Review 03: Finance & Valuation (11-14)

Question 1

With regard to the Wood Destroying Insect Report, which statement is correct?
A. The seller is responsible for repairing all structural damage discovered.
B. The report determines that there is no active sign of infestation, but does not guarantee structural integrity.
C. The seller usually pays for the report.
D. The report guarantees there is no insect damage.

Answer 1

B. The report determines that there is no active sign of infestation, but does not guarantee structural integrity.
(The Wood Destroying Insect Report is usually paid for by the buyer. It provides information as to the presence of insects, but it does not guarantee the status of structural integrity. If damage is found, that issue is subject to negotiation between the parties as to who pays for the repairs)

Question 2

Assume annual real estate taxes amount to $1,800 and have been paid in advance for the calendar year by the seller. If closing is set for September 15, which of the following is correct.
A. Credit seller $525, debit buyer $525
B. Credit buyer $525, debit seller $525
C. Credit seller $1,275, debit buyer $525
D. Credit seller $525, debit buyer $1,275

Answer 2

A. Credit seller $525, debit buyer $525
(Annual taxes are $1,800. The daily amount is $1,800 divided by 360 = $5 per day. From January 1 through August 30 is 240 days + 15 days for September = 255 days. The seller owes 255 days x $5 per day = $1,275. The seller paid $1,800 - $1,275 owed = $525. The seller will be credited the amount they overpaid of $525 and the buyer will be debited that amount at closing)

Question 3

Personal property taxes on a residential closing are normally: 1. Prorated between the buyer and seller. 2. Single entry debit to the seller if the personal property taxes are unpaid. 3. No entry and disregarded if the personal property taxes are paid.
A. 1 and 2
B. 2 and 3
C. 1 and 3
D. 1 only

Answer 3

B. 2 and 3
(Usually the personal property taxes are the seller’s responsibility and are paid. When the personal property taxes have been paid, there is no entry on the HUD and the amount of the personal property taxes is disregarded)

Question 4

The type of interest usually charged on home loans is:
A. simple interest
B. compound interest
C. interim interest
D. accrued interest

Answer 4

A. simple interest
(Usually mortgage loans are simple interest loans meaning that interest is charged only on the outstanding principal balance)

Question 5

The purpose of a soil suitability test is to:
A. test for brownfield cleanup requirements.
B. test a soil’s absorption or drainage capacity to accommodate septic systems.
C. test for soil toxins to assure they do not leach into the septic system.
D. test the potability of drinking water from a private well.

Answer 5

B. test a soil’s absorption or drainage capacity to accommodate septic systems.
(A soil suitability test, known as a perc test, is conducted on homes that have a septic system as opposed to a city sewer connection to make certain the septic tank can operate properly)

Question 6

What is the federal law which requires the lender to provide the borrower with a Loan Estimate (LE) and the booklet, “Your Home Loan Toolkit” within 3 business days of loan application?
A. Fair Credit Reporting Act
B. Real Estate Settlement & Procedures Act
C. Truth in Lending Act
D. Equal Credit Opportunity Act

Answer 6

B. Real Estate Settlement & Procedures Act
(The Loan Estimate (LE) and the booklet are required within 3 business days of loan application by the Real Estate Settlement & Procedures Act (RESPA))

Question 7

If a consumer receives 100% financing, which of the following types of loans would the consumer MOST likely be obtaining?
A. Conventional
B. Seller financing
C. FHA
D. VA

Answer 7

D. VA
(Although there are other loans which provide 100% financing, the most common and heavily utilized 100% financing loan program is a VA loan)

Question 8

A buyer who has a VA loan has elected to pay the loan off early because the buyer inherited a large sum of money. Which of the following would be a correct statement?
A. VA loans may be paid off early with no penalty.
B. VA loans may be paid off early, but a 30-day prepayment penalty is allowed.
C. VA loans may be paid off early, but the lender may collect interest through the end of the month in which the loan payoff is received.
D. VA loans may not be paid off early.

Answer 8

A. VA loans may be paid off early with no penalty.
(There is no prepayment penalty with VA loans. In fact, Conventional, FHA and VA loans due not have a prepayment penalty. However, on the payoff of an FHA loan the lender may collect interest for the entire month in which the loan is paid off)

Question 9

When calculating qualifying ratios, real property taxes are included when you calculate:
A. neither the housing expense nor the total debt of recurring obligations expense.
B. only the housing expense.
C. only the total debt of recurring obligations expense.
D. in both the calculation of the housing expense and the total debt of recurring obligations expense.

