Making loans without the co-signors' benefit

Lending money at variable interest rates

The ability to be used in many ways

Real Estate License Practice Test Financing 1 — Questions and Answers

Question 1: Usury roughly means:

Illegal rates of interest (Correct answer)
Making loans without the co-signors' benefit
Lending money at variable interest rates
The ability to be used in many ways

Correct answer: Illegal rates of interest

Usury refers to the practice of lending money at excessively high or illegal rates of interest. State laws often set limits on the maximum interest rate that can be charged on loans, and any rate above this legal limit is considered usurious.

Question 2: VA loan may be approved for the purchase of a one- to four-family home property if:

The veteran agrees to stay. (Correct answer)
The loan will be amortized over a maximum of 20 years.
The down payment will be at least 10% of the purchase price.
The veteran certifies that the rent earned will cover the mortgage payments.

Correct answer: The veteran agrees to stay.

A key requirement for a VA loan on a one-to-four family home is that the veteran intends to occupy one of the units as their primary residence. This owner-occupancy requirement is fundamental to the VA loan program, which aims to help veterans secure housing for themselves.

Question 3: What is a promissory note?

cannot be carried out in connection with a real estate loan.
is an agreement to perform or refrain from performing specific activities.
is the major proof of a debt. (Correct answer)
is a government agency's guarantee.

Correct answer: is the major proof of a debt.

A promissory note is a written promise by a borrower to repay a specific sum of money to a lender under specified terms. It serves as the primary legal evidence of the debt and outlines the repayment schedule, interest rate, and other conditions of the loan.

Question 4: When is an appraiser least worried about the state's economy?

When appraising the value of a hardware shop
When appraising a medical building (Correct answer)
When assessing a restaurant
When appraising a home

Correct answer: When appraising a medical building

Medical buildings, especially those serving essential healthcare needs, tend to be less affected by short-term economic fluctuations compared to retail businesses or residential homes. Healthcare demand is generally more stable, making medical properties more resilient during economic downturns and thus less sensitive to the state's economy.

Question 5: If you finance a home with a long-term loan and make equal monthly payments, the amount of each payment applied to the remaining principle balance will be as follows:

Increases by a fixed amount during the life of the loan
Increases as the interest payment falls (Correct answer)
Drops as the interest payment rises.
Decreases at a consistent rate

Correct answer: Increases as the interest payment falls

In a long-term, equal monthly payment (amortized) loan, the initial payments are heavily weighted towards interest. As the loan matures, the outstanding principal balance decreases, meaning less interest accrues each month. Consequently, a larger portion of each fixed payment is then applied to reduce the principal balance.

Question 6: When a straight note is compared to an installment note, the straight note:

Will have equal yearly principal reduction payments
Will have a higher total effective interest rate than if the loan was an installment loan.
Will have all principal payments made over the loan's duration, including the final payment.
There will be no principle payments over the loan's term, except for the final payment. (Correct answer)

Correct answer: There will be no principle payments over the loan's term, except for the final payment.

A straight note (or interest-only loan) requires the borrower to make regular interest payments throughout the loan term, but the entire principal amount is due as a single 'balloon' payment at the end of the term. In contrast, an installment note involves periodic principal reductions over the loan's duration.

Question 7: Which of the following best describes a balloon payment?

A payment made to avoid a prepayment penalty.
The mandatory payment of the whole outstanding debt (Correct answer)
The required payment of accrued interest prior to the first monthly regular installment.
A 30-year loan's tenth yearly payment

Correct answer: The mandatory payment of the whole outstanding debt

A balloon payment is a large, lump-sum payment that is due at the end of a loan term, often much larger than the regular installment payments. It typically covers the remaining principal balance that was not fully amortized over the life of the loan, requiring the borrower to pay off the entire outstanding debt at once.

Question 8: What is a release clause in a mortgage?

Allows for the release of sections of the property supplied as security from the mortgage lien upon performance of a specified act. (Correct answer)
Creates a lien that is second only to the lien created by taxes and assessments.
Allows for the extension of its due date.
Releases a guarantor from additional obligation if certain requirements are met.

Correct answer: Allows for the release of sections of the property supplied as security from the mortgage lien upon performance of a specified act.

A release clause, often found in blanket mortgages covering multiple parcels of land, allows individual parcels to be released from the mortgage lien as specific portions of the loan are repaid. This enables the borrower to sell or develop parts of the property without having to pay off the entire loan.

Question 9: Which of the following statements regarding syndication is FALSE?

It reveals the borrower's attitude toward credit and debt management.
In order to be legal, a note must be linked to a mortgage.
The majority of syndicate investors put a lot of their own money into their investments. (Correct answer)
Non-institutional lenders are exempt from usury law.

Correct answer: The majority of syndicate investors put a lot of their own money into their investments.

Syndication typically involves a group of investors pooling their capital to undertake a real estate project, often allowing individuals to invest smaller amounts than they could alone. Therefore, the statement that the majority of syndicate investors put a lot of their own money into their investments is generally false, as the appeal is often the ability to participate with less individual capital.

Question 10: The Tax Reform Act of 1986 provided a vehicle for the issuance of multiclass securities. What is the name of this entity?

