©PREP4EXAMS2024/2025 REAL EXAMS DUMP Wednesday, August 7, 2024 9: 33 PM
Real Estate Finance: Basics of Real Estate
Finance Study Guide 2024/2025
In order for a lender to actually make a real estate loan, the following steps will
need to be completed: - Answer✔️✔️-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: -
Answer✔️✔️--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: - Answer✔️✔️-By obtaining
1
,©PREP4EXAMS2024/2025 REAL EXAMS DUMP Wednesday, August 7, 2024 9: 33 PM
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 - Answer✔️✔️-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
2
, ©PREP4EXAMS2024/2025 REAL EXAMS DUMP Wednesday, August 7, 2024 9: 33 PM
standards and the buyer's income and creditworthiness are unchanged at the time of
the loan.
Prequalification - Answer✔️✔️-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 - Answer✔️✔️-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 - Answer✔️✔️-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 - Answer✔️✔️-The monthly cost of buying and
maintaining a home (mortgage payments—both principal and interest—plus a
3
Real Estate Finance: Basics of Real Estate
Finance Study Guide 2024/2025
In order for a lender to actually make a real estate loan, the following steps will
need to be completed: - Answer✔️✔️-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: -
Answer✔️✔️--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: - Answer✔️✔️-By obtaining
1
,©PREP4EXAMS2024/2025 REAL EXAMS DUMP Wednesday, August 7, 2024 9: 33 PM
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 - Answer✔️✔️-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
2
, ©PREP4EXAMS2024/2025 REAL EXAMS DUMP Wednesday, August 7, 2024 9: 33 PM
standards and the buyer's income and creditworthiness are unchanged at the time of
the loan.
Prequalification - Answer✔️✔️-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 - Answer✔️✔️-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 - Answer✔️✔️-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 - Answer✔️✔️-The monthly cost of buying and
maintaining a home (mortgage payments—both principal and interest—plus a
3
