RE 101 Ch. 10: Lesson 10: Applying for a Residential Loan - Quiz Qs

One significant result of deregulation of the nation's financial institutions is:

A.government control of financial institutions has been eliminated

B.there is no maximum limit on the interest rates financial institutions may pay depositors

C.financial institutions are less able to respond to market conditions

D.financial institutions may no longer make short-term business loans

B.there is no maximum limit on the interest rates financial institutions may pay depositors

Deregulation in the 1980s and 1990s eliminated many longstanding rules for financial institutions. Among other things, limits on the maximum interest rates payable to depositors were removed.

Which of the following types of lenders is most likely to have the greatest percentage of its assets invested in real estate loans?

A.Life insurance companies

B.Savings and loan associations

C.Commercial banks

D.Pension plans

B.Savings and loan associations

Savings and loans have a traditional emphasis on home mortgage loans.

A group of developers needs a long-term loan of $30 million to build a shopping mall. The most likely source of a loan would be a:

A.national bank

B.life insurance company

C.mutual fund

D.savings and loan association

B.life insurance company

Life insurance companies usually don't make small real estate loans. Instead, they prefer investing in large, long-term commercial loans.

Which of the following types of lenders prefers to make loans on commercial properties rather than construction loans, seeks to avoid administering loans, and prefers long-term loans?

A.Savings and loan associations

B.Commercial banks

C.Insurance companies

D.Mortgage companies

C.Insurance companies

An insurance company tends to prefer large, long-term commercial loans, and typically uses a loan correspondent (such as a mortgage company) to originate and service its loans, instead of administering them itself.

Rather than originating and servicing real estate loans directly, life insurance companies prefer to deal with their investment loans indirectly through:

A.savings and loan associations

B.mortgage bankers

C.the FHA and VA

D.All of the above

B.mortgage bankers

Life insurance companies generally aren't equipped to operate in local real estate markets, so they tend to use loan correspondents to invest in real estate. Mortgage bankers (commonly called mortgage companies) often act as loan correspondents, originating and servicing loans on behalf of large investors like life insurance companies.

Most junior loans for the purchase of real property are secured through:

A.commercial banks

B.individual lenders

C.insurance companies

D.mortgage companies

B.individual lenders

Private individuals -- usually property sellers who carry back a second loan -- are the most common source of junior loans.

Unlike other primary market lenders, _______________ aren't depository institutions.

Mortgage Companies

The lenders that represent the largest source of investment funds in the United States are _______________.

Commercial Banks

The depository institutions that generally serve only members of a particular group are known as _______________.

Credit Unions

When _______________ started out in the nineteenth century, their lending activities were mainly limited to home purchase loans.

Savings & Loans

Instead of getting directly involved in local real estate lending, _______________ often hire local loan correspondents.

Insurance Companies

Lenders will often charge a fee for document preparation and other services in issuing a new loan, which is expressed as a percentage of the face amount of the loan. This fee is known as:

A.discount points

B.a prepayment fee

C.a lock-in fee

D.an origination fee

D.an origination fee

A fee charged by a lender to cover administrative costs involved in processing the loan is an origination fee. It may also be called a loan fee, a service fee, or an administrative charge.

One discount point is equal to:

A.1% of the loan amount

B.1% of the selling price

C.$1

D.$100

A.1% of the loan amount

"Point" is short for "percentage point," so one discount point paid on a loan would be equal to one percentage point of the loan amount.

A lender makes a loan for $100,000, and charges three discount points. This will be a charge of:

A.$100

B.$300

C.$1,000

D.$3,000

D.$3,000

One discount point is equal to one percentage point of the loan amount, so three discount points would be the same as three percent of the loan amount ($100,000 x .03 = $3,000).

A lender will charge discount points when issuing a new loan in order to:

A.increase the effective yield on the loan

B.close the gap between market interest rates and the rate being charged on the loan

C.pay for administrative costs in originating the loan

D.Both A and B

D.Both A and B

A. - increase the effective yield on the loan

B. - close the gap between market interest rates and the rate being charged on the loan

When discount points are paid at closing, the upfront payment increases the effective yield (essentially, the lender's profit) on the loan. And a lender offering a below-market interest rate in order to attract borrowers will typically charge discount points to make up for the difference between the market rate and the rate the borrowers will pay. (Administrative costs incurred in originating the loan are covered by the origination fee, not by discount points.)