198000
REMIC (Correct answer)
Escrow officer
Reducing

Correct answer: REMIC

The Tax Reform Act of 1986 created the Real Estate Mortgage Investment Conduit (REMIC). A REMIC is a special purpose vehicle that holds commercial and residential mortgages in trust and issues multi-class securities to investors, facilitating the securitization of mortgages.

Question 11: Which of the following is not a common type of short-term mortgage loan?

Inability to maintain property in good condition
A loan for a single-family home (Correct answer)
The most complete type of ownership
The tenant's relocation

Correct answer: A loan for a single-family home

Short-term mortgage loans are typically used for specific purposes like construction, bridge financing, or property rehabilitation, where the loan is expected to be repaid or refinanced quickly. A loan for a single-family home is generally a long-term commitment, often 15 or 30 years, making it not a common type of short-term mortgage.

Question 12: What is the name for a loan that is not guaranteed by the government?

Take-out commitment
Liquidity
Cycle back money to primary lenders
Conventional (Correct answer)

Correct answer: Conventional

A conventional loan is a mortgage loan that is not insured or guaranteed by a government agency like the FHA (Federal Housing Administration) or the VA (Department of Veterans Affairs). These loans are typically offered by private lenders and adhere to their own underwriting standards, without government backing.

Question 13: After evaluating the area, an appraiser will investigate all physical features of the individual property being assessed, except for which of the following?

Highway accessibility (Correct answer)
Growing equity
Secondary mortgage market
Take-out commitment

Correct answer: Highway accessibility

When an appraiser evaluates an individual property, they focus on its specific physical characteristics like its condition, size, features, and amenities. Highway accessibility is a broader area or neighborhood characteristic that would be considered during the initial market analysis phase, not a physical feature of the individual property itself.

Question 14: A kind of mortgage in which the lender provides monthly payments to the borrower, who must be 62 or older to qualify for the FHA program is called?

Reverse (Correct answer)
Deficit
Opposite
Accelerate

Correct answer: Reverse

A reverse mortgage is a specialized loan product designed for homeowners aged 62 or older, particularly under the FHA program. Instead of the borrower making monthly payments to the lender, the lender makes payments to the borrower. This allows seniors to convert a portion of their home equity into cash without having to sell their home, with the loan typically repaid when the borrower moves out, sells the home, or passes away.

Question 15: A chattel mortgage is typically granted in connection with

Commercial Property
Personal Property (Correct answer)
Realty
Farms

Correct answer: Personal Property

A chattel mortgage is a type of loan where personal property is used as collateral. Unlike a traditional mortgage that uses real estate, a chattel mortgage secures a debt with movable items such as vehicles, equipment, or other personal belongings. This distinguishes it from mortgages on real estate, which involve land and permanent structures.

Question 16: One discount point equals

1% of the loan amount (Correct answer)
1% of the sales price
1% of the interest sale
None of the above

Correct answer: 1% of the loan amount

One discount point is a fee paid to the lender at closing to reduce the interest rate on a mortgage loan. Each discount point is equivalent to 1% of the total loan amount, not the sales price of the property. For example, on a $200,000 loan, one discount point would cost $2,000.

Question 17: In most FHA and VA loans, the discount points are paid by the

Broker
Seller (Correct answer)
Lender
Purchaser

Correct answer: Seller

In most FHA (Federal Housing Administration) and VA (Department of Veterans Affairs) loans, discount points are typically paid by the seller. This is often done to make the loan more attractive to the buyer by reducing their upfront costs or to help the buyer qualify for a lower interest rate, which can be a negotiating point in the sale.

Question 18: The primary appeal of VA mortgages to borrowers lies in

An unlimited mortgage ceiling
Easy availability
Minimum down payment (Correct answer)
Low interest rates

Correct answer: Minimum down payment

The primary appeal of VA mortgages for eligible veterans lies in their requirement for a minimum down payment, which is often zero. This significantly reduces the upfront financial burden for veterans looking to purchase a home. While VA loans can also offer competitive interest rates and no private mortgage insurance, the ability to purchase with no money down is a major advantage.

Question 19: What will happen when a loan on a sold property is assumed?

The purchaser assumes responsibility for the debt. (Correct answer)
The purchaser must get an eligibility certificate.
The original borrower is released from further liability.
All of the above

Correct answer: The purchaser assumes responsibility for the debt.

When a loan on a sold property is assumed, the purchaser takes over the existing mortgage and becomes responsible for the remaining debt. The original borrower may or may not be released from liability, depending on whether the lender grants a novation. However, the immediate effect is that the new owner is now obligated to make the loan payments.

Question 20: When will the estopple certificate be required?

When property is sold
When mortgage is assumed
Mortgage is sold to an investor (Correct answer)
Property is being foreclosed

Correct answer: Mortgage is sold to an investor

An estoppel certificate is typically required when a mortgage is sold to an investor or assigned to another party. This document verifies the current unpaid balance of the loan, the interest rate, and the date to which interest has been paid, confirming the exact terms between the borrower and the lender. It prevents future claims that the loan terms are different from what was represented.

Real Estate License Practice Test Financing 1

Usury roughly means: