PSI CH 6
Terms
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1. All of the following statements concerning real
estate financing are correct EXCEPT
1. the mortgage generally is considered a lien.
2. the mortgagee is the lender.
3. an owner of property by whom the mortgage is executed is c - 1. (4) In some states, the mortgage creates a lien on the property; the note is the promise to repay the debt. (59)
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2. A promissory note is NOT
1. a negotiable instrument.
2. evidence of debt.
3. a document in which the debtor agrees to repay the stated loan.
4. evidence of title. - 2. (4) The promissory note is evidence of the debt but not evidence of title. Deeds are the instruments that convey title and provide evidence of ownership interest. (59)
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3. Which of the following payment plans allows for periodic payments of interest only, with the principal due as a lump sum payment at maturity?
1. Amortized 3. Straight
2. Flexible 4. Balloon - 3. (3) The amortized, flexible, and balloon all provide for payment of principal. (59)
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4. All of the following are participants in the secondary mortgage market EXCEPT
1. FHLMC. 3. FDIC.
2. FNMA. 4. GNMA. - 4. (3) The FDIC insures checking and savings accounts up to $100,000 per account. (62)
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5. Which of the following is NOT characteristic of a conventional loan?
1. It is neither insured nor guaranteed by public agency.
2. Security rests on the borrower's ability to pay and the collateral pledged.
3. It is never insured b - 5. (3) Conventional loans may be insured by a private agency. (61)
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6. Department of Veterans Affairs (DVA) guarantees a lender from 25 to 50 percent of the loan balance on a Veterans Administration (VA) loan, up to
1. $25,000. 3. $46,000.
2. $36,000. 4. $60,000. - 6. (4) The veteran is entitled to a loan up to four times the amount of the entitlement. (61-62)
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7. Which of the following is NOT characteristic of a Federal Housing Administration (FHA) loan?
1. A mortgage insurance premium is charged.
2. The lender is insured against loss.
3. The maximum mortgage debt is determined by a formul - 7. (4) The FHA will not provide money for a loan. However, the VA will provide the money for a loan where the supply of money is scarce. (61)
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8. Which of the following is NOT characteristic of a DVA loan?
1. The loan is guaranteed.
2. Only an eligible veteran or eligible dependents of veterans, as well as reservists and National Guard members who have served for six years, may - 8. (3) An FHA loan provides public mortgage insurance for which the buyer pays an insurance premium. The VA does not charge the veteran for the guarantee of the loan. (61-62)
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9. A mortgage that covers more than one parcel of real property is
1. a junior mortgage.
2. a blanket mortgage.
3. a package mortgage.
4. an open-end mortgage. - 9. (2) A blanket mortgage would be used to finance the development of a subdivision and is applied to more than one parcel of land. A partial-release clause is used in order for the developer to sell individual lots out from under the blanket. (62)
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10. Granting a conventional loan requires that the borrower provide the lender with which of the following?
1. Sales contract and hypothecation instrument
2. Mortgage and promissory note
3. Deed of trust and sales contract
4. Mo - 10. (2) A deed of trust is used in place of a mortgage in states such as California. A mortgage or deed of trust and a note are required for a conventional loan. The mortgagee creates a lien on the property as security for the debt. The note is a promise to repay the debt. (59)
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12. Under judicial foreclosure, the
1. mortgage generally must include a power-of-sale clause.
2. court may award title to the lender.
3. lender sues the borrower in court and obtains a judgment and court order to sell.
4. lende - 12. (3) Judicial foreclosure is one of the three alternative procedures available to the lender for mortgage foreclosure. Nonjudicial foreclosure does not require the lender to sue the borrower in court. Under strict foreclosure, the court may award title to the lender. Strict foreclosure happens after a delinquent borrower has been served adequate notice giving him or her a deadline to pay off the debt. If the deadline is missed, the property is awarded to the lender and no sale takes place. (60)
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13. The process by which a mortgagor regains his or her interest in a property is called
1. foreclosure.
2. redemption.
3. a deficiency judgment.
4. laches. - 13. (2) Foreclosure is related to the redemption period, which may end with the foreclosure sale (equitable redemption) or after the foreclosure sale (statutory redemption). If the lender does not recover what is owed by the borrower, it may sue for a deficiency judgment. Laches was discussed above. (60)
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14. You financed the purchase of a home by means of a deed of trust. Until you pay off the debt, title will be held by the
1. trustee. 3. seller.
2. trustor. 4. beneficiary. - 14. (1) The trustor is the borrower and the beneficiary is the lender. (59)
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15. The tandem plan involves
1. the VA and FHA.
2. Fannie Mae and Freddie Mac.
3. Fannie Mae and Ginnie Mae.
4. Ginnie Mac and Freddie Mac. - 15. (3) Freddie Mac is a warehousing agency in the secondary mortgage market. VA and FHA are not involved in the secondary mortgage market purchase of mortgages. (65)
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16. Which of the following statements about FHA mortgages is FALSE?
