Reu3ch8

When you prequalify a buyer, what are you trying to determine?

What is the major difference between prequalification and preapproval?

What risks do lenders face when making a mortgage loan?2

Define underwriting.

How does a lender determine if the buyer’s income is enough to pay the loan?

Why is information about net worth important?

What does the term net equity mean?

What is the most important part of a credit report?

Underwriting will determine whether a borrower and property meet the minimum_____ established by the lender, the investor, or the secondary market.

The____ ratio establishes the borrower's capacity to pay by limiting the percent of gross income a borrower may spend on housing costs.
A____ is calculated based on all of the monthly obligations the borrower has, including those items or payments the borrower must make for other debts.

The information about the borrower's net worth is important to the lender as it gives an indication of the borrower's ability to keep up the payments on the loan in the event that the borrower______

A borrower's_________ is the most important part of the credit report.

Which type of loan requires that debt-ratio guidelines must not exceed 41 percent?
Urban Renewal loans
PMI loans
FHA loans
Conventional loans

When a lender is processing a loan, which of the following is NOT one of the critical procedures involved?
Determine the ability of the borrower to repay the loan
Research the marketability of the title.
Prepare the documents necessary to approve the loan.
File the property deed with the county clerk's office.

With Pat and Bob's $4000 monthly income, how much would they be allowed to have in monthly housing and debt obligations with a VA loan?
$1,120
$1,440
$1,640
$1,120

To qualify for a mortgage loan, the borrower must meet the following qualifications EXCEPT
income.
creditworthiness.
net worth.
respectability.

What does the lender NOT do during the preapproval process?
Order a credit history report
Order a title search
Check employment history
Confirm income

What does the underwriter evaluate when qualifying a borrower?
The value of the property being purchased
The type of loan applied for
If all documents and applications have been completed and submitted
The borrower's ability to repay the loan

What is the single most important document used to determine loan worthiness?
Job History
Credit History
Income Records
Capital Assets

What do conventional loans typically require income and debt ratios to be?
Under 28% for income and 36% or lower for debt
29% or lower for income and 41% or lower for debt
29% for income and 41% for debt
36% for income and 29% for debt

What term is used to denote everything that a person owes?
Credit History
Arrears Payments
Liabilities
Passive Capital

Once the borrower has submitted a loan application to a lender, what happens?
The lender prequalifies the borrower.
The underwriting process begins.
The lender distributes the loan money.
The borrower closes on the property purchase.

What is the role of a loan underwriter?

What is the collateral for a mortgage loan and why is it important to establish the value of this particular collateral?

List five issues that must be considered when qualifying a property for a mortgage loan. (Additional answers can be found on Page #2.)

Why must each piece of property be inspected and appraised when qualifying for a mortgage loan?

What the three approaches to appraisals?

Which appraisal approach is usually given the most weight and why?

What does the appraiser do in an on-site physical inspection?

What happens if the appraisal shows the property is worth less than the amount of the loan?

List at least five things a land survey shows.

What is an abstract of title and what does it NOT do?

What is created if any problems are found with either the physical layout of the property or in the chain of title, and would this affect the loan?

What are the two types of title insurance and what do they protect against?

Appraisal

Must conform to Uniform Standards of Professional Appraisal Practice
Market approach uses____ ____ as basis
Cost approach calculates the value based on actual cost to____
Income approach determines value according to potential___
Market approach is given most weight because it reflects current___ ___

How do lenders determine the value of a property?
Lenders use standard HUD reports.
Lenders rely on MLS reports.
Lenders rely on current listing prices.
Lenders rely on appraisal reports.

Both Fannie Mae and Freddie Mac have enthusiastically endorsed which of the following appraisal approaches?
The income approach
The cost approach
The drive-by approach
None of the above

What are the two types of title insurance policies?
Lender and buyer
Buyer and seller
Owner and lender
Owner and title searcher

The abstract, chain of title, and the title insurance policy must meet the standards of the lender
before the lender orders a land survey.
for the title to qualify for the mortgage loan.
to conform with state law.
to determine the amount of the loan.

