down from one adjustment period to the next after the first adjustment.
The annual percentage rate is:
a. a measure of the cost of credit, expressed as a yearly rate. b. an annualized simple interest rate. c. the cost of a loan, expressed as a biannual rate. d. the cost of credit, expressed as a monthly rate
a. a measure of the cost of credit, expressed as a yearly rate.
Correct answer is (a).
The annual percentage rate is a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made.
Which would not be a conforming loan that Fannie Mae would purchase?
a. Single-family second home b. Non-owner occupied 1-4 residence c. Timeshare d. Condominium
c. Timeshare
Correct answer is (c).
Fannie Mae purchases conforming loans made on 1-4 family unit residences (both owner and non-owner occupied), single-family second homes, co-ops, condos, PDs, and leaseholds.
8. When interest is not paid on a payment-option ARM because of a payment cap, the interest is: a. added to next period's interest. b. added to the balance of the loan. c. dismissed. d. waived.
Correct answer is (b).
b. added to the balance of the loan
Many payment-option ARMs have a payment cap to prevent any one adjustment from increasing excessively, even if the index rate would merit a high increase. However, any interest not paid because of the payment cap is added to the balance of the loan.
9.
Which of the following statements is true about a no-ratio loan?
a. Assets are not disclosed.
b. Employment is not disclosed.
c. Income is not used in qualifying the borrower.
d. The amount of debt the borrower can handle is not calculated.
c. Income is not used in qualifying the borrower.
Correct answer is (c).
Under no ratio documentation, income is not disclosed or used in qualifying the borrower. The loan decision is based on the borrower’s credit rating and down payment or equity in the property.
All of the following are FHA loan programs, except:
a. 245 graduated payment mortgage. b. Title 1 home improvement loan. c. Energy Efficient Mortgage. d. Traditional 30-year fixed-rate loan.
d. Traditional 30-year fixed-rate loan.
Correct answer is (d).
FHA loan programs include the 203(b) residential loan, 251 adjustable-rate mortgage, 245 graduated payment mortgage, 255 reverse mortgage, 203(k) rehabilitation loan, Title 1 home improvement loan, and the Energy Efficient Mortgage.
Kendra and Bobby lost their last home due to job layoffs, which negatively affected their credit. Ocean Bank is helping them finance an affordable home that is closer to Bobby’s new employer. Kendra and Bobby are aware their loan interest rate will be high but would like a mortgage to help rebuild their credit. What loan type might the lender suggest to Kendra and Bobby to meet their needs?
a. Conforming loan b. Reverse mortgage c. Non-conforming loan d. “A” paper loan
c. Non-conforming loan
Correct answer is (c).
Non-conforming or “B” paper loans allow borrowers with less-than-perfect credit to rebuild their credit and refinance the loan at a better rate.
What is included in the finance charge for a loan secured by real property?
a. Application fee b. Broker fee c. Notary fee d. Title fee
b. Broker fee
Correct answer is (b).
The broker fee refers to the broker origination fee paid to the mortgage loan originator (mortgage broker). The finance charge includes the following types of charges: interest, points, loan fees, assumption fees, finder’s fees. Charges excluded from the finance charge for a real estate loan include: application fees, seller’s points, title insurance, property survey, abstract of titles, preparing loan documents (deeds or settlement documents), notary fees, credit report fees, appraisals, inspections (pest, geologic, flood hazard, etc.), and amounts placed in impound accounts. [FDIC 6500, Reg. Z Part 226, Section 226.4 Finance Charge]
When compared to a 25-year amortized loan, a 30-year amortized loan has:
a. less interest over the term of the loan. b. more principal over the term of the loan. c. higher monthly payments of principal and interest. d. lower monthly payments of principal and interest.
d. lower monthly payments of principal and interest.
Correct answer is (d).
The longer the term of the loan, the lower the monthly payments. Since interest will be paid for a longer period, the total financing costs over the life of the loan would be higher.
How can home buyers protect themselves from claims by others to legal rights in their new property?
a. Assume the seller's homeowner's insurance policy b. Buy mortgage insurance c. Buy an owner's title insurance policy d. Buy a lender's title insurance policy
c. Buy an owner’s title insurance policy
Correct answer is (c).
A buyer will buy, or have the seller buy for him, an owner’s title insurance policy insuring him against loss due to claims of others to the title or to legal rights in the property.
