RE Finance I

Question 1

Lenders who make money available directly to borrowers and originate loans are called what?

Answer 1

Primary mortgage market lenders

Question 2

Construction loans, home improvement loans, and manufactured housing loans are all loans typically made by whom?

Answer 2

Commercial banks

Question 3

Life insurance companies typically invest what portion of their assets in real estate loans?

Answer 3

Up to a third

Question 4

To process applications and decide whether to accept or reject a loan, lenders use who?

Answer 4

Loan underwriters

Question 5

A balloon payment loan is considered what type of loan?

Answer 5

Partially amortized loans

Question 6

Index, adjustment period, interest rate caps, and margins are all key components to what?

Answer 6

Adjustable-rate mortgages (ARMs)

Question 7

What is the major difference between pre-qualification and pre-approval?

Answer 7

• Pre-qualification is an informal process in which a lender or an agent can do.
• Pre-approval is a formal process that only a lender can do and it involves an actual loan application.

Question 8

What is the purpose of 80-10-10 financing?

Answer 8

To avoid having to pay private mortgage insurance (PMI)

*The buyer gets an 80% loan from one lender and then a 10% from the same or another, and then finally a 10% from someone else. This means there’s a 1st, 2nd, and 3rd lien on the property.

Question 9

What are the two distinct features of fixed-rate, mortgage style loans?

Answer 9

• The interest rate remains fixed for the life of the loan.
• The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

Question 10

What does federal law say about the termination of private mortgage insurance?

Answer 10

Any loans originated after July 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments.

However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI.

Question 11

What does a buyer receive until the debt is fully paid in case of installment land sales contract?

Answer 11

Equitable title

Question 12

What type of loan is considered an expandable one?

Answer 12

Open-end

Question 13

When a buyer borrows from the seller in addition to the lender, this is known as what?

Answer 13

Purchase money mortgage

Question 14

What are some of the risks included in construction loans?

Answer 14

• Inadequate protection against mechanics’ liens
• Financial failure of contractors or subcontractors
• Potential delays in construction completion

Question 15

Which type of mortgage usually includes all the personal property and appliances that are installed on the property?

Answer 15

A package mortgage

Question 16

Making home improvements, paying college tuition, paying medical expenses, and/or taking a vacation would be all good reasons to utilize what type of loan?

Answer 16

Home equity loan

Question 17

Credit unions

Answer 17

Nonprofit banks that can offer higher interest rates on deposits because they don’t pay income tax.

Question 18

Real Estate Investment Trusts (REIT)

Answer 18

A method of pooling investment money using a trust to avoid corporate tax (can only be used if certain tax requirements are met)

Question 19

Mortgage bankers

Answer 19

Work for lending institutions (like a bank)

Question 20

Mortgage broker

Answer 20

an intermediary working with many financial institutions

Question 21

Mortgage

Answer 21

A financing instrument that creates a lien against property

Question 22

Primary mortgage market lenders:

Answer 22

People who originate loans

(i.e make the money available directly to borrowers)

Question 23

Savings and loan association

Answer 23

A financial institution whose primary function is to promote thrift and homeownership

Question 24

Commercial bank

Answer 24

A bank for commercial activities, usually short-term loans

Question 25

Promissory Note

Answer 25

Signed document describing amount of money borrowed and the terms/conditions under which it will be repaid.

*Establishes legal evidence of the debt incurred

Question 26

Judicial foreclosure

Answer 26

Sale of property under supervision of the court.

Question 27

Non-judicial foreclosure

*Sometimes referred to as a “power-of-sale” foreclosure

Answer 27

The process whereby the lender gives the borrower a notice of default (NOD) and the intent to sell the property in a form prescribed by that state’s statute.

Question 28

Deed in lieu of foreclosure

Answer 28

The voluntary transfer of the deed from a defaulting borrower to lender transferring legal title

*This does not terminate any existing liens on the property

Question 29

Right of Redemption

*Also called Equity of Redemption

Answer 29

The right to reclaim a property that has been foreclosed by paying off amounts owed to creditors, including interest and costs

Question 30

Deficiency judgment

Answer 30

A court order sought by lender when a property sale does not cover the amounts owed on the loan.