Any problem found with either the physical layout of the property or in the chain of title of recorded ownership creates which of the following?
A “cloud” on the title
A "black mark" on the title
An encroachment on the title
An encumbrance on the title

If a cloud on the title is found and the problem cannot be resolved, what happens?
A new title is issued.
The lender will not fund the loan.
A new title search is done.
An abstract is completed.

The cost of title insurance is
amortized in the loan payments.
paid annually in a single payment.
paid in separate monthly installments.
a one-time charge paid at closing.

Which of the following statements is NOT true of a VA loan appraisal?
A VA loan is based on a Certificate of Reasonable Value (CRV).
A VA loan's CRV is done by a VA appraiser.
The appraiser is selected by the lender.
The appraisal is done to determine the market value of the property for the VA loan.

A recent trend in appraisals is establishment of the property's value through computer research on data provided through the real estate community and a large bank of computerized information available to appraisers. This is known as
the income approach.
a drive-by appraisal.
an on-site physical inspection.
the cost approach.

Which of the following terms means that some other party has some rights or claim to the property?
An encumbrance
An encroachment
An infringement
A deed

Name three factors that affect net operating income.

In addition to the demographic makeup of the population and the median income of families in a particular area, what will the market rents for retail space depend on?

List two examples of variable expenses.

List three examples of fixed expenses.

A property has a potential rental income of $90,000. The vacancy for the year resulted in $17,500 in collection losses. The property had operating expenses of $44,000. What is the net operating income for this property?

Define cash flow.

What is before-tax cash flow?

What is gross rental income?

How is an investor’s tax liability derived?

A property has a Cash Flow Before Tax of $200,000 and a Cash Flow After Tax of $140,000. The investor invested $750,000 in the property. What is the Cash-on-Cash Return, before taxes?

For the property described in Question 1, what is the Cash-on-cash return after taxes?
- A property has a Cash Flow Before Tax of $200,000 and a Cash Flow After Tax of $140,000. The investor invested $750,000 in the property. What is the Cash-on-Cash Return, before taxes?

200,000/750,000 = 27%

What does a debt coverage ratio measure?

What is a capitalization rate designed to do?

A property earns an annual NOI of $120,000. Its owner uses a cap rate of 8%. What is the property’s value, according to the income capitalization method

What is loan to value used for?

What are three conditions under which a mortgage typically has a lower risk? (Additional answers can be found on page #23.)

List the three types of default and briefly explain each.

For what is debt service coverage ratio used, and what is the formula for calculating it?

What does the total debt service include?

the income produced by a property after all expenses have been deducted from the gross receipts; potential income minus vacancy and credit losses and minus operating expenses.

—price a property is likely to achieve in current conditions.

net operating income minus all allowable deductions, including the amount allowed for annual depreciation on the property and interest expenses.

an annual deduction allowed by tax laws for loss of asset value.

-- Taxable income multiplied by the investor’s marginal tax bracket

presents cash flows from operations plus non-operating cash flows, such as debt service, income taxes, and capital expenditures.

-- the revenue a property would generate if it had no vacancies.

- gross rental income amount is adjusted to reflect vacancy losses.

-- effective rental income amount is adjusted to include income from other sources.

-- the principal and interest payments made on a debt over a period of time; Debt service is subtracted from net operating income to get before-tax cash flow.

-- the ratio of annual before-tax cash flow or after-tax cash flow to the total amount of cash invested, expressed as a percentage; cash flow divided by cash invested; also called equity dividend rate.

designed to reflect the recapture rate of an investor’s original investment over the economic life of the investment to give that investor an acceptable rate of return on his or her investment.

Net Operating Income divided by a Cap rate gives an indication of_____ by the income capitalization method; IRV formula variations can be used to solve for income, cap rate, or value if two of the factors are known.

– used to determine what percentage of the property is being financed.

_____default – happens during life of loan, possibly from disruption to the revenue stream

_____default – happens at end of loan term

______default – non-monetary default, such as inadequate insurance, putting property at risk of loss

used to determine if the property is able to cover the mortgage and all other expenses tied to the property. Calculated by dividing net operating income by total debt service

_+_____service – includes principal and interest payments for all loans on the property.