1. FHA mortgages require a larger down payment than VA mortgages.
2. There is no prepayment penalty.
3. FHA mortgages are assumable provided the new borrower qualifi - 16. (4) FHA and VA mortgages are assumable with qualification. (61)
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17. The difference between interest rates in financing arrangements such as wraparound mortgages is called
1. equity.
2. usury.
3. disintermediation.
4. arbitrage. - 17. (4) Equity is the difference between what an asset is worth and what is owed on it. Usury laws limit the interest rate that can be charged to borrowers by lenders. Disintermediation refers to an outflow of funds from a lender which limits the lender's lending capacity. (66)
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18. On the FHA loan, the buyer would NOT be required to
1. provide mortgage insurance to protect the lender.
2. meet FHA credit standards.
3. find an approved lender willing to make the loan.
4. make a 20 percent down payment on - 18. (4) The cash investment on an FHA-insured loan is 3 percent of the sales price or appraised value plus closing costs. Gift letters may be used for the required down payment. The maximum mortgage formula for houses over $50,000 is 97.75 percent. (61)
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20. Funds for Department of Veterans Affairs (DVA) loans usually are provided by
1. HUD.
2. the secondary mortgage market.
3. Freddie Mac.
4. approved lenders. - 20. (4) Freddie Mac functions in the secondary mortgage market; HUD is a regulatory agency. (61-62)
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21. Charging a rate of interest in excess of the maximum rate allowed by law is
1. laches.
2. hypothecation.
3. subordination.
4. usury. - 21. (4) Subordination allows a lender to agree to consent to a subsequent mortgage having legal priority thus placing the original lender in a lesser position. Laches refers to the inability to assert a legal right because of undue delay in asserting it. Hypothecation is pledging property as security for a loan without giving up possession of the property. Usury is charging an interest rate higher than that allowed by state law. (66)
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22. Pledging property as security for a loan without losing possession of it is
1. a subordination agreement.
2. hypothecation.
3. an impound account.
4. seller financing. - 22. (2) An impound account is a trust account established for funds to meet the customary requirements of a property, e.g., taxes and insurance. Subordination and hypothecation were discussed above in answer 21. A land contract would be an example of seller financing. (66)
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23. A veteran buys a home with a DVA-guaranteed loan. Two years later, the veteran sells the home to a buyer who, with the lender's approval, assumes the veteran's loan. In this situation, the veteran is
1. responsible for paying an insurance - 23. (3) Both the DVA and FHA require buyers who assume existing mortgages to be qualified to do so. Therefore, the original buyer's liability is assigned to the new buyer in a process called novation. (61-62)
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24. If a lender charges a borrower two points on a $60,000 loan, what will be the service charge for points?
1. $120
2. $1,200
3. $2,400
4. None of the above - 24. (2) One point is one percent of the loan amount. $60,000 x 0.02 = $1,200. (61)
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25. Reserve requirements for banks are controlled by which of the following federal agencies?
1. FNMA
2. GNMA
3. Federal Deposit Insurance Corporation (FDIC)
4. The Federal Reserve - 25. (4) FNMA and GNMA function in the secondary mortgage market. The FDIC insures lenders' checking and savings accounts. (64)
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26. The insurance report that tells about previous insurance claims is
1. CLUB
2. CLUE
3. CASE
4. COST - 26. (2) CLUE is an acronym for Comprehensive Loss Underwriting Exchange report. (66)
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27. In order to help a buyer qualify for financing, a homeowner paid money to the lender to subsidize the buyer's PI payment for three years. This type of loan is called a(n)
1. ARM.
2. permanent buydown.
3. temporary buydown.
4 - 27. (3) A temporary buydown allows the seller to prepay some of the buyer's interest in order to subsidize his or her payment. This effectively buys the interest rate down on a temporary basis. For example, in a 7 percent market, using a 2 – 1 buydown, the interest rate is artificially reduced by 2 percent the first year and 1 percent the second year. In other words, the buyer makes a payment based on 5 percent the first year and 6 percent the second. At the beginning of the third year the subsidy goes away and the buyer pays the full freight. (63-64)
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28. A buyer asked a seller to pay two points to permanently lower the buyer's interest rate. This type of loan is called
1. graduated payment mortgage.
2. wraparound.
3. purchase-money mortgage.
4. buydown. - 28. (4) Often a buydown loan enables the purchaser to qualify for a larger mortgage because of the lower interest rate. The lower rate is created by the seller's willingness to pay the discount points, which is often considered prepaid interest. (63-64)
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29. A buyer purchased a home and asked the seller to pay 2Vi discount points equaling $4,000. How much money did the buyer want to borrow?
1. $100,000
2. $160,000
3. $170,000
4. None of the above - 29. (2) $4,000 is 2.5% of the borrowed amount. $4,000 / 2.5% = $160,000. (66)
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30. If a buyer can afford a PI payment of $ 1,200 and the amortization rate for a 51/2 percent 30-year mortgage is $5.68 per thousand, how much money can the buyer afford to borrow?
(Round to the closest dollar.)
1. $115,680
2. $116, - 30. (3) Divide the PI payment of $ 1,200 by $5.68 to find the number of thousands to borrow. $1,200 / $5.68= 211.27 x 1,000 = $211,268 (59).