Unit 16: Real Estate Financing: Practice

Question 1

Adjustable-rate Mortgage (ARM)

Answer 1

A loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index.

Question 2

Amortized Loan

Answer 2

A loan in which the principal as well as the interest is payable in monthly or other periodic installments over the term of the loan. (also called a direct reduction loan)

Question 3

Balloon Payment

Answer 3

A final payment of a mortgage loan that is considerably larger than the required periodic payments because the loan amount was not fully amortized.

Question 4

Blanket Loan

Answer 4

A mortgage covering more than one parcel of real estate, providing for each parcel’s partial release from the mortgage lien on repayment of a definite portion of the debt. It is usually used to finance subdivision developments. However, it can be used to finance the purchase of improved properties or to consolidate loans as well.

Question 5

Buydown

Answer 5

A financing technique used to reduce the monthly payments for the first few years of a loan. Funds in the form of discount points are given to the lender by the builder or the seller to buy down or lower the effective interest rate paid by the buyer, thus reducing the monthly payments for a set time.

Question 6

Certificate Of Reasonable Value (CRV)

Answer 6

A form indicating the appraised value of a property being financed with a VA loan.

Question 7

Community Reinvestment Act (CRA)

Answer 7

Under the act, financial institutions are expected to meet the deposit and credit needs of their communities; participate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small businesses, and small farms.

Question 8

Construction Loan (Interim financing or Interim loan)

Answer 8

A short-term loan usually made during the construction phase of a building project. (also called interim financing). The general contractor must provide the lender with adequate waivers that release all mechanic’s lien rights for the work covered by the payment.

Question 9

Conventional Loan

Answer 9

A loan that requires no government insurance or guarantee.

Question 10

Equal Credit Opportunity Act (ECOA)

Answer 10

The federal law that prohibits discrimination in the extension of credit because of race, color, religion, national origin, sex, age, or marital status.

Question 11

Fannie Mae

Answer 11

A quasi-government agency established to purchase any kind of mortgage loans in the secondary mortgage market from the primary lenders.

Question 12

Federal Reserve System

Answer 12

often referred to as the Federal Reserve or simply “the Fed,” is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

Question 13

FHA Loan

Answer 13

A loan insured by the Federal Housing Administration and made by an approved lender in accordance with the FHA’s regulations. (FHA qualifying ratios are 31% and 43%.)

Question 14

Freddie Mac

Answer 14

A corporation established to purchase primarily conventional mortgage loans in the secondary mortgage market. It buys and pool blocks of conventional mortgages.

Question 15

Ginnie Mae

Answer 15

A government agency that plays an important role in the secondary mortgage market. It sells mortgage-backed securities that are backed by pools of FHA and VA loans. Within the Department of Housing and Urban Development (HUD).

Question 16

Growing-equity Mortgage (GEM)

Answer 16

A loan in which the monthly payments increase annually, with the increased amount being used to directly reduce the principal balance outstanding and thus shorten the overall term of the loan.

Question 17

Home Equity Loan

Answer 17

A loan under which a property owner uses his residence as collateral and can then draw funds up to a prearranged amount against the property. Also called a line of credit.

Question 18

Loan-to-value (LTV) Ratio

Answer 18

The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral. The lower the ratio of debt to value, the higher the down payment by the borrower.

Question 19

Mortgage Insurance Premium (MIP)

Answer 19

An up-front premium charged at closing for all FHA loans.

Question 20

Mortgage Loan Originator (MLO)

Answer 20

Anyone who, for compensation or expectation of compensation, takes a residential mortgage loan by phone or in person.

Question 21

Open-end Loan

Answer 21

A mortgage loan that is expandable by increments up to a maximum dollar amount, the full loan being secured by the same original mortgage.

Question 22

Package Loan

Answer 22

A real estate loan used to finance the purchase of both real property and personal property, such as in the purchase of a new home that includes carpeting, window coverings, and major appliances.

Question 23

Primary Mortgage Market

Answer 23

The mortgage market in which loans are originated, consisting of lenders such as commercial banks, savings and loan associations, and mutual savings banks.

Question 24

Private Mortgage Insurance (PMI)

Answer 24

Insurance provided by a private carrier that protects a lender against a loss in the event of a foreclosure and deficiency. PMI protects the top 20 to 30% of the loan against borrower default.

***Under the Homeowners Protection Act of 1998, PMI must terminate automatically when the borrower reaches a 22% equity position based on the original value of the property at the time the loan was originated with no allowance for appreciation or depreciation if the loan was written after July 29, 1999, and the borrower is current on mortgage payments.

Question 25

Purchase Money Mortgage (PMM)

Answer 25

A note secured by a mortgage or deed of trust given by a buyer, as borrower, to a seller, as lender, as part of the purchase price of the real estate. Often used when the buyer does not qualify for a typical lender loan.