Answer 9

D. in both the calculation of the housing expense and the total debt of recurring obligations expense.
(When calculating debt ratios, the payment which is used to qualify the borrower is a PITI payment which includes the taxes and insurance. That same payment must be included in the total debt of recurring obligations)

Question 10

An adjustable rate mortgage (ARM) can BEST be described as:
A. one in which payments go up when the index to which it is based goes down.
B. one in which payments assure that the loan will be paid off at the end of its term.
C. one in which payments can go up or down depending on the fluctuation or changes in an index upon which it is based.
D. one in which payments are adjustable in the first few years, but then fixed.

Answer 10

C. one in which payments can go up or down depending on the fluctuation or changes in an index upon which it is based.
(Adjustable rate mortgages can fluctuate either up or down. The change which occurs when the interest rate is adjusted is based on the margin and the index of the loan. The margin is a constant number set for the loan at the time the loan is made. The index is a number which will change based on financial markets)

Question 11

Which of the following ads would be considered a violation of TILA/Reg Z requiring the disclosure of costs?
A. Only $235,000 for this beautiful home, Monthly payment is $1875 (PITI) with $3000 down and an APR of 12%.
B. Seller willing to finance at an interest rate of 10%.
C. Terrific commercial mortgage at 12% interest with just $5,000 down.
D. Fantastic residential loan can make you a homeowner for just $1,000 down.

Answer 11

D. Fantastic residential loan can make you a homeowner for just $1,000 down.
(TILA/Reg Z requires disclosure of the APR and this ad must therefore include the APR. when trigger terms (use of any of the loan terms) is used in 1-4 family residential properties. Here, the trigger term is the amount of downpayment)

Question 12

All of the following statements are correct, EXCEPT:
A. The trustee receives naked or bare title from the trustor.
B. The trustor holds equitable title when a trust deed is used.
C. The beneficiary delivers a deed of reconveyance to the trustee when the loan is paid in full.
D. The trust deed conveys the power of sale from the trustor to the trustee.

Answer 12

C. The beneficiary delivers a deed of reconveyance to the trustee when the loan is paid in full.
(This statement is incorrect. The deed of reconveyance, which evidences payoff of the promissory note and releases the lender’s lien on the property is delivered by the trustee to the trustor at the instruction of the beneficiary)

Question 13

All of the following statements are correct, EXCEPT:
A. the payoff document in a mortgage is called the satisfaction of mortgage.
B. RESPA requires attorneys to close real estate transactions in North Carolina.
C. TILA or Regulation Z requires lenders and real estate agents to clearly explain the costs of a loan in advertisements when a trigger term is included in the advertisement.
D. the payoff document with a deed of trust is called the deed of reconveyance.

Answer 13

B. RESPA requires attorneys to close real estate transactions in North Carolina.
(The use of real estate attorneys is a matter of state law. RESPA does not dictate the use of real estate attorneys as closing agents, that is required because NC is an attorney state)

Question 14

Which federal law provides individuals with the right to check their own credit reports and demand that mistakes be corrected?
A. Truth in Lending Act
B. Real Estate Settlement and Procedures Act
C. Fair Credit Reporting Act
D. Equal Credit Opportunity Act

Answer 14

C. Fair Credit Reporting Act
(The Fair Credit Reporting Act provides that consumers have a right to access their credit report at least once a year and provides a process for them to correct credit report errors. It also requires that lenders provide to consumers the identity and source of credit information that may have been utilized in a decision to deny credit)

Question 15

Which of the following act requires credit institutions to inform borrowers of the true cost of obtaining credit so that the borrowers can compare the costs of various lenders and avoid the uninformed use of credit?
A. Real Estate Settlement & Procedures Act
B. Fair Credit Reporting Act
C. TILA/Reg Z
D. Equal Credit Opportunity Act

Answer 15

C. TILA/Reg Z
(TILA/Reg Z deals with the cost of obtaining credit and the true costs of that credit. It is why TILA imposes the inclusion of the Annual Percentage Rate (APR) in both advertising and as a separate disclosure to the consumers at closing)