Under the terms of the Truth in Lending Act, borrowers in consumer loans must be informed of credit terms by the:

A.loan broker

B.lender

C.seller

D.escrow company

B.lender

TILA requires a lender making a consumer loan to fully disclose the terms and total cost of the loan to the prospective borrower.

Which of the following is the purpose of the Truth in Lending Act?

A.Regulation of fees charged by lenders

B.Establishment of maximum interest rates charged by creditors

C.Limiting the cost of consumer credit

D.Requiring disclosures to consumers regarding the terms and total costs of credit

D.Requiring disclosures to consumers regarding the terms and total costs of credit

The Truth in Lending Act is a consumer protection law designed to ensure that prospective borrowers are given enough information so that they can accurately compare the costs of similar loans offered by different lenders.

Which of the following loans would be exempt from the Truth in Lending Act?

A.A personal loan of $20,000 from a commercial bank

B.A household loan of $20,000 from a credit union

C.An agricultural loan from a commercial bank

D.A VA-guaranteed home mortgage loan from a savings and loan association

C.An agricultural loan from a commercial bank

The Truth in Lending Act applies only to consumer loans; loans for business, commercial, or agricultural purposes are exempt from the law. Consumer loans are also exempt if they are for more than $58,300 and are not secured by real property, but none of the options meet those criteria.

What is the difference between the nominal interest rate and effective interest rate?

A.The effective rate is the prevailing market rate and the nominal rate is the rate the borrower will actually pay

B.The effective rate is the rate stated on the promissory note and the nominal rate is the rate the borrower will actually pay

C.The effective rate is the rate actually paid by the borrower and the nominal rate is the rate stated on the promissory note

D.The effective rate is the same thing as the nominal rate

C.The effective rate is the rate actually paid by the borrower and the nominal rate is the rate stated on the promissory note

The effective rate is the annual percentage rate: the rate the borrower will actually pay, taking all of the finance charges (not just the interest) into account. The nominal rate is simply the interest rate stated on the promissory note.

The nominal interest rate of a loan is:

A.the maximum rate that may be charged by law

B.the rate the borrower will actually pay, reflecting the total finance charge

C.the amount of projected interest on an annualized rate

D.the interest rate stated on the promissory note

D.the interest rate stated on the promissory note

The nominal interest rate is the rate stated on the promissory note. This is in contrast to the effective rate (also called the annual percentage rate), the rate that the borrower will actually pay, taking all of the other finance charges as well as the interest into account.

Which of the following will not be included as part of the total finance charge in a Truth in Lending Act disclosure statement for a mortgage loan?

A.Discount points paid by the buyer

B.Mortgage insurance premiums

C.Finder's fees

D.Appraisal and credit report fees

D.Appraisal and credit report fees

In mortgage loan transactions subject to TILA, the fees for the appraisal and credit reports are not included in the total finance charge.

The Truth in Lending Act defines the annual percentage rate charged on a real estate loan as:

A.total cost of credit expressed as a dollar amount

B.direct loan costs only

C.all loan costs expressed as a percentage rate

D.what percentage of the loan amount will be used to pay for closing costs

C.all loan costs expressed as a percentage rate

A loan's annual percentage rate is the cost of the loan, including the interest and all other finance charges, stated as a percentage of the amount financed.

A federal notice of the right of rescission must be given to a borrower if:

A.the loan is secured by the borrower's existing residence

B.the loan is secured by commercial property

C.the loan is an unsecured loan of $1,000,000

D.the loan is to purchase business inventory

A.the loan is secured by the borrower's existing residence

Under the Truth in Lending Act, the borrower has a right of rescission when the loan will be secured by the borrower's existing residence, the home she already owns (as in the case of a home equity loan). TILA doesn't give borrowers a right of rescission for home purchase loans. And TILA does not apply at all to agricultural, business, or commercial loans, or to consumer loans for more than a specified amount (that changes annually) that aren't secured by real property.

