Real Estate License Practice Test – Financing
How does a home equity line of credit differ from a second mortgage?
In a traditional second mortgage, a borrower would take all of the money loaned to them at one time. In a home equity line of credit the borrower may take up to a specified amount, but they do not need to take that amount in full or all at one time.
What is the primary advantage of a biweekly mortgage?
Because there are 26 2-week periods each year, those with a biweekly mortgage will make 13 yearly payments instead of 12. This results in a faster loan payoff, typically between 18-22 years. While easier budgeting and a better interest rate may be true in certain mortgage scenarios, the primary advantage of a biweekly mortgage is faster loan payoff.
When a property is released from a mortgage because it has been paid off by the borrower, what document does the lender provide to prove this to be true?
A satisfaction piece is a document from the lender that states the property has been paid off and is released from the lien.
Which government entity encourages low-income housing?
While all of these are second mortgage markets, only Ginnie Mae was designed to encourage low-income housing.
A new house has an origination fee of one point. If the loan is for a $275,000 house, what would the fee be?
One point is equal to 1% of the total loan amount. If the loan is $275,000, than the amount would be: $275,000 * .01= $2,750
What is the purpose of underwriting?
Mortgage lenders use a process called underwriting to assess the risks of making a loan. To assess a potential borrower’s risk, they look at factors such as salary, credit history, and terms of employment.
If a borrower puts down 10% on their home loan, what is the loan-to-value ratio?
If a loan has a 90% loan-to-value ratio, the borrower is responsible for putting down 10%. Most conventional home loans have a home-to-value ratio of 80%.
A homeowner is buying a new home but hasn’t sold their old one. Which type of loan would they obtain in the short term and pay back as soon as their old house is sold?
A swing loan (also sometimes referred to as a “bridge” or “gap” loan) is a short term loan that allows borrowers to borrow against their current property in order to buy a new one. They are typically taken out when the borrower wants to buy a bigger home but hasn’t sold their current property.
Which is not one of the “three c’s” of underwriting?
Capacity is the cash reserve and debt ratio of the borrower. Collateral includes their down payment and property types. Credit includes their credit score and accounts. Conformity is not one of the three c’s of underwriting.
Who is the typical reverse mortgage customer?
In a reverse mortgage, the lender gives money to the borrower using the home itself as collateral. The loan typically does not require repayment until death or until the homeowner moves out. Reverse mortgages are popular options for those who are elderly and/or who are “house rich and cash poor,” meaning they have a lot of equity in their home but not a lot of liquid cash.
A mortgage broker’s primary role is to ____.
The mortgage broker is an intermediary and does not create, sell, or underwrite loans (which is the job of the lender).
Mortgage lenders make their money by ____.
All three of these are common processing and maintenance fees lenders charge.
Subprime loans are usually an option for ____.
Subprime loans carry a higher interest rate because the bank/lender feels they carry greater risk of full repayment.
Most Real Estate loans deal with simple interest, the formula for which is ____.
The annual interest in a simple interest setup is the balance of the loan multiplied by the interest rate.
Which of these is a tool the Federal Reserve can use to control/influence monetary policy and supply?
All three are used by the Fed to establish the monetary supply.
What financial instrument is given by a borrower to the lender as promise to repay a debt?
A note, or promissory note, is evidence of a debt that can be resold.
A mortgage is a ____.
The mortgage along with the note are given to the lender to obtain a loan.
Gradual liquidation through periodic payments of principal and interest is called ____.
Amortized loans are the norm in most residential Real Estate and gradually lower the owed amount through monthly payments to principal and interest.
How does an ARM mortgage differ from a fixed rate mortgage?
Fixed rate mortgages are locked in at the same rate for the life of the loan, while ARM mortgages have a rate that can “float” or “ride” market rates.
A foreclosure sale is ____.
A foreclosure sale occurs when the owner cannot sell the property via short sale. If it doesn’t sell in a foreclosure auction, it becomes property of the lending institution.
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