Question 16

James Smith moved to North Carolina. What type of document will Mr. Smith be asked to sign that gives a security interest in the real property to the lender?
A. Promissory note
B. Security deed
C. General warranty deed
D. Deed of trust

Answer 16

D. Deed of trust
(In NC borrower’s usually sign two documents for the lender, the promissory note (or the IOU) is the written promise to pay back all of the money under certain terms and conditions and the trust deed gives the trustee (neutral third party) a security interest in the property)

Question 17

When must the brochure, “ Your Home Loan Tool Kit” and a Loan Estimate (LE) be provided to a borrower?
A. Within 5 business days of loan application
B. Within 7 business days of loan application
C. At the settlement meeting
D. Within 3 business days of loan application

Answer 17

D. Within 3 business days of loan application
(A borrower makes a loan application when they provide the lender with enough information upon which a credit decision could reasonably be based. Within 3 business days, the lender must provide the borrower with a Loan Estimate (LE) and the booklet “Your Home Loan Tool Kit”)

Question 18

A real estate agent has created a “Gratitude Program” where they provide a $100 gift certificate to a local restaurant each time a home inspector or a loan officer refers a client to them. Which federal law prohibits this type of referral fee or “kickback?”
A. Regulation Z
B. Real Estate Settlement & Procedures Act
C. Marketable Title Act
D. Truth In Lending Act

Answer 18

B. Real Estate Settlement & Procedures Act
(RESPA prohibits a kickback or referral fee to a settlement service provider in connection with the referral of business in a real estate transaction. Both the home inspector and the loan officer would be considered “settlement service providers.”)

Question 19

Which of the following best describes a package loan?
A. One loan is wrapped around another loan in the same transaction.
B. A term used by the Federal Reserve for loans made from the Reserve directly to member banks.
C. A term used in the secondary mortgage market when loans are purchased in bulk from lenders.
D. Both real and personal property are included in the loan.

Answer 19

D. Both real and personal property are included in the loan.
(A package loan is one which covers both real and personal property. They are rare in residential transactions. In residential transactions we convey personal property with a separate Bill of Sale. However, if a commercial buyer were purchasing a restaurant and their lender combined the loan for the real estate and all of the restaurant equipment and personal property it would be considered a package loan)

Question 20

Which of the following is another name for the due-on-sale clause?
A. Defeasance clause
B. Acceleration clause
C. Subordination clause
D. Alienation clause

Answer 20

D. Alienation clause
(An alienation clause and a due on sale clause are the same thing. They both mean that the borrower is alienating (selling or transferring) the real estate and must pay off the entire loan balance)

Question 21

In North Carolina, the closing attorney is usually selected by:
A. the buyer’s agent
B. the buyer
C. the closing agent
D. the bank

Answer 21

B. the buyer
(The buyer typically selects the closing attorney and pays the closing attorney’s fees)

Question 22

In performing their duties, which would be a correct action by a Property Manager?
A. Paying for the capital improvements and repairs that need to be made in order for the premises to be in a fit and habitable condition.
B. Spot checking credit histories for a large enough sample size of tenants to assure all tenants credit histories are in line with the property owner’s credit history criteria.
C. Analyzing the capital gains and tax advantages of the rental property and providing regular investment reports to the owner.
D. Offering concessions to all prospective tenants to induce tenants to fill those vacancies.

Answer 22

D. Offering concessions to all prospective tenants to induce tenants to fill those vacancies.
(Concessions are inducements to retain or attract tenants and with the permission and consent of the owner are often offered by property managers)

Question 23

An amortized loan payment includes:
A. principal and interest payments
B. principal, interest, taxes and insurance (PITI) payments
C. principal payments only
D. interest payments only

Answer 23

A. principal and interest payments
(An amortized loan is a loan in which each level payment includes a portion that is applied to principal and a portion that is applied to interest)

Question 24

Which of the following best describes subordination?
A. An insurance company which is stepping into the shoes of their insured in order to recover losses that they have paid
B. Entering into a mortgage agreement with the lender
C. A waiver of lien priority of one lender to another lender
D. Selling a loan to the secondary mortgage market

Answer 24

C. A waiver of lien priority of one lender to another lender
(One lender may waive their lien priority and allow other lenders to be in a high lien priority. This is subordination. The superior lien would have to waive its rights in order for a junior lien to be paid ahead of it)