If an advertisement in a newspaper for real property discloses only the annual percentage rate:

A.no further disclosures are required

B.the required downpayment must be disclosed

C.the total number of payments to repay the loan must be disclosed

D.points and other finance charges must be disclosed

A.no further disclosures are required

Under the Truth in Lending Act, an ad may list the property's cash price or the loan's APR without triggering the full disclosure requirement.

If an advertisement for a graduated payment mortgage required full disclosure under the Truth in Lending Act, which of the following would be included in that disclosure?

A.The location of the property

B.The name and address of the lender

C.The amount of the different monthly payments

D.The name of the grantor

C.The amount of the different monthly payments

If TILA requires full disclosure in an advertisement, the ad must include the annual percentage rate, the required downpayment, the payment amounts, the number of payments, and the repayment period.

A broker who negotiates a loan for a client must give the disclosure statement required by the Mortgage Loan Broker Law at what point?

A.Before the borrower signs the loan papers

B.Within 24 hours of the borrower's signature of loan papers

C.When the transaction closes

D.When the purchase agreement is signed

A.Before the borrower signs the loan papers

Under California's Mortgage Loan Broker Law, the broker must give a disclosure statement to the borrower before he signs the loan papers or within three days of the receipt of a completed loan application, whichever is earlier.

How long must a broker retain a copy of a mortgage loan broker disclosure statement?

A.Two years

B.Three years

C.Four years

D.Seven years

B.Three years

Under California's Mortgage Loan Broker Law, a broker who arranges a loan for a client must retain a copy of the disclosure statement for three years.

A man owns a house and has a first deed of trust executed against the home. He has a substantial amount of equity in the home. He needs a loan of $9,600 for college tuition for his son. A real estate broker arranges the loan, which is secured by the home. What document does the broker need for this transaction?

A.Real property security statement

B.Mortgage loan disclosure statement

C.Real property securities license

D.None of the above

B.Mortgage loan disclosure statement

California's Mortgage Loan Broker Law requires a real estate broker who provides loan services to give the borrower a disclosure statement. It must list all of the costs involved in obtaining the loan and state the net amount the borrower will receive after the costs have been deducted.

A buyer had her broker arrange a second deed of trust for her. The loan was for $3,000, for a term of two years. What would be the maximum amount for commission and loan costs that the broker could charge?

A.$450

B.$600

C.$690

D.$840

C.$690

Under the Mortgage Loan Broker Law, the maximum commission rate that may be charged on a junior loan with a term that is at least two years but less than three years is 10%. Ten percent of $3,000 is $300 ($3,000 × .10 = $300). Loan costs may be 5% of the loan amount or $390, whichever is more. Five percent of $3,000 is only $150 ($3,000 × .05 = $150), so the loan costs may be $390. Add $300 and $390 to arrive at a total of $690.

A real estate broker arranged a second deed of trust for a client. The loan was for $18,000, and was repayable in 36 monthly payments. What is the maximum commission that the loan broker may collect?

A.$900

B.$1,800

C.$2,700

D.$3,090

C.$2,700

If the loan is repayable in 36 monthly payments, it is a three-year loan, so the maximum commission rate is 15%. Fifteen percent of $18,000 is $2,700 ($18,000 × .15 = $2,700). Note that this question asks only about the maximum commission, not the maximum loan costs.

The Truth in Lending Act applies only to loans made to natural persons.

True

Loans made to corporations and other organizations are exempt, as are loans for business, commercial, or agricultural purposes.

The annual percentage rate is the sum of all fees and charges the borrower pays in connection with the loan.

False

The annual percentage rate expresses the total cost of the loan as an annual percentage of the amount borrowed.

In a residential mortgage transaction, the lender must give the loan applicant a loan estimate form with good faith estimates of certain loan fees.

True

The loan estimate, which describes loan fees, must be provided within three days after the application is received.