Pre-tax cash flow differs from net income insofar as it
takes tax liability into account.
accounts for a property's financing.
takes depreciation into account.
reduces net income by the amount of interest paid on the loan.

Thorough underwriting designed to avoid default risk focuses on four key areas. Which of the following is NOT one of those areas?
The structure of the proposed loan to minimize and mitigate unknown risks
The economic strength and supply and demand dynamics for other properties in the market in which the collateral property operates
The competitiveness of the collateral property in its market
The equity contribution and management expertise of the borrower

The three abbreviations I, R, and V stand for which of the following
Interest, Return, and Value
Income, Reserves, and Vacancy
Interest Rate, Revenue, and Value
Income, Rate of return, and Value

The __________ is designed to reflect the recapture rate of an investor’s original investment over the economic life of the investment to give an acceptable rate of return on the investment.
debt coverage ratio
operating expense ratio
cap rate
return on equity

What does the debt coverage ratio measure?
The loan amount allowable in relation to equity
The degree to which loan payments cover the amount of interest owed
The amount of debt service that a property's NOI can safely cover without going negative
The investor's creditworthiness in relation to the amount of debt placed on the property

NOI / total debt service =
property value.
annual payment.
loan to value ratio.
debt service coverage ratio.

The capitalization rate of a property will indicate which of the following?
How much cash is required to purchase a property
The investor's rate of return on the investment
The price of the property
The property's net income

The operating expense ratio indicates which of the following?
Market rent levels
Vacancy rates
How profitable the property is
The effects of financing on the profitability

If property cash flows were evenly distributed over the loan term without volatility, assessing __________ would be simple.
term risk
technical default risk
maturity default risk
LTV

The formula for calculating the DSCR is
total debt service minus NOI.
NOI / annual payment.
NOI plus total debt service.
total debt service / NOI.

Which of the following are variable expenses on an income property?
Gas and electric expenses
Maintenance expense
Insurance premiums
Real estate taxes

Effective Gross Income minus Total Operating Expenses =
DSCR.
Total Debt Service.
NOI.
annual payment.

What does the break-even ratio measure?
How many years a property must be held to return the investor's investment back
The amount of debt a property can safely carry
The occupancy level required in a property needed to generate a profit
The percent of gross income that is required to meet cash expenditures

How does the notion of market rents affect investment analysis of a property?
Increasing market rents can cause an oversupply of space in the market.
Changes in market rents raise or reduce a property's total rental income.
They directly impact the existing rent roll of a building.
They do not significantly impact investment analysis.

Which of the following does NOT lower the risk of commercial mortgage default?
The loan amount is sufficiently higher than the loan collateral to cover the difference in value.
The borrower has significant cash equity in the property.
The property is well managed by an experienced property manager.
The property generates cash flow from its operations that exceeds the periodic interest and principal payments of the proposed loan.

On a financed investment property, the equation for cash flow after taxes is
cash flow before tax minus tax liability.
NOI minus depreciation and interest.
cash flow times the investor's tax bracket.
NOI times the investor's tax bracket.

If an investor requires a given return on an existing investment property, the analyst would be compelled to
identify the required price in view of its existing net operating income.
multiply the net operating income times the return requirement to identify the price.
divide the price by the net operating income to compare the resulting return figure to the return required.
subtract the tax rate from the property's net operating income.

To derive taxable income, one must do which of the following?
Subtract depreciation and interest from net operating income.
Multiply NOI times the investor's tax bracket.
Add depreciation to, and subtract debt service from, net operating income.
Subtract tax liability from pre-tax cash flow.

The vacancy rate affects income property analysis in which of the following ways?
Rising vacancy increases overall investment return.
Rising vacancy decreases net income.
Rising vacancy increases total operating expenses.
Rising vacancy increases market rents.

In addition to supply and demand, retail market rent is primarily driven by which of the following factors?
Number of employees
Employee density and per capita area used
Net operating income
Demographics and trade area income

Which of the following is true regarding a financed investment property?
Due to the loan, cash flow always exceeds net operating income.
After-tax cash flows identify what the investor actually yields from the investment.
The annual debt service is equal to the total principal paid on the loan.
You must subtract NOI from cash flow to identify the property's yield.