Unit 10 Exam: Financing for Real Estate Investments

Question 1

An adjustable-rate loan includes all of the following clauses EXCEPT:

a. fixed monthly payments
b. an index
c. a cap
d. a ceiling

Answer 1

a. fixed monthly payments (p. 146)

this technique involves the development of a formula for interest computation based on an acceptable measuring unit called an index (such as U.S. Treasury Bill rates), plus a fixed margin rate, as an indication of current interest rates.

-if the index moves up a point, then the interest rate on the loan will be adjusted upward 1%

ADJUSTABLE, not FIXED monthly payments

Question 2

A basic difference between a deed of trust and a note and mortgage is:

a. the redemption period
b. the interest rate
c. the length of the loan
d. the size of the loan

Answer 2

a. the redemption period (p. 138)

the deed of trust financing arrangement acts to shorten a borrower’s redemption period from as long as [ONE YEAR, under a NOTE AND MORTGAGE] to as little as [90 DAYS UNDER A TRUST DEED].

Question 3

A coverage ratio:

a. protects the lender from possible defaults
b. establishes the amount of down payment
c. establishes the amount of insurance required
d. usually exceeds more than 3 to 1

Answer 3

a. protects the lender from possible defaults (p. 134)

in lending for home ownership, the income to repay the loan comes from the individual borrower. this is why lenders are concerned with the borrower’s credit standing and job history.

• commercial lending differs in that the funds to repay the loan come not from the individual borrower, but from the property. it is the NOI of an investment property that is used to repay the loan.
• THIS is why lenders are as concerned with the property’s operating statement as with the individual borrower.

Question 4

When assuming the balance of an existing loan:

a. the original borrower and the new borrower are jointly liable on the loan
b. the original borrower is relieved of any further personal liability on the loan
c. the new borrower does not incur any personal liability on the loan
d. the new borrower is buying the property subject to the terms of the loan

Answer 4

a. the original borrower and the new borrower are jointly liable on the loan (p. 144)

the purchase of a property and the assumption of the existing loan legally place the buyer in the same liability position as the original makers of the note and mortgage and all intervening owners who had assumed the same loan.

Question 5

All of the following refer to a real estate financing transaction EXCEPT:

a. agglomeration
b. collateralization
c. subordination
d. hypothecation

Answer 5

a. agglomeration

agglomeration: a mass or collection of things, an essemblage

Question 6

The real estate loan form under which the lender maintains legal ownership is:

a. a deed of trust
b. a note and mortgage
c. a contract for deed
d. a certificate of title

Answer 6

c. a contract for deed (p. 139)

Question 7

A negative amortization loan includes:

a. a principal-only payment
b. an interest-only payment
c. a less than interest-only payment
d. a principal-plus-interest payment

Answer 7

c. a less than interest-only payment (p. 146)

in finance, negative amortization occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases.

Question 8

A wraparound financial encumbrance implies all of the following EXCEPT:

a. an existing underlying encumbrance
b. a possible override profit
c. an all-inclusive loan
d. a priority lien position

Answer 8

d. a priority lien position (p. 141)
- the unique feature of a wrap is that it creates a new loan that encompasses any existing loan without disturbing the legal priority of the underlying encumbrance

Question 9

A seller under a sale-leaseback arrangement benefits from all of the following EXCEPT:

a. immediate cash receipts
b. release of liability under the existing assumed mortgage
c. tax-deductible rent payments
d. continued possession of the property

Answer 9

b. release of liability under the existing assumed mortgage (p. 142)

the owner’s of a property sell it to investors and, simultaneously, lease it back, usually for long periods of time–often from 30 to 40 years.

ADVANTAGES:

• immediate use of the cash proceeds from sale
• opportunity to deduct the entire rental amount as an operational business expense
• used most effectively with properties already fully depreciated

Question 10

With a $60,000 wrap loan payable at 10% interest only around an existing $50,000 loan balance at 8%, the wrap holder’s annual yield is:

a. 8%
b. 10%
c. 20%
d. 56%

Answer 10

c. 20%

50,000 x .02 = 1,000
+ (10,000 x 0.10 = 1,000) = 2,000
/ 10,000 = 0.20 (or 20%)