A loan origination fee covers the administrative costs the lender incurs in processing the loan.

True

The loan origination fee is not considered part of the yield on the loan; instead, it covers the costs of making the loan.

According to the Truth in Lending Act, a buyer can change her mind and rescind a purchase money loan agreement within three days of signing the final loan documents.

False

The three-day rescission right applies to loans on properties already owned by the borrower, such as home equity loans or refinancing with a new lender. It doesn't apply to purchase loans.

The advertising rules in the Truth in Lending Act provide that if certain financing terms are advertised, then other financing terms that apply to the transaction must also be included in the ad.

True

Under TILA, an ad that includes a specific "triggering term" such as the monthly payment amount or the amount of any finance charge must also disclose other information about the financing, such as the APR and the payment schedule.

A real estate agent acting as a loan broker must retain a copy of the Mortgage Loan Disclosure Statement for two years.

False

The Mortgage Loan Disclosure Statement must be retained for at least three years.

The nominal interest rate is the interest rate that is stated on the face of the promissory note.

True

The nominal interest rate, which is stated on the promissory note, is contrasted with the effective interest rate (or APR), which incorporates all finance charges.

Broker Ralph arranges a $2,500 second deed of trust for a term of two years for Martin. The maximum amount of commission Martin will have to pay is $250.

True

A junior deed of trust that has a term of at least two years but less than three years has a maximum commission rate of 10%. Ten percent of $2,500 is $250.

When a lender decides whether or not to make a real estate loan, which of the following would it be most concerned with?

A.Availability of mortgage funds

B.Degree of risk involved

C.Key interest rates

D.Federal and state regulations

B.Degree of risk involved

Because each loan is an investment that may prove profitable or result in a loss, a lender's primary concern in deciding whether to make a loan is the degree of risk it would involve.

A borrower tried to purchase a home but had his application denied because of a negative credit report. If the borrower's request for a copy of his credit report is denied, the borrower may sue for:

A.actual damages

B.punitive damages

C.attorney's fees and court costs

D.All of the above

D.All of the above

California law requires credit reporting agencies to give consumers copies of their credit reports upon request. If the agency fails to do so, the consumer may sue for actual damages, punitive damages up to $5,000, and attorney's fees and court costs.

The most basic protection for a lender of funds secured with a residential property is:

A.the good credit history of the borrower

B.the value of the property itself

C.the borrower's other assets

D.the stability of key interest rates

B.the value of the property itself

The lender's ultimate line of defense against losing money on a mortgage loan is the value of the property. If the borrower defaults, the lender will foreclose on the property in order to recover its funds. So before approving the loan, the lender will order an appraisal to make sure that the property is worth enough to serve as security for the loan amount.

An underwriter adds up the income from all acceptable sources to determine the applicant's _______________ .

Stable monthly income

A ________________ measures the monthly mortgage payment alone against the stable monthly income

Housing expense to income ratio

The funds that a borrower has left over after closing, available in case of emergency, are referred to as __________________________

Reserves

The _______________ measures the monthly mortgage payment plus any other regular obligations against the stable monthly income.

Debt to income ratio

An individual's _______________________ is determined by subtracting total personal liabilities from total personal assets.

Net Worth

Many underwriters use _____________________ to help evaluate how likely or unlikely it is that the applicant will eventually default on the proposed loan.

Credit Scores

A longer loan term will result in:

A.a greater amount of interest paid

B.a higher monthly payment

C.a lower amount of interest paid over the loan's lifetime

D.the loan being considered as subprime

A.a greater amount of interest paid

A longer loan term will enable a borrower to make smaller monthly payments, but the downside is that the borrower will pay more total interest over the life of the loan.

Liquidation of a financial obligation through installment payments is known as:

A.acceleration

B.alienation

C.amortization

D.conveyance

C.amortization

Amortization is an arrangement for paying off a debt in installments, where the amount applied to the principal increases as the amount applied toward interest decreases.