Question 25

An owner’s equity is best represented as:
A. the property’s original market value minus its original cost
B. the current appraised value of the property
C. the amount of money the owner has repaid the lender
D. the difference between the market value and the remaining mortgage owed

Answer 25

D. the difference between the market value and the remaining mortgage owed
(The equity created in a property would be that amount over all of the liens and monies owed, or the difference between the market value and what is owed. While the homeowner owns the property we would refer to this as equity. If they sell the home it would be their profit)

Question 26

A seller had repairs done to the property per agreement. If the seller didn’t pay, which type of lien most likely would most likely be placed on the property?
A. General Lien
B. Special Lien
C. Mechanic’s Lien
D. Assessed Lien

Answer 26

C. Mechanic’s Lien
(Mechanic’s liens are placed against property when work is done to protect payment)

Question 27

In order for a deed of trust to be valid, it must contain which of the following?
A. The signature of the trustor
B. The lender’s signature
C. A seal or notarization
D. The trustee’s signature

Answer 27

A. The signature of the trustor
(The only person who must sign the deed of trust is the trustor. Generally, only the person who is giving up or surrendering a right must sign the document. We only require the grantor to sign a deed and we only require the trustor to sign the trust document because they are giving up a right or an interest in the property as collateral for the loan)

Question 28

Which of the following best describes an open-end mortgage?
A. A mortgage contract providing for advances from a lender, up to, but not exceeding a specific amount.
B. A mortgage given by the buyer to the seller to cover all or a portion of the purchase price.
C. One mortgage covering two or more parcels.
D. A mortgage with flexible terms.

Answer 28

A. A mortgage contract providing for advances from a lender, up to, but not exceeding a specific amount.
(Also known as a HELOC or home equity line of credit, this type of loan allows the borrower to continue to borrower money up to a specific amount. Payment is based on the amount borrowed. Credit cards are a type of open end loan)

Question 29

When a rental property is transferred or sold and there are valid leases for market rents, what is the status of the leases on the property?
A. The new owner must honor the leases for a minimum six-month period.
B. The leases are void and extinguished at the time of the sale or transfer.
C. The leases are valid and must be honored by the new owner.
D. The new owner has the option of honoring or cancelling the leases.

Answer 29

C. The leases are valid and must be honored by the new owner.
(Sale or transfer of a property does not terminate a lease. The leases travel with the property and must be honored by the new owner)

Question 30

In which type of loan are release provisions normally contained?
A. RAM loan
B. Package loan
C. Subordinated loan
D. Blanket loan

Answer 30

D. Blanket loan
(A blanket loan covers more than one parcel. When this occurs it is typical for the blanket loan to contain a release provision. A release provision provides for a particular parcel to be released from the loan or lien upon a predetermined reduction in the amount of the principal)

Question 31

If closing takes place on June 18th and the real property taxes have not been paid, what would be the appropriate entry on the settlement statement?
A. debit seller/credit buyer for the buyer’s portion of the taxes
B. credit seller/debit buyer for the seller’s portion of the taxes
C. debit seller/debit buyer to collect the total amount of the taxes
D. debit seller/credit buyer for the seller’s portion of the taxes

Answer 31

D. debit seller/credit buyer for the seller’s portion of the taxes
(If the taxes are unpaid, debit the seller for the amount of taxes for the time that they were in the property, credit that same amount to the buyer. When the buyer gets the full tax bill they will be responsible for it all, but will have collected at closing, funds to cover the period of time during which the seller was in possession of the property)

Question 32

Under which federal act is the use of Annual Percentage Rates (APR) required to be included in advertising when a trigger term is placed in the ad?
A. Real Estate Settlement Procedures Act
B. Equal Credit Opportunity Act
C. Sherman Anti-trust Act
D. Truth in Lending Act

Answer 32

D. Truth in Lending Act
(The Truth in Lending Act requires the disclosure of the true costs of obtaining credit. It is also known as TILA or Regulation Z)

Question 33

Discount points are best described as:
A. Points are used to offer the borrower a below market interest rate as opposed to the par rate, while at the same time increasing the lender’s yield
B. Points are used to reduce the borrower’s closing costs.
C. A dollar amount needed to improve the value and marketability of bundled loans.
D. Fees charged by lenders that allow the banks to receive an upfront amount of money that they can then reinvest in new mortgages.

Answer 33

A. Points are used to offer the borrower a below market interest rate as opposed to the par rate, while at the same time increasing the lender’s yield
(Each point that a bank charges reduces the borrower’s interest rate by .125% (1/8 of one percent). When the borrower buys down the rate they are paying points to increase the lender’s yield on the loan in exchange for paying a lower interest rate)

Question 34

Which of the following may qualify for a VA loan?
A. Any immediate family member of the veteran.
B. Any U.S. citizen may qualify for a VA loan.
C. Veterans and certain widows or widowers.
D. Veterans, their children and grandchildren.

Answer 34

C. Veterans and certain widows or widowers.
(In order to obtain a VA loan, a veteran must obtain a Certificate of Eligibility. In certain instances when the veteran is deceased the widow or widower may still be entitled to VA loan)

Question 35

When a borrower has repaid the amount in full that they borrowed, and the borrower has used a trust deed what is the payoff document that the borrower receives called?
A. A satisfaction of mortgage
B. A deed of reconveyance
C. A defeasance document
D. A release of liability

Answer 35

B. A deed of reconveyance
(A loan in a title theory state, such as NC, is obtained with the borrower (Trustor) signing a Promissory Note and a Deed of Trust. The Deed of Trust conveyed the power of sale to the Trustee. Once the loan is paid off, the beneficiary will instruct the trustee to issue a deed of reconveyance (returning the power of sale) to the trustor)

Question 36

The federal law which requires lenders or “arrangers of credit” to disclose various information concerning the cost of credit to borrowers or consumers in connection with consumer loans, including real estate loans that are NOT made for business, commercial or agricultural purposes called?
A. Real Estate Settlement Procedures Act
B. TILA/Reg Z
C. The Good Funds Act
D. Marketable Title Act

Answer 36

B. TILA/Reg Z
(The Truth in Lending Act (aka TILA/Reg Z) is the federal law requiring disclosure of the true costs of obtaining credit, including disclosure of the APR)

Question 37

All of the following are exempt from the Truth In Lending Act (TILA) EXCEPT:
A. Commercial loans
B. Agricultural purpose loans
C. Closed end residential loans
D. Business purpose loans

Answer 37

C. Closed end residential loans
(The Truth in Lending Act applies to loans on 1-4 unit residential properties. The residential loan may have been an acquisition loan, a refinance loan or a home equity open end loan. All of these are still loans on residential property and are subject to the provisions of the Truth in Lending Act)

Question 38

A borrower has a three day right of rescission of their loan after the loan documents have been signed on which of the following types of properties?
A. The refinance of an owner-occupied residence.
B. The purchase of an investment property.
C. The purchase of a commercial building.
D. The purchase of a primary residence.

Answer 38

A. The refinance of an owner-occupied residence.
(Under the Truth in Lending Act a borrower has a three day right of rescission on a refinance loan of their primary residence. The days are calendar days and the time commences from the time the actual loan documents are signed. The rescission does not apply to the purchase, only refinance loans)

Question 39

Under what circumstances is a lender required to waive a VA funding fee?
A. When a widow is applying for the VA loan.
B. When a disabled veteran is applying for the loan.
C. When the veteran is on active duty.
D. When a veteran has completed their term of active service

Answer 39

B. When a disabled veteran is applying for the loan.
(The funding fee is the charge paid at closing for the guarantee of the loan by VA. It is waived in certain circumstances, usually when the veteran has a disability)

Question 40

A borrower is obtaining a loan of $98,000 at an interest rate of 6%. What is the monthly interest that the borrower will pay at the time of the first payment if the loan is a 30 year fixed rate loan?
A. $588
B. $5,880
C. $6,200
D. $490

Answer 40

D. $490
(Interest on mortgage loans is simple interest and paid on the outstanding balance only. At the beginning of the loan $98,000 x 6% = $5,880 in annual interest, divided by 12 = $490 per month)

Question 41

What is the clause in the loan documents that provides for the lender to release their interest in the property once the loan has been paid in full?
A. Deed of Reconveyance
B. Alienation
C. Satisfaction of Mortgage
D. Defeasance

Answer 41

D. Defeasance
(Defeasance comes from the word “defeated.” When a loan has been repaid in full, a process called defeasance occurs, meaning that the borrower has defeated the lender’s interest in the collateral. The defeasance clause requires the lender to release their lien when the promissory note has been paid in full)

Question 42

A due on sale clause in mortgage lending is also known as a(an) :
A. Defeasance clause
B. Alienation clause
C. Subordination clause
D. Acceleration clause

Answer 42

B. Alienation clause
(Alienation means to sell or transfer. An alienation clause or due on sale clause means that if the owner sells or transfers the property, the entire loan balance is due and payable)

Question 43

Which is true about the cost approach?
A. It sets the lowest limit of value
B. It is most common in retail properties
C. It is the only approach that uses depreciation
D. Land and improvements depreciate

Answer 43

C. It is the only approach that uses depreciation
(The cost approach tends to set the highest limit of value and only depreciates the improvements)

Question 44

During the course of a sale, homes need to be appraised to be sure they are worth the price the buyer is willing to pay. Who selects the appraiser?
A. The appraiser is assigned by an appraisal management company selected by the lender
B. The buyer
C. The loan officer
D. The seller

Answer 44

A. The appraiser is assigned by an appraisal management company selected by the lender
(Federal law requires that the appraisal for a borrower obtaining a loan must be obtained through an appraisal management company. Lenders work with appraisal management companies and the specific appraiser is assigned on a rotating basis at random)

Question 45

A seller has requested a real estate licensee prepare a comparable market analysis. The potential seller’s home is located in an older neighborhood. The home is 2,300 square feet. The only other home the agent can find as a comparable is a 2,500 square foot home in an older neighborhood. Assuming that a square foot is valued at $100.00, what adjustment should the agent make?
A. Add $20,000 to the subject property.
B. Subtract $20,000 from the subject property.
C. Add $20,000 to the comparable property.
D. Subtract $20,000 from the comparable property.

Answer 45

D. Subtract $20,000 from the comparable property.
(Adjustments are always made to the comparable property, not the subject property. Because the comparable is superior (200 square feet bigger) the agent must subtract $20,000 from the comparable property)

Question 46

A provisional broker is trying to determine the value of an office building. Which valuation approach would be the most important in determining the value of the building?
A. Cost approach
B. Comparable market analysis
C. Market approach
D. Capitalization approach

Answer 46

D. Capitalization approach
(The capitalization approach is used for income producing properties. Commercial properties such as the office building are being purchased for income purposes and therefore would rely most heavily on applying and analyzing capitalization rates)

Question 47

If the licensee can determine the net operating income for the property and they know the market capitalization rate for similarly situated buildings, the licensee can calculate:
A. the sales price of the building
B. the actual return on investment for the buyer
C. the cost of the building
D. the value of the building

Answer 47

D. the value of the building
(The net operating income divided by the market capitalization rate will provide the value of the building)

Question 48

An appraiser in valuing a property using the cost approach would rely on all of the following, EXCEPT:
A. the cost of building materials
B. the labor required to construct the structure
C. the age of the structure
D. the net income of the property

Answer 48

D. the net income of the property
(the net operating income would be used in the income approach, not the cost approach)

Question 49

A subject property was built in 2010. The best comparable properties that the agent has identified were all built prior to 2000. In creating a CMA, which of the following is correct regarding the adjustments that the licensee must make?
A. Adjust the subject property up for its age
B. Adjust the comparable properties down for their age
C. Adjust the subject property down for its age
D. Adjust the comparable properties up for their age

Answer 49

D. Adjust the comparable properties up for their age
(The adjustments are always made to the comparable property, not the subject property. Compared to the subject property the age of the comparable is inferior and therefore the comparables will have to be adjusted up for their age)

Question 50

A shopping center in a neighborhood was recently vacated by the tenants. The shopping center is now run down with a lot of vacant shops and high crime which is adversely affecting the value of the homes in the neighborhood, an appraiser would refer to this as:
A. economic obsolescence
B. functional obsolescence
C. external depreciation
D. obsolete functionality

Answer 50

A. economic obsolescence
(When a property suffers a decrease (diminution) in value due to external neighborhood issues it is called economic obsolescence. Functional obsolescense occurs when the property itself has outdated or obsolete features)