Real Estate Finance

Question 1

Mortgage Financing

Answer 1

Financing that uses mortgaged real property as security for borrowed funds

Question 2

Hypothecation

Answer 2

Use of real property as collateral for a mortgage loan

Question 3

Lien Theory

Answer 3

A state whose laws give a lender on a mortgaged property equitable title rather than legal title

Question 4

Title Theory

Answer 4

A state whose laws give legal title of a mortgaged property to the mortgage until the mortgagor satisfies the terms and obligations of the loan

Question 5

Note

Answer 5

An agreement to repay a loan of an indicated amount under certain terms

Question 6

Mortgage

Answer 6

A legal document wherein a mortgagor pledges ownership interest in a property to a lender, or mortgage, as collateral against performance of the mortgage debt obligation

Question 7

Mortgagor

Answer 7

The borrower in a mortgage

Question 8

Mortgagee

Answer 8

The lender in a mortgage

Question 9

Deed of Trust

Answer 9

An instrument used by a buyer to convey title to mortgaged property to a trustee to be held as security for the lender, who is the beneficiary of the trust

Question 10

Principal

Answer 10

The loan balance to which interest charges are applied

Question 11

Loan Balance

Answer 11

At any point during the life of a mortgage loan, the remaining unpaid principle is called the loan balance, or remaining balance

Question 12

Interest

Answer 12

A lender’s charge for the use of the principle amount of a loan

Question 13

Points

Answer 13

A discount point is one percent of the loan amount. Thus, one point on a $100,000 loan equals $1000. The lender charges this as pre-paid interest at closing by funding only the face amount of the loan minus the discount points. The borrower, however, must repay the full loan amount, along with interest calculated on the full amount

Question 14

Term

Answer 14

The loan term is the period of time over which the loan must be repaid. A “30-year loan” is a loan whose balance must be paid off at the end of 30 years

Question 15

Payment

Answer 15

The loan term, loan amount, and interest rate combine to determine the periodic payment amount. What these three quantities are know, it is possible to identify the periodic payment from a mortgage table or with a financial calculator. Mortgage payments are usually made on a monthly basis. On an amortizing loan, a portion of the payment goes to repay the loan balance in advance, and a portion goes to payment of interest in arrears

Question 16

Mortgage Insurance

Answer 16

An insurance policy, purchase by a borrower, that protects a lender against loss of that portion of a mortgage loan which exceeds the acceptable loan-to-value ratio

Question 17

Underwritten

Answer 17

A process of investigating the financial capabilities and creditworthiness of a prospective borrower and granting credit to a qualified borrower

Question 18

Qualification

Answer 18

A mortgage underwritten procedure to determine the financial capabilities and credit history of prospective borrower

Question 19

Loan-to-Value Ratio

Answer 19

An underwritten ratio that relates the size of a loan to the market value of the collateral. The closer the loan value is to market value, the riskier the loan is for the lender, since the lender is less likely to recover the debt fully from the proceeds of a foreclosure sale

Question 20

Equal Credit Opportunity Act

Answer 20

Requires a lender to evaluate a loan applicant on the basis of that applicant’s own income and credit rating, unless the applicant requests the inclusion of another’s income and credit rating in the application

Question 21

Income Ratio

Answer 21

An underwritten ratio that relates a borrower’s gross or net income and debt service of a loan; used to determine how large a loan a borrower can reasonably afford

Question 22

Debt Ratio

Answer 22

An underwritten equation that is used to determine how much debt an individual can afford in view of the party’s or household’s income

Question 23

Loan Commitment

Answer 23

A lender’s written pledge to lend funds under specific terms. May contain deadlines and conditions

Question 24

Regulation Z

Answer 24

A fair financing law applying to residential loans; lenders must disclose financing costs and relevant terms of the loan to the borrower

Question 25

Real Estate Settlement Procedures Act

Answer 25

A federal law which aims to standardize settlement practices and ensure that buyers understand settlement costs. RESPA applies to purchases of residential real estate (one- to four- family homes) to be financed by “ federally related” first mortgage loans

Question 26

Primary Mortgage Market

Answer 26

Lenders and mortgage brokers who originate loans directly to borrowers

Question 27

Secondary Mortgage Market

Answer 27

Lenders, investors, and government agencies who buy, sell, insure, or guarantee existing mortgages, mortgage pools, and mortgage-backed securities

Question 28

Fannie Mae

Answer 28

A government-sponsored agency in the secondary mortgage market which buys conventional, FHA, and VA loans, sells mortgage- backed securities, and guarantees payment of principle and interest on the securities

Question 29

Ginnie Mae

Answer 29

A division of HUD which guarantees FNMA mortgages and securities backed by pools of VA-guarentees and FHA-insured mortgages

Question 30

Freddie Mac

Answer 30

A major secondary mortgage market organization which buys conventional, FHA, and VA loans and sells mortgaged-backed securities

Question 31

FHA

Answer 31

The Federal Housing Administration is an agency of the Department of Housing and Urban Development (HUD). It does not lend money, nut insures permanent long-term loans made by others

Question 32

Assumability

Answer 32

Rules for assumability vary according to when the FHA-insured loan was originated and whether the original loan was for an investment property or an owner-occupied principal residence. Loans originated before Dec. 1, 1986, are generally assumable without restriction. Loans originated after Dec 1,1986, require that the assumer show creditworthiness. Loans originated after Dec. 15, 1989, may not be assumed unless the borrower fully qualifies. No loans for investment or non-owner-occupied properties originated after the latter date are assumable

Question 33

VA

Answer 33

The Veterans Administration (Department of Veterans Affairs) offers loans guarantees to qualified veterans. The VA, like the FHA, does not lend money except in certain areas where other financing is not generally available. Instead, the VA partially guarantees permanent long-term loans originated by VA- approved lenders to issue loans with higher loan-to-value ratios than would otherwise be possible. The interest rate on a VA- guaranteed loan is usually lower than one on a conventional loan. The borrower does not pay any premium for the loan guarantee, but does pay a VA funding fee at closing

Question 34

Amortization

Answer 34

A partial or complete reduction of a loan’s principal balance over the loan term, achieved by periodic payments which include principal as well as interest

Question 35

Adjustable Rate Loan

Answer 35

A mortgage loan having an interest rate that can be periodically raised or lowered in accordance with the movement of a financial index

Question 36

Seller Financing

Answer 36

Any financing arrangement where a seller takes a note and mortgage from the buyer for all or part of the purchase price of the property