In originating a new loan, an amortization table can be used to determine the:

A.downpayment

B.interest rate

C.length of the loan term

D.monthly payment amount

D.monthly payment amount

An amortization table lists the different monthly payment amounts that would be needed to amortize a specified loan amount at various rates of interest and with various repayment periods. Software calculators have generally replaced the use of printed tables.

A balloon payment in a first deed of trust is:

A.the first payment made after the origination of the loan

B.the payment required when the property is sold pursuant to an alienation clause

C.the final payment made on the balance due at the end of a loan term

D.the penalty imposed for prepayment of a loan in its first five years

C.the final payment made on the balance due at the end of a loan term

A balloon payment is characteristic of a loan that isn't fully amortized. The regular payments aren't sufficient to cover the full amount owed, so the borrower will have to make a large final payment at the end of the loan term.

With a partially amortized loan, the larger-than-usual payment made at the end of the loan's term is known as a:

A.balloon payment

B.escrow payment

C.reserve payment

D.secondary payment

A.balloon payment

A balloon payment is a payment of any principal balance remaining at the end of a loan's term, if it is a partially amortized or interest-only loan.

A lower loan-to-value ratio indicates a higher:

A.degree of risk

B.interest rate

C.equity in the property

D.loan amount

C.equity in the property

A lower loan-to-value ratio indicates that the borrower has a greater equity interest in the property. For instance, with an 80% loan on a $100,000 property, the borrower's equity is $20,000; with a 70% loan on the same property, the borrower's equity would be $30,000.

What is the result of appreciation of a mortgaged property?

A.Primary benefit for the trustor

B.Primary benefit for the trustee

C.Primary benefit for the beneficiary

D.Disadvantage for trustor

A.Primary benefit for the trustor

The borrower (the trustor) is the party who benefits most when a mortgaged property appreciates, since appreciation can rapidly increase the borrower's equity. For instance, if a buyer puts down $10,000 to purchase a $100,000 property, which then appreciates 10% in value to $110,000, her equity has doubled to $20,000. Appreciation also indirectly benefits the lender (the beneficiary), since it increases the likelihood that the lender will be able to recoup the entire amount owed in the event of foreclosure.

If a borrower obtained a loan for the purchase of property without making a downpayment, the lender's best protection in the event of default would be:

A.a low interest rate

B.low monthly payments

C.appreciation of the property

D.an economic slowdown

C.appreciation of the property

If a lender makes a 100% loan and the borrower later defaults, the lender is unlikely to recapture its entire investment from the foreclosure sale unless the property has appreciated (increased in value) significantly.

Loan-to-value ratios are used by lenders to determine:

A.eligibility for VA loans

B.the amount of money to lend

C.the size of the monthly payment

D.the value of the property

B.the amount of money to lend

A lender will use the loan-to-value ratio to set maximum loan amounts. For instance, a lender might allow loans of no more than 80% of the property's sales price or appraised value, whichever is less.

A home is listed at $212,000 and appraised at $205,000. The lender is willing to lend 80% of the property's appraised value. If the buyers want to make a full-price offer, how much will they need to put down?

A.20% of $205,000

B.20% of $212,000

C.20% of $205,000 plus $7,000

D.20% of $212,000 minus $7,000

C.20% of $205,000 plus $7,000

To make a full-price offer, the buyers will need to make up the difference between the appraised value and the listing price. The lender will lend them up to 80% of $205,000 (which is $164,000), meaning they will need to come up with the other 20% (which is $41,000), plus an additional $7,000, which is the difference between $212,000 and $205,000.

The buyers want to purchase a property but can't obtain sufficient financing. They are interested in having the seller carry back a second loan, but the seller declines. At this point, the buyers' agent tells the buyers to make a full-price offer and then offers to loan money to the buyers to make up the difference, with the secondary loan also secured by the property being purchased. This is a:

Select your answer below:

A.conflict of interest

B.legitimate business practice

C.smart business practice

D.wraparound loan

B.legitimate business practice

Secondary financing may come from a private third party (such as a real estate agent), in addition to coming from an institutional lender or the seller, so it is a legitimate business practice. A real estate agent is usually not in the business of underwriting loans, though, so unless the agent has full access to the buyers' financial information and feels confident that the buyers are creditworthy, it may not be a smart business practice.