Question 26

Real Estate Settlement Procedures Act (RESPA)

Answer 26

The federal law that requires certain disclosures to consumers about mortgage loan settlements. The law also prohibits the payment or receipt of kickbacks and certain kinds of referral fees.

Question 27

Reverse Mortgage

Answer 27

A reverse mortgage allows people 62 or older to borrow money against the equity they have built in their home. A loan under which the homeowner receives monthly payments based on her accumulated equity rather than a lump sum. The loan must be repaid at a prearranged date or on the death of the owner or the sale of the property.

Question 28

Secondary Mortgage Market

Answer 28

A market for the purchase and sale of existing mortgages, designed to provide greater liquidity for mortgages.

Question 29

Secure And Fair Enforcement For Mortgage Licensing Act Of 2008 (SAFE Act)

Answer 29

Act requires that each individual state must license and register mortgage loan originators (MLOs).

Question 30

Straight Loan

Answer 30

A loan in which only interest is paid during the term of the loan, with the entire principal amount due with the final interest payment. Also called a term loan.

Question 31

Trigger Terms

Answer 31

Specific credit terms that may not be advertised unless the advertisement includes other detailed information.

Question 32

Truth In Lending Act (TILA)

Answer 32

Federal legislation that allows the government to regulate the lending practices of mortgage lenders. Often called Regulation Z. The regulation does not apply to business or commercial loans or to agricultural loans of any amount.

Question 33

TILA-RESPA Integrated Disclosures (TRID)

Answer 33

a series of guidelines enforced by the Consumer Financial Protection Bureau (CFPB) that attempts to close loopholes some lenders have used against consumers. These rules specify the mortgage information lenders must provide to borrowers and when they need to send it.

Question 34

VA Loan

Answer 34

A mortgage loan on approved property made to a qualified veteran by an authorized lender and guaranteed by the Department of Veterans Affairs to limit the lender’s possible loss. The VA does not normally lend money; rather, it guarantees loans made by lending institutions approved by the agency. (VA loans have only one ratio, the back end ratio at 41%.) Lenders will typically loan four times the guarantee (for example, a conforming loan of $424,100 ÷ 4 = $106,025 VA guarantee).

Question 35

Wraparound Loan

Answer 35

A method of refinancing in which the new mortgage is placed in a secondary, or subordinate, position; the new mortgage includes both the unpaid principal balance of the first mortgage and whatever additional sums are advanced by the lender.

Question 36

fiduciary lenders

Answer 36

fiduciary obligations to protect and preserve their depositors’ funds.

Question 37

Mortgage brokers

Answer 37

Mortgage brokers are not lenders. They are intermediaries who bring borrowers and lenders together. Mortgage brokers locate potential borrowers, process preliminary loan applications, and submit the applications to lenders for final approval. They do not service loans once they are made.

Question 38

Fannie Mae/Freddie Mac Conforming Loan Limits (2020)

Answer 38

One-family unit / $510,400
Two-family unit / $653,550
Three-family unit / $789,950
Four-family unit / $981,700

**Maximum loan limits are 50% higher in Alaska, Guam, Hawaii, the U.S. Virgin Islands, and for other certain high-cost areas.

Question 39

periodic rate cap

Answer 39

limits the amount the rate may increase at any one time

Question 40

aggregate rate cap

Answer 40

limits the amount the rate may increase over the entire life of the loan.

Question 41

Nonrecourse Loans

Answer 41

one in which the borrower is not held personally responsible for the loan. The lender has no recourse against the borrower personally in the event of a default. More common in commercial and investment real estate transactions

Question 42

for a loan to be eligible for purchase on the secondary market by a government-sponsored enterprise (Fannie Mae or Freddie Mac), it must be a “qualified mortgage,” which requires a debt-to-income ratio of what percentage?

Answer 42

43%.
Expenses such as insurance premiums, utilities, and routine medical care are not included in the 43%

Question 43

Farmer Mac

Answer 43

The Federal Agricultural Mortgage Corporation, usually called Farmer Mac, is another government-sponsored enterprise that operates similarly to Fannie Mae and Freddie Mac but in the context of agricultural loans

Question 44

A clause in a blanket mortgage which gives the property owner the right to pay off a portion of the indebtedness, thereby freeing a portion of his property from the mortgage.

Answer 44

Release Clause

Question 45

FICO score

Answer 45

A credit score scale used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender is known as a:

Question 46

Serves as evidence of debt.

Answer 46

Promissory notes

Question 47

a document signed by a lender stating the outstanding amount on a mortgage loan.

Answer 47

reduction certificate

Question 48

when a Lender will examine the borrowers income, their character and the property.

Answer 48

A loan commitment