Real Estate Principles Chapter 12 Quiz 1. A prudent lender who is deciding whether or not to make a real estate loan to a prospective borrower will ensure that: A. the market value of the property is greater than the loan amount B. the borrower's credit is satisfactory C. the borrower has adequate cash reserves after paying the downpayment and closing costs D. All of the above 2. 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 fixed rates C. pay for administrative costs in originating the loan D. Both "A" and "B" 3. Which of the following elements in the underwriting decision is the most difficult for the lender to evaluate? A. The value of the property securing the mortgage B. The costs involved in originating the loan C. The degree of risk involved in the mortgage D. The conditions of the mortgage money market 4. Which of the following would not be included in a disclosure statement required by the Truth in Lending Act? A. The interest rate B. Annual percentage rate C. Total finance charge D. Total amount financed 5. When compared with an FHA loan, a conventional loan will offer the borrower: A. lower interest rates B. a lower loan-to-value ratio C. a longer repayment period D. less stringent qualifying standards 6. In deciding whether or not to approve a potential borrower, a lender will evaluate the borrower according to which of the following? A. Borrower's credit characteristics B. Borrower's marital status C. Borrower's ethnicity D. Age and size of the property 2006 Rockwell Publishing Company 1
7. Liquidation of a financial obligation through installment payments is known as: A. acceleration B. alienation C. amortization D. conveyance 8. 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 9. Savings and loan associations obtain most of the funds used for making home loans from: A. savings by individuals B. savings by businesses C. the Federal Reserve D. the Federal National Mortgage Association 10. The Truth in Lending Act requires that the cost of credit on certain consumer loans is expressed as a/an: A. annual percentage rate B. maximum percentage rate C. minimum percentage rate D. discount rate 11. The mutual mortgage insurance on an FHA loan will: A. protect the lender if the property is destroyed B. protect the lender in the event of the borrower's death C. protect the lender in the event of default by the borrower D. be paid for by the lender 12. Which of the following is a unique feature of VA-guaranteed loans? A. The downpayment is determined by the Certificate of Reasonable Value B. The downpayment does not have to more than 3% of the sale price C. Interest rates on VA-guaranteed loans are set by the Department of Veterans Affairs D. VA-guaranteed loans do not require a downpayment 13. Which of the following is not a predatory lending practice? A. Blockbusting B. Equity stripping C. Fee packing D. Loan flipping 2006 Rockwell Publishing Company 2
14. 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 15. 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 2006 Rockwell Publishing Company 3
Answer Key with Explanations 1. D Explanation: An underwriter will consider both the applicant's credit history and net worth. One important consideration in net worth is whether the borrower will have adequate reserves left over after closing. And the underwriter will also consider whether the value of the property is sufficient for it to serve as security for the loan. 2. D Explanation: If a lender charges points, it will increase the yield on the loan (in other words, increase the lender's profit). It may also enable the lender to charge a below-market interest rate in order to attract borrowers, since the difference will be made up with the amount paid as points. 3. C Explanation: The most difficult element in the decision whether or not to make a loan is assessing how risky the loan will be. 4. A Explanation: The nominal interest rate is not a required disclosure. The lender must disclose the annual percentage rate (which reflects the interest rate after factoring in all other loan costs), the total finance charge, and the total dollar amount of the loan. 5. B Explanation: A conventional loan will usually require a lower loan-to-value ratio than an FHA loan, because the conventional loan does not come with governmental insurance in case of default. The greater risk means the lender is less likely to accept an LTV of 95% or greater. 6. A Explanation: The three main considerations a loan underwriter will use to evaluate a borrower are the borrower's income, net worth, and credit history. Considerations of marital status or race would be a violation of the law. Although the underwriter will consider the property separately, the property is not a consideration in whether to approve the borrower. 7. C Explanation: Amortization is a means of paying off a debt on an installment basis, where the amount paid toward principal increases as the amount paid toward interest decreases. 8. B Explanation: Because each loan is an investment, a lender's primary concern is minimizing the risk that the loan creates. It analyzes the risks posed by each potential borrower during the underwriting process. 9. A Explanation: Most of a savings and loan association's lendable funds come from long-term deposits by individuals. 2006 Rockwell Publishing Company 4
10. A Explanation: A TILA disclosure statement must contain the total finance charge and the annual percentage rate (APR), which is an expression of the loan's annual interest rate after factoring in all finance charges. 11. C Explanation: Mutual mortgage insurance on an FHA loan works the same way as private mortgage insurance: it reimburses a lender for a portion of the value of the loan in the event of a default. 12. D Explanation: One principal advantage of VA-guaranteed loans is that they do not require a downpayment. For a large loan that exceeds the maximum guaranty amount, a lender may still charge a downpayment. 13. A Explanation: Blockbusting is a discriminatory listing practice that is prohibited by the Fair Housing Act. The other items are predatory lending practices; fee packing involves unnecessary fees while equity stripping and loan flipping involve repeated unnecessary refinances. 14. C Explanation: Negative amortization occurs when a 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. 15. C Explanation: A balloon payment is characteristic of a loan that isn't amortized (or is partially amortized). The borrower will be responsible for paying off the remaining principal balance at the end of the loan term. 2006 Rockwell Publishing Company 5