With each payment made on a fully amortized loan, the amount of the debt is reduced and the interest due with the next payment is recalculated based on the lower balance.

True

A fully amortized loan is repaid within a certain period of time by means of regular payments that include a portion for principal and a portion for interest.

The higher the loan-to-value ratio, the lower the lender's risk.

False

It is just the opposite. A high loan-to-value ratio means a small downpayment, and borrowers who make small down payments are a greater risk to lenders.

Lenders frequently offer lower interest rates on 15-year loans (as compared to 30-year loans).

True

A 15-year loan usually has a lower interest rate than a 30-year loan.

When a property appreciates in value because of inflation, this primarily benefits the trustor.

True

Appreciation in value increases the borrower's (the trustor's) equity interest in the property.

A property sells for $380,000, but the appraisal comes in at $360,000. The lender sets a maximum LTV of 80%, so the maximum loan amount will be $304,000.

False

The loan-to-value ratio is a percentage of the sales price or the appraised value, whichever is less. 80% of $360,000 is $288,000.

If the monthly payments on an adjustable-rate mortgage are insufficient to cover the interest due, the result is:

A.a lengthened loan term

B.additional principal payments

C.negative amortization

D.a lower loan-to-value ratio

C.negative amortization

Negative amortization occurs when the monthly payment isn't sufficient to pay all the interest due on a loan and the unpaid interest is added to the principal balance, causing the balance to go up instead of down.

Covers the lender's administrative expenses and also includes a profit for the lender.

Margin

The margin is the component of an ARM's interest rate that covers the lender's expenses and its profit.

The consequence of an ARM's payment increases not keeping up with the interest rate increases.

Negative Amortization

When the monthly payments on an ARM don't cover all the interest owed, the lender will add the unpaid interest to the principal balance; this is called negative amortization.

The interval at which the borrower's monthly mortgage payment is increased or decreased to reflect changes in the interest rate.

Payment Adjustment Period

This describes the payment adjustment period. With most ARMs, the payments are adjusted as often as the interest rate, but some ARMs call for more frequent rate adjustments than payment adjustments.

Limits how much the lender can raise the interest rate on an ARM.

Rate Cap

This describes a rate cap. An ARM usually has both an annual rate cap and a life-of-the-loan rate cap.

A feature of an adjustable-rate mortgage that determines how often its interest rate may be adjusted.

Rate Adjustment Period

This is the rate adjustment period. A rate adjustment period of one year is most common.

A loan that permits the lender to periodically adjust the interest rate to reflect changes in the cost of money.

Adjustable Rate Mortgage

With an adjustable-rate or variable-rate mortgage, the interest rate on the loan goes up or down in response to increases or decreases in market interest rates.

A published statistical rate that is a reliable indicator of changes in the cost of money.

Index

This refers to an index. Examples of indexes used for ARMs include the one-year Treasury bill index and the Eleventh District cost of funds index.

When a borrower makes a downpayment of less than 20% of the purchase price, the lender will usually require private mortgage insurance.

True

Private mortgage insurance is usually required for conventional loans with an LTV over 80%.

A nonconforming loan is one that meets Freddie Mac's underwriting standards but falls short of the standards set by Fannie Mae.

False

A nonconforming loan is one that doesn't meet standards set by either Fannie Mae or Freddie Mac.

FHA and VA loans are considered conventional loans.

False

A conventional loan is any loan not insured or guaranteed by the government.

In general, a 95% loan is less risky for a lender than an 80% loan.

False

With an 80% loan, the borrower is making a downpayment of 20% (compared to a downpayment of only 5% with a 95% loan). A lender's risk is greater when a borrower's downpayment is smaller.

A borrower who obtains a loan requiring private mortgage insurance is required to pay the monthly PMI premiums for the life of the loan.

False

As the borrower pays off the loan and the property appreciates, the loan-to-value ratio decreases. The PMI must be canceled at the borrower's request when the LTV reaches 80%, and without request when the LTV reaches 78%.

