Real Estate Finance: Basics of Real Estate Finance-Questions with
Correct Answers/ Verified/ 100% Pass
In order for a lender to actually make a real estate loan, the following steps will need to be
completed: - ✔️✔️Application;
Underwriting;
Pre-disclosures;
Verification, title work and appraisal;
Final underwriting;
Processing loan documents;
Signing of loan documents, final disclosures and waiting periods (if any);
Funding and closing.
The parties with whom the real estate licensees and buyer may work are: - ✔️✔️-the loan officer
who takes the application
-the loan processor who processes the application, submits it to underwriting and prepares the loan
documents
-the underwriter who reviews all of the documentation and indicates whether or not the package
complies with the underwriting guidelines.
By obtaining the loan application and verifying the information provided by the applicant, the lender
is trying to answer four questions: - ✔️✔️By obtaining the loan application and verifying the
information provided by the applicant, the lender is trying to answer four questions:
*Can the borrower pay the loan back?* The lender wants to see that the borrower has sufficient
income to pay the loan back and that the income is stable.
*How will the borrower pay the loan back?* The lender wants to know that the income will be
sufficient to meet the payments and pay all other obligations that the borrower has or could have
under normal conditions.
*If the borrower can't pay one or more payments from normal income, what other repayment
sources are available?* Does the borrower have any other income sources, cash in the bank or
collateral from which the loan can be paid? With real estate financing, the lender will take into
consideration the value of the real estate and the amount of money it is likely to bring in a
foreclosure sale, which is typically 20% or more less that it will bring under a normal sale.
*Is the borrower willing to pay the loan back?* The lender checks the borrower' credit history to see
if the he/she has good bill-paying habits. Even if the borrower has plenty of income, lots of cash in
,the bank and the real estate is worth substantially more than the loan amount, if the borrower has a
bad credit history, the lender is not likely to make the loan.
Loan Commitment or Pre-approval Letter - ✔️✔️Issued when the lender has reviewed the buyer's
credit history and verified the income.
The letter states that the lender will make a loan to the borrower named in the letter up to a certain
amount, at an interest rate not exceeding the rate stated in the letter, for a term not less than the
term stated in the letter (usually 15, 20 or 30 years), provided that the property the buyer wishes to
purchase meets the lender's standards and the buyer's income and creditworthiness are unchanged
at the time of the loan.
Prequalification - ✔️✔️Prequalification is not a pre-approval! With a prequalification, the lender or
the buyer's agent have estimated how much of a loan the buyer should be able to obtain based
upon the income the buyer has stated that he/she is earning.
There is no credit check involved and the buyer's income has not been verified, so it is only used to
give the buyer an idea of how much of a loan the buyer might be able to get if the buyer's credit is
good and the income is verifiable.
Income Verification - ✔️✔️The borrower's creditworthiness and ability to repay the debt are most
important in the lender's decision. Therefore, the lender will want to verify the borrower's income to
be certain that it is as stated in the loan application.
To do this, the lender will ask the buyer to produce copies of W-2s for the most recent tax year or
two, copies of pay stubs for the most recent 30-day period, or, if the borrower is self-employed,
copies of the last two years federal income tax returns, signed and dated.
'Rule of Thumb" Formula - ✔️✔️To determine whether a prospective buyer can afford a certain
purchase, lenders traditionally have used a "rule of thumb" formula for homebuyers who are able to
provide at least 5 percent of the purchase price as a down payment:
Housing expense to income ratio - ✔️✔️The monthly cost of buying and maintaining a home
(mortgage payments—both principal and interest—plus a monthly amount for real property taxes
and hazard insurance) should not exceed 28 percent of gross (pretax) monthly income.
Debt to income ratio - ✔️✔️The payments on all debts (normally including housing expenses, credit
card payments, car payments, student loans or other mortgages) should not exceed 36 percent of
monthly income.
, Loan-to-Value Ratio (LTV) - ✔️✔️The LTV is the ratio of the loan amount to the value of the
property. Value is the sale price or the appraised value, whichever is less. The lower the loan-to-
value ratio, the higher the down payment by the borrower. For the lender, the higher down
payment means a more secure loan, which minimizes the lender's risk.
Con - ✔️✔️*Conventional loans are viewed as the most secure loans because their loan-to-value
ratios are often lowest.* Traditionally, the ratio was 80 percent of the value of the property or less,
because the borrower makes a down payment of at least 20 percent (although conventional loans
with LTVs up to 95 percent are available).
Private Mortgage Insurance - ✔️✔️One way a borrower can obtain a mortgage loan with a lower
down payment is under a Private Mortgage Insurance (PMI) program. Because the loan-to-value
ratio is higher than for other conventional loans, the lender requires additional security to minimize
its risk. The borrower purchases insurance from a private mortgage insurance company as additional
security to insure the lender against borrower default. LTVs of up to 97 percent of the appraised
value of the property are possible with mortgage insurance.
PMI protects a certain percentage of a loan, usually 25 to 30 percent, against borrower default. The
borrower pays a monthly fee while the insurance is in force.
Federal law requires that PMI automatically terminate if - ✔️✔️the loan balance is 78% or less of
the original purchase price or current appraised value (77% for high-risk loans) and
the borrower is current on the mortgage payments.
Under current law, a borrower with a good payment history may request that PMI be canceled when
he or she has built up equity equal to 20 percent of the purchase price or the appraised value.
Lenders are required by the law to inform borrowers of their right to cancel PMI.