5. If the payments on a loan financing a real estate purchase are insufficient to service the debt, the result will be: a. a smaller balloon payment. b. negative amortization. c. positive cash flow. d. default on the debt.
b. negative amortization.
Negative amortization means that a portion of the interest is not paid each month. This portion is added to the unpaid principal.
In real estate financing, the role of the Department of Veterans Affairs is to:
a. make loans to qualified veterans. b. guarantee loans made by an approved lender. c. make loans to any qualified resident of the United States. d. guarantee loans made to qualified veterans by an approved lender.
The Department of Veterans Affairs (DVA or VA) does not make loans. It guarantees loans made by approved lenders, much like the FHA.
The DVA has programs that provide benefits to all of the following, except:
a. veterans. b. government employees. c. family members. d. survivors of veterans.
b. government employees.
The DVA is a government-run military veteran benefit system with the responsibility of administering programs of veteran’s benefits for veterans, their families, and surviviors.
Harry is 67 years old. He has no outstanding loans on his home. He would like to have additional income so that he can travel. What loan product is suitable for Harry in this situation?
a. Exploding ARM b. Reverse mortgage c. Graduated payment mortgage d. 20-year fixed-rate mortgage
b. Reverse mortgage
A reverse mortgage allows homeowners 62 years and older to borrow the equity in their personal residence and not repay the loan until they no longer occupy the property.
Which index reacts quickly to changes in the market?
a. 11th District Cost of Funds b. Certificate of Deposit c. Common Market d. Monthly Treasury Average
b. Certificate of Deposit
These indexes are averages of the secondary market interest rates on nationally traded Certificates of Deposit. The 6-month Certificate of Deposit (CD) index generally reacts quickly to changes in the market.
What happens to portfolio loans after the lender originates them?
a. They are sold in the secondary market. b. Fannie Mae purchases them. c. They are kept in the lender's loan portfolio. d. Freddie Mac purchases them.
c. They are kept in the lender’s loan portfolio.
. A portfolio loan is a loan retained by the lender. Since these loans do not conform to Fannie Mae/Freddie Mac credit standards, they cannot be sold into the secondary market. They are either retained in the lender’s portfolio or privately securitized.
The FHA was established to:
a. make loans to qualified borrowers. b. make loans to veterans. c. stabilize the mortgage market. d. set FNMA/FHLMC lending standards.
c. stabilize the mortgage market.
Originally created to stabilize the mortgage market, the FHA caused the some of the greatest changes in the housing industry in the 20th century. It forever changed home mortgage lending by insuring long-term, amortized loans; creating standards for qualifying borrowers; and by establishing minimum property and construction standards for residential properties.
A loan discount:
a. increases the interest rate on the loan. b. lowers the interest rate on the loan. c. improves the chances of getting loan approval. d. is only used in reverse mortgages.
b. lowers the interest rate on the loan
Loan discount, often called “points” or “discount points”, is a one-time charge imposed by the lender or broker to lower the interest rate on the loan. [HUD-1, Section 802]
A borrower who applies for a subprime loan is most likely someone who:
a. has an immaculate credit history. b. experienced bankruptcy or foreclosure in the past. c. is not perceived as a high credit risk. d. usually makes his or her loan payments on time.
b. experienced bankruptcy or foreclosure in the past.
Subprime loans are offered to borrowers who may have recently filed for bankruptcy or foreclosure, or have late payments on their credit reports.
With a stated income stated assets loan:
a. assets are disclosed and only income is verified. b. income is disclosed and only assets are verified. c. both income and assets are disclosed and verified. d. both income and assets are disclosed but not verified.
d. both income and assets are disclosed but not verified.
A loan based on disclosure but no verification of assets and income may be called a stated income stated assets loan.
A(n) _____________ is a fee charged when a loan is paid off early.
a. ARM penalty b. cash-out penalty c. prepayment penalty d. rate penalty
c. prepayment penalty
A prepayment penalty is a fee charged when the loan is paid off early.
Benefits of FHA-insured loans include all of the following, except:
a. low down payments. b. complicated qualifying. c. competitive interest rates. d. low closing costs.
b. complicated qualifying.
FHA-insured loans allow low to moderate-income people to buy a home with lower initial costs. FHA-insured loans feature low down payments, competitive interest rates, easy qualifying, and low closing costs. In addition, FHA loans are assumable and have no prepayment penalties.
Sam wants a home loan with rates that will not change during the loan term. He just learned from the lender that he does not qualify for the $250,000 traditional 30-year fixed-rate loan for which he applied. However, the lender told Sam he does qualify for another fixed-rate loan with lower monthly payments. Based on this information, Sam qualifies for a ___________________ fixed-rate loan.
a. 40-year b. 20-year c. 15-year d. 10-year
a. 40-year
A 40-year fixed-rate loan extends the repayment term of a fixed-rate mortgage, which results in smaller monthly payments. This longer term fixed-rate loan product provides another way to put a more expensive home within the reach of buyers.
Which of the following will necessarily involve a balloon payment?
a. Fully amortized loan b. Partially amortized loan c. Variable rate loan d. Fixed rate loan
b. Partially amortized loan
If it were fully amortized, it would be paid off at the end of the term. Partial amortization means that a large (balloon) payment will be due at the end of the loan term.
A(n) __________ loan is a type of loan a borrower can get to finance the costs associated with construction.
a. internal b. intermittent c. interim d. inherent
c. interim
An interim loan is a short-term loan that finances construction costs, such as the building of a new home.
All of the following types of loans could be used for a construction loan, except a(n):
a. adjustable rate mortgage. b. balloon mortgage. c. 30-year fixed rate loan. d. reverse mortgage.
d. reverse mortgage.
Correct answer is (d).
Reverse mortgages are for senior citizens, using existing residences as collateral.
In a deed of trust, the power of sale in the event of default is given from the:
a. beneficiary to the trustee. b. buyer to the seller. c. trustor to the trustee. d. trustee to the beneficiary.
c. trustor to the trustee.
The buyer is the trustor and gives the power of sale to the trustee. If the buyer defaults, the trustee is authorized by the lender (beneficiary) to sell the property and give the proceeds to the lender.
The liquidation of a financial obligation on an installment basis defines:
a. amortization. b. appreciation. c. hypothecation. d. leverage.
a. amortization.
Correct answer is (a).
Amortization is the liquidation of a financial obligation on an installment basis.
What home loan characteristic can possibly lead to foreclosure?
a. Following strict underwriting guidelines b. Full documentation requirements c. Higher rates and fees d. No prepayment penalties
c. Higher rates and fees
Subprime borrowers pay higher rates and fees that make them more susceptible to predatory lending practices that can strip them of the equity in their homes and possibly lead to foreclosure.
What does COFI stand for?
a. Certificate of Financial Indebtedness b. Cost of Funds Index c. Cost of Fire Insurance d. Capacity of Flood Insurance
Correct answer is (b).
b. Cost of Funds Index
COFI stands for cost of funds index. The COFI reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts and other sources of funds.
What do banks use as a base to determine interest charged on commercial loans?
a. Certificate of Deposit b. Eurodollar market c. Prime rate d. Wall street
c. Prime rate
Banks use this rate as a base rate when determining the interest rates they charge on commercial loans and on some consumer loan products.
A promissory note:
a. is security for a trust deed. b. is evidence of a debt. c. must be recorded d. is collateral for the loan.
b. is evidence of a debt.
Correct answer is (b).
A promissory note is evidence of the debt.
Which of the following is an FHA loan program?
a. Interest Rate Reduction Refinancing Loan b. Conventional loan program c. Section 203(b) loan d. All of the above
c. Section 203(b) loan
The majority of FHA loans made are Section 203(b) loans.
The adjustable-rate mortgage (ARM) loan has an interest rate that adjusts with a movable _____________ index.
a. economic b. lender c. price d. public
a. economic
Correct answer is (a).
An adjustable-rate loan or adjustable-rate mortgage (ARM) is a loan with an interest rate that adjusts with a movable economic index. The interest rate on the loan varies upward or downward over the term of the loan depending on money market conditions and the agreed upon index.
Which of the four “Cs” of credit is associated with the ability to repay loans?
a. Capacity b. Capital c. Character d. Collateral
a. Capacity
Capacity refers to the ability of the borrower to pay back the loan. Character refers to the borrower’s credit history. Collateral refers to the property being used as security for the debt. Capital refers to the other assets owned by the borrower.
In 1968 a new organization was formed to assume many of the functions of the Federal National Mortgage Association. This organization also works hand in hand with the Department of Housing and Urban Development (HUD). This organization is known as:
a. Fannie Mae b. Ginnie Mae. c. Freddie Mac. d. Farmer Mac.
Correct answer is (b).
It is GNMA or Ginnie Mae.
Even though she had a debt-to-income ratio of 50%, Jane was able to qualify for a home loan of $525,000. The lender got Jane into a loan product with a low teaser rate that will increase dramatically after 2 years. Jane is unaware of the fact that the payment increase will cause her debt-to-income ratio to spike to 70%. What type of loan product did she secure?
a. Fixed-rate loan b. Exploding ARM c. Conforming loan d. Fannie Mae loan
b. Exploding ARM
The exploding ARM is a notorious home loan product that features a low introductory teaser rate for which the borrower qualifies even with high debt-to-income ratios. When these rates adjust, typically in as little as 2 years, the new fully-indexed rate on this subprime home loan can increase debt-to-income ratios 20% or more. This dramatic rate increase causes the payments to jump to a level that is unmanageable for the majority of homeowners.
A lender with automatic authority from the DVA may:
a. originate home loans without FHA review or approval. b. originate jumbo loans for sale to Fannie Mae or Freddie Mac. c. close VA-guaranteed loans without the prior approval of the DVA. d. do all of the above.
c. close VA-guaranteed loans without the prior approval of the DVA.
Correct answer is (c).
Many VA-approved lenders, such as mortgage companies, savings and loans, or banks, originate these loans and have automatic authority to close VA-guaranteed loans. Automatic authority is the authority of a lender to close VA-guaranteed loans without the prior approval of the DVA.
A way to finance several properties under one loan is to obtain a:
a. blanket loan. b. takeout loan. c. subordination loan. d. timeshare.
a. blanket loan
A blanket loan offers a convenient way to finance multiple properties under one security instrument.
The main benefit of a VA-guaranteed home loan is:
a. stringent qualifying criteria. b. no down payment. c. excessive loan charges. d. a prepayment penalty.
b. no down payment.
The main benefit is that veterans may not need to make a down payment.
What type of loan can a borrower get if he or she wants to purchase a cooperative unit?
a. HELOC b. Reverse mortgage c. Share loan d. Proprietary lease
c. Share loan
Correct answer is (c).
For prospective purchasers of a cooperative, there is financing available in the form of a share loan. A share loan is a type of loan that is made to finance the purchase of shares in a corporation.
Which of the following is not a purchase money loan?
a. Second loan to purchase a condominium b. Second loan to remodel the kitchen c. Seller carry back financing d. Loan obtained to buy a rural home
b. Second loan to remodel the kitchen
A loan used to purchase property is called a purchase money loan. They are used strictly for the purpose of financing the purchase of real property. Any loan made at the time of a sale, as part of the sale, is a purchase money loan. Even a second loan that finances part of the purchase of a property is a purchase money loan.
The Department of Veterans Affairs administers programs of veterans’ benefits for veterans, their families, and survivors. The benefits include:
a. home loan programs. b. education benefits. c. medical benefits. d. all of the above.
Correct answer is (d).
The Department of Veterans Affairs is a government-run military veteran benefit system with the responsibility of administering programs of veterans’ benefits for veterans, their families, and survivors. In addition to home loan programs, the benefits provided include disability compensation, pension, education, life insurance, vocational rehabilitation, survivors’ benefits, medical benefits, and burial benefits.
All of the following are nontraditional loan products, except:
a. interest-only ARMs. b. hybrid ARMs. c. option ARMS. d. reverse mortgages.
d. reverse mortgages.
The SAFE Act defines a nontraditional loan as any loan product other than a
30-year fixed mortgage. The more exotic of these are Hybrid ARMs, Option ARMs, interest-only mortgages, no-money-down, and alternative-documentation (Alt-A) loans. While a reverse mortgage does not exactly meet the criteria of a traditional mortgage, it does have a fixed interest rate.
Who is an ideal candidate for a reverse mortgage?
a. First-time homebuyers with no down payment b. Individuals, age 62 or older, who want to purchase a home c. Homeowners, age 62 or older, with equity but little income d. Investors purchasing a duplex
c. Homeowners, age 62 or older, with equity but little income
The reverse mortgage is a loan program for homeowners who are 62 or older and who have paid off their existing home loan or have only a small balance remaining.
The utilization of borrowed funds to increase purchasing power is:
a. amortization. b. appreciation. c. hypothecation. d. leverage.
Leverage is the utilization of borrowed funds to increase purchasing power.
d. leverage.