Question 31

Points (in terms of loans)

Answer 31

Fee charged by lender

(1 point = 1 % of loan amount)

Question 32

Underwriting

Answer 32

Determining borrower’s ability to repay a loan.

(i.e the level of risk for the lender in approving the loan).

Question 33

Straight line loan

*Also called interest-only loans

Answer 33

Loan structured with the monthly payments allocated only to interest.

No principal is paid off. At the end of the term, the borrower must pay off the entire principal amount or get another loan

Question 34

Mortgage style loans

Answer 34

Loans structured usually as fixed-interest, long-term loans of 15 or 30 years.

At the end of the loan term, the full amount of the principal and all of the interest is paid off and the balance is zero.

Question 35

Balloon mortgage

Answer 35

Loan with monthly payments not large enough to fully amortize the loan by end of term so borrower has one large final payment due when the loan has been paid off.

Question 36

Adjustable-rate mortgages (ARMs)

Answer 36

A Loan where the interest rate varies according to some index not controlled by the lender.

Question 37

Conventional mortgage

Answer 37

A non-government backed loan that usually require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property’s sale price.

Question 38

Private mortgage insurance program (PMI)

Answer 38

Programs that insure the top 30% of a loan, protecting the lender in case the borrower defaults on the loan allowing borrowers to lower the down payment on a traditional loan.

Question 39

Graduated Payment Mortgage (GPM)

Answer 39

Loan structured so the monthly payment for principal and interest increases by a certain percentage each year for a certain number of years then levels off for the remaining term of the mortgage.

Question 40

Pledged Account Mortgage (PAM)

Answer 40

A type of graduated-payment mortgage under which the owner or borrower contributes a sum of money into an account that is pledged to the lender.

*The account is drawn on during the first 3-5 years of the loan to supplement the periodic mortgage payments, thereby reducing the borrower’s monthly payments in the initial years. Once the account is empty, the borrower makes the full mortgage payment.

Question 41

What is a Buydown in regards to Mortgages?

Answer 41

When a builder or family member puts down a lump sum of the pledged mortgage to the lender at closing.

*That payment serves to reduce the interest rate on the loan for the first few years.

Question 42

Open-end loan

Answer 42

An expandable loan which gives borrowers a limit up to which they may borrow.

Each incremental advance must be secured by the same mortgage and any advances may not exceed the original borrowing limit.

Question 43

Blanket mortgage loan

Answer 43

Loan which covers more than one piece of property.

*Often used by land developers when they buy a plot of land and divide it into many separate lots.

Question 44

Wraparound mortgage

Answer 44

Loan that allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan.

The second lender issues a new, larger loan to the borrower at a higher interest rate.

Question 45

Bridge loan

Answer 45

A short-term loan that covers the period between the end of one loan and the beginning of another.

Question 46

Installment land sales contract

*Also called a Contract for Deed.

Answer 46

Contract where the seller keeps legal title until the debt is paid in full.

Once paid, the buyer receives equitable title.

Question 47

Construction loans

Answer 47

Loan where the lender commits to the full amount of the loan, but disburses payments over the life of the construction project.

The payments are made to the general contractor or the owner for the parts of the construction completed since the last payment.

Question 48

Package mortgage

Answer 48

Mortgage that includes all the personal property and appliances that are installed on the property.

*This type of loan has been used extensively in the sale of furnished condominiums

Question 49

Reverse annuity mortgage (RAM)

Answer 49

A mortgage where the lender is making payments to the borrower.

This allows older owners to receive regular monthly payments from the equity in their paid-off property without having to sell.

The borrower pays a fixed rate of interest and then repays the loan either when the home sells or from the borrower’s estate upon his or her death.

Question 50

Shared equity mortgage

Answer 50

A participation mortgage in which the lender shares in the appreciation of a mortgaged property if and when the property sells.

Question 51

Sale and leaseback

Answer 51

This arrangement is when the owner of real estate sells the property and then leases it back from the buyer.

The buyer becomes the owner and the former owner becomes the tenant.