States that use Mortgages
Mortgagor is the
Mortgagee is the - ✔️✔️Borrower
Lender
Correct Answers/ Verified/ 100% Pass
In order for a lender to actually make a real estate loan, the following steps will need to be
completed: - ✔️✔️Application;
Underwriting;
Pre-disclosures;
Verification, title work and appraisal;
Final underwriting;
Processing loan documents;
Signing of loan documents, final disclosures and waiting periods (if any);
Funding and closing.
The parties with whom the real estate licensees and buyer may work are: - ✔️✔️-the loan officer
who takes the application
-the loan processor who processes the application, submits it to underwriting and prepares the loan
documents
-the underwriter who reviews all of the documentation and indicates whether or not the package
complies with the underwriting guidelines.
By obtaining the loan application and verifying the information provided by the applicant, the lender
is trying to answer four questions: - ✔️✔️By obtaining the loan application and verifying the
information provided by the applicant, the lender is trying to answer four questions:
*Can the borrower pay the loan back?* The lender wants to see that the borrower has sufficient
income to pay the loan back and that the income is stable.
*How will the borrower pay the loan back?* The lender wants to know that the income will be
sufficient to meet the payments and pay all other obligations that the borrower has or could have
under normal conditions.
*If the borrower can't pay one or more payments from normal income, what other repayment
sources are available?* Does the borrower have any other income sources, cash in the bank or
collateral from which the loan can be paid? With real estate financing, the lender will take into
consideration the value of the real estate and the amount of money it is likely to bring in a
foreclosure sale, which is typically 20% or more less that it will bring under a normal sale.
*Is the borrower willing to pay the loan back?* The lender checks the borrower' credit history to see
if the he/she has good bill-paying habits. Even if the borrower has plenty of income, lots of cash in
,the bank and the real estate is worth substantially more than the loan amount, if the borrower has a
bad credit history, the lender is not likely to make the loan.
Loan Commitment or Pre-approval Letter - ✔️✔️Issued when the lender has reviewed the buyer's
credit history and verified the income.
The letter states that the lender will make a loan to the borrower named in the letter up to a certain
amount, at an interest rate not exceeding the rate stated in the letter, for a term not less than the
term stated in the letter (usually 15, 20 or 30 years), provided that the property the buyer wishes to
purchase meets the lender's standards and the buyer's income and creditworthiness are unchanged
at the time of the loan.
Prequalification - ✔️✔️Prequalification is not a pre-approval! With a prequalification, the lender or
the buyer's agent have estimated how much of a loan the buyer should be able to obtain based
upon the income the buyer has stated that he/she is earning.
There is no credit check involved and the buyer's income has not been verified, so it is only used to
give the buyer an idea of how much of a loan the buyer might be able to get if the buyer's credit is
good and the income is verifiable.
Income Verification - ✔️✔️The borrower's creditworthiness and ability to repay the debt are most
important in the lender's decision. Therefore, the lender will want to verify the borrower's income to
be certain that it is as stated in the loan application.
To do this, the lender will ask the buyer to produce copies of W-2s for the most recent tax year or
two, copies of pay stubs for the most recent 30-day period, or, if the borrower is self-employed,
copies of the last two years federal income tax returns, signed and dated.
'Rule of Thumb" Formula - ✔️✔️To determine whether a prospective buyer can afford a certain
purchase, lenders traditionally have used a "rule of thumb" formula for homebuyers who are able to
provide at least 5 percent of the purchase price as a down payment:
Housing expense to income ratio - ✔️✔️The monthly cost of buying and maintaining a home
(mortgage payments—both principal and interest—plus a monthly amount for real property taxes
and hazard insurance) should not exceed 28 percent of gross (pretax) monthly income.
Debt to income ratio - ✔️✔️The payments on all debts (normally including housing expenses, credit
card payments, car payments, student loans or other mortgages) should not exceed 36 percent of
monthly income.
, Loan-to-Value Ratio (LTV) - ✔️✔️The LTV is the ratio of the loan amount to the value of the
property. Value is the sale price or the appraised value, whichever is less. The lower the loan-to-
value ratio, the higher the down payment by the borrower. For the lender, the higher down
payment means a more secure loan, which minimizes the lender's risk.
Con - ✔️✔️*Conventional loans are viewed as the most secure loans because their loan-to-value
ratios are often lowest.* Traditionally, the ratio was 80 percent of the value of the property or less,
because the borrower makes a down payment of at least 20 percent (although conventional loans
with LTVs up to 95 percent are available).
Private Mortgage Insurance - ✔️✔️One way a borrower can obtain a mortgage loan with a lower
down payment is under a Private Mortgage Insurance (PMI) program. Because the loan-to-value
ratio is higher than for other conventional loans, the lender requires additional security to minimize
its risk. The borrower purchases insurance from a private mortgage insurance company as additional
security to insure the lender against borrower default. LTVs of up to 97 percent of the appraised
value of the property are possible with mortgage insurance.
PMI protects a certain percentage of a loan, usually 25 to 30 percent, against borrower default. The
borrower pays a monthly fee while the insurance is in force.
Federal law requires that PMI automatically terminate if - ✔️✔️the loan balance is 78% or less of
the original purchase price or current appraised value (77% for high-risk loans) and
the borrower is current on the mortgage payments.
Under current law, a borrower with a good payment history may request that PMI be canceled when
he or she has built up equity equal to 20 percent of the purchase price or the appraised value.
Lenders are required by the law to inform borrowers of their right to cancel PMI.
States that use Mortgages
Mortgagor is the
Mortgagee is the - ✔️✔️Borrower
Lender