The creation of the Federal Housing Administration in 1934 had a number of secondary benefits. Which of the following is not one of those benefits?

A.Creation of a nationwide mortgage market

B.Establishment of maximum construction standards

C.Mortgage insurance with low premiums to protect the lender

D.Promotion of subdivision development

B.Establishment of maximum construction standards

The FHA pioneered mortgage insurance, helped create a nationwide mortgage market, and promoted home construction and subdivision development. It also helped establish minimum construction standards, not maximum construction standards.

An important characteristic of FHA loans is that:

A.a land contract is used to secure the subject property

B.no downpayment is required

C.the FHA is an insurer, not a lender

D.the interest rate on FHA loans is usually 1-3% lower than on other loans

C.the FHA is an insurer, not a lender

The Federal Housing Administration does not originate loans. Instead, it insures loans, some of which might not be available under conventional underwriting standards.

The primary reason for the creation of the FHA was to provide:

A.a secondary market for home mortgages

B.origination of loans at below-market rates

C.insurance for bank depositors

D.insurance for home loans made by institutional lenders

D.insurance for home loans made by institutional lenders

The FHA insures loans made to low- and middle-income home buyers by approved lenders. The FHA does not operate in the secondary market and does not originate loans.

The principal of a mortgage loan may be insured by:

A.the VA or the FNMA

B.the lender

C.the FHA or a private mortgage insurer

D.the FHLMC and the GNMA

C.the FHA or a private mortgage insurer

The two most common sources of mortgage insurance are the FHA (which insures all FHA loans) and private insurers (which insure conventional loans with loan-to-value ratios higher than 80%).

A prospective borrower seeking an FHA loan would apply to:

A.the FHA

B.a real estate broker

C.an arranger of credit

D.a mortgagee

D.a mortgagee

A borrower does not apply to the FHA in order to obtain an FHA loan; instead, she applies directly to a lender. If the loan is approved, the lender would become the mortgagee or beneficiary, holding a security interest in the borrower's property.

One difference between an FHA loan and a typical conventional loan is that the FHA loan:

A.probably has a higher loan-to-value ratio

B.requires a larger downpayment

C.is issued by the government instead of a commercial lender

D.probably has a shorter loan term

A.probably has a higher loan-to-value ratio

The required downpayment for an FHA loan is smaller, not larger, than the downpayment required for a typical conventional loan. An FHA loan often has a loan-to-value ratio over 95%; the maximum FHA LTV is 96.5% of the appraised value or sales price. In contrast, LTVs over 95% are not typical for conventional loans. FHA loans are insured by the government, but they are issued by commercial lenders just like conventional loans. There's no difference between FHA loans and conventional loans in regard to repayment periods.

Who pays the origination fee or service fee on an FHA loan?

A.Seller

B.Borrower

C.Primary lender

D.Secondary lender

B.Borrower

With an FHA loan (as with most mortgage loans), the lender usually charges an origination fee (sometimes called a service fee), and the fee is ordinarily paid by the borrower.

Which of the following would be used in an FHA loan?

A.Prepayment penalty

B.Mortgage repayment schedule

C.Secondary financing for the downpayment

D.Certificate of eligibility

B.Mortgage repayment schedule

As with most mortgage loans, a lender will give an FHA borrower a schedule of payments, indicating how the loan amount is to be repaid. FHA loans cannot have prepayment penalties, and secondary financing generally can't be used for the downpayment (the minimum cash investment). A certificate of eligibility is associated with VA loans, not FHA loans.

A buyer assumes a loan with the lender's approval, by paying the seller's equity in cash and paying a $300 fee to the lender. What is this fee called?

A.An origination fee

B.Discount points

C.An assumption fee

D.A lock-in fee

C.An assumption fee

In order to assume any type of mortgage loan, the buyer will typically have to pay an assumption fee.

FHA programs are primarily designed to help home buyers with low to moderate incomes.

True

As a result, FHA underwriting standards are less strict than those used for most conventional loans.

A fourplex can be purchased with an FHA loan, as long as one of the units is occupied by the borrower.

True

The property purchased with an FHA loan can have up to four units, as long as the borrower occupies one unit as her primary residence.

An FHA borrower is required to pay a one-time premium (paid at closing or financed) and also annual premiums.

True

An FHA borrower pays both a one-time premium and annual premiums. (The annual premiums are divided into monthly installments and added to the monthly mortgage payment.)

A borrower who wants to assume an FHA loan that was made two years ago can do so without meeting any underwriting standards.

False

A borrower who wants to assume an FHA loan made since 1990 must (1) meet the FHA's credit standards, and (2) occupy the property as his primary residence.

If an FHA borrower doesn't have enough cash for the minimum cash investment, she can borrow the necessary amount, as long as the debt is secured by a mortgage or deed of trust against the new home.

False

As a general rule, an FHA borrower can't resort to secondary financing to pay the required minimum cash investment. There are exceptions to that rule, however.

To obtain an FHA loan, a home buyer applies directly to the FHA.

False

A buyer applies to a primary market lender such as a bank or savings and loan for an FHA-insured loan.

Creation of the Federal Housing Administration helped establish minimum construction standards for housing and a nationwide mortgage market.

True

The FHA helped establish minimum construction standards and the secondary market.

Which of the following is a special feature of VA-guaranteed loans?

A.The downpayment is determined by the Certificate of Reasonable Value

B.The downpayment does not have to be more than 3% of the sales price

C.Interest rates on VA-guaranteed loans are set by the Department of Veterans Affairs

D.VA-guaranteed loans usually do not require a downpayment

D.VA-guaranteed loans usually do not require a downpayment

One advantage of VA-guaranteed loans is that they usually do not require a downpayment. (A downpayment is required in some transactions because the loan amount is large or the sales price exceeds the appraised value.)

Which of the following will not limit the amount of a VA-guaranteed loan?

A.Buyer's income

B.Certificate of Reasonable Value

C.Certificate of Eligibility

D.Maximum guaranty amount

C.Certificate of Eligibility

A Certificate of Eligibility does not limit a VA borrower's loan amount; it is simply a document stating that the borrower is eligible for a VA loan. The Certificate of Reasonable Value (or Notice of Value) can limit the loan amount, because the VA will not guarantee a loan amount larger than the appraised value of the property. The lender might choose to limit the size of a VA loan based on the maximum guaranty amount, so that the guaranty will be adequate to cover the lender's losses in the event of default. The loan amount may also be limited by how much income the buyer has, since that affects the buyer's ability to repay the loan.

If a home sells for $290,000 and has been appraised at $286,000, what is the minimum amount of cash that a buyer with a VA loan will need in order to close the transaction?

A.$0

B.$50

C.$1,500

D.$4,000

D.$4,000

A VA loan can't exceed the appraised value of the property as set forth in the Notice of Value. Therefore, if a property is appraised for $4,000 less than the sales price, a VA borrower will need at least $4,000 in cash to complete the sale. (The borrower will probably need additional cash, though, in order to pay for closing costs.)

The maximum amount the VA will pay the lender after foreclosure on a VA loan, in case the sale results in a deficiency.

VA guaranty

A lender who forecloses on a defaulted VA loan can recoup its losses up to the amount of the VA guaranty. Like private mortgage insurance, the VA guaranty does not cover the entire loan amount.

The consequence of a veteran selling his home and repaying the VA loan in full.

Restoration of Entitlement

If the veteran sells property financed by a VA loan and is able to repay the loan in full from the proceeds of the sale, full guaranty entitlement is restored for future use.

In a VA loan transaction, the document that sets forth the appraised value of the property that the veteran wants to buy.

Notice of Value

The appraisal report for a VA loan is called a Notice of Value, or NOV. (It was formerly called a Certificate of Reasonable Value.)

The document that establishes that a veteran has met the necessary service requirements and will be allowed to apply for a VA-guaranteed loan.

Certificate of Eligibility

After a veteran's service history is reviewed and determined to meet the requirements, a Certificate of Eligibility is issued. The veteran must still qualify for the loan, however.