Free practice
Methods and sources of financing: mortgage and seller financing, primary and secondary markets
Finish →Question 1 of 40
Which instrument states the borrower's promise to repay a real estate loan?
Reveal answer
Correct answer: Promissory note
The promissory note states the debt and repayment promise. Security instruments connect the debt to collateral.
Question 2 of 40
A credit union makes a new home loan directly to a member. Which market activity is occurring?
Reveal answer
Correct answer: Primary mortgage market origination
A new loan between a borrower and an originating lender is primary-market activity.
Question 3 of 40
Which description identifies the secondary mortgage market?
Reveal answer
Correct answer: Investors buying existing mortgages and mortgage-backed securities
The secondary market trades existing loans and mortgage-backed securities, rather than originating borrower loans.
Question 4 of 40
Elena finds loan programs for buyers and submits their applications to lenders, but does not fund the loans described. What role is she performing?
Reveal answer
Correct answer: Mortgage broker
A mortgage broker arranges financing with a lender. Elena's described work is arranging, not funding, investing, or servicing.
Question 5 of 40
A firm funds new mortgages and routinely sells them to investors. Which label best describes its origination role?
Reveal answer
Correct answer: Mortgage banker
Mortgage bankers originate loans and may sell them. Funding distinguishes this role from merely brokering another lender's loan.
Question 6 of 40
A bank makes a home loan and keeps it as an investment instead of selling it. How should this be classified?
Reveal answer
Correct answer: Primary-market origination followed by portfolio retention
Making the loan is primary-market origination. Keeping it as an investment is portfolio lending; no secondary sale is described.
Question 7 of 40
What distinguishes a conventional mortgage from federally insured or guaranteed mortgage financing?
Reveal answer
Correct answer: It lacks federal mortgage insurance or a federal loan guaranty.
Conventional describes the absence of federal insurance or guaranty. Conforming status and whether the loan is sold are separate classifications.
Question 8 of 40
What federal function characterizes FHA financing under the supplied mortgage statute?
Reveal answer
Correct answer: Insuring qualifying mortgages
12 U.S.C. § 1709 authorizes insurance of qualifying mortgages. FHA financing is mortgage insurance, not a home purchase or grant program.
Question 9 of 40
A privately funded mortgage lacks federal insurance and a federal guaranty, but fails the applicable Fannie Mae and Freddie Mac purchase standards. How is it classified?
Reveal answer
Correct answer: Conventional and nonconforming
Absence of federal backing makes it conventional; failure to meet applicable purchase standards makes it nonconforming.
Question 10 of 40
Which description best matches the general federal support used in VA home-loan financing for eligible borrowers?
Reveal answer
Correct answer: A Department of Veterans Affairs loan guaranty
VA financing generally uses a federal loan guaranty for eligible borrowers. This differs from FHA insurance and seller financing.
Question 11 of 40
At closing, a seller delivers a deed and accepts the buyer's note secured by the property for part of the price. What financing method is described?
Reveal answer
Correct answer: Seller carryback financing
The seller extends new purchase credit by accepting a secured note. Delivery of the deed distinguishes this from the described title-retaining contract for deed.
Question 12 of 40
Which feature generally distinguishes a contract for deed from a sale with a deed delivered at closing and a seller-held mortgage?
Reveal answer
Correct answer: The seller retains legal title until the buyer fulfills the contract.
Retained legal title is the distinguishing feature. Payments over time, seller credit, and real property can appear in both arrangements.
Question 13 of 40
A buyer uses a bank first loan and gives the seller a new secured note for another part of the purchase price. What follows?
Reveal answer
Correct answer: Institutional financing and seller carryback financing coexist in the purchase.
A seller carryback may supplement an institutional first loan. Lien position does not determine primary versus secondary market classification.
Question 14 of 40
A buyer pays a seller on a new obligation that includes the balance of the seller's existing loan. The seller continues paying that underlying lender. Which method fits?
Reveal answer
Correct answer: Wraparound financing
A wraparound obligation includes existing debt, with payments made to the wrap lender who remains responsible for the underlying loan.
Question 15 of 40
A buyer agrees to become personally liable for the seller's existing mortgage debt. Which term describes that undertaking?
Reveal answer
Correct answer: Loan assumption
An assumption involves undertaking personal liability for existing mortgage debt. Taking subject to the loan does not itself create that liability.
Question 16 of 40
A deed transfers property subject to an existing mortgage, and the buyer makes no agreement assuming the debt. What is the sound conclusion from those facts?
Reveal answer
Correct answer: The property remains encumbered, but the transfer alone does not create the buyer's personal liability.
Subject-to ownership leaves the property burdened by the lien without itself imposing an assumption of personal debt liability on the buyer.
Question 17 of 40
A bank sells a pool of existing mortgages and uses the proceeds to fund additional home loans. What benefit of the secondary market does this illustrate?
Reveal answer
Correct answer: Replenishment of funds available for new lending
Selling existing loans produces proceeds that can be used for additional lending. It does not cancel debt or change the loan program by itself.
Question 18 of 40
Which activity is associated with Fannie Mae and Freddie Mac in the lesson?
Reveal answer
Correct answer: Purchasing eligible mortgages and supporting securitization
Fannie Mae and Freddie Mac support the secondary market by purchasing eligible mortgages and supporting securitization.
Question 19 of 40
An investor asks what Ginnie Mae guarantees in the financing system described. Which answer is correct?
Reveal answer
Correct answer: Payments on eligible mortgage-backed securities
Ginnie Mae guarantees payments on eligible mortgage-backed securities, rather than property values, future loan approval, or resale profits.
Question 20 of 40
After a mortgage is sold, the original lender continues collecting payments and administering the account for the new owner. Which role has the original lender retained?
Reveal answer
Correct answer: Loan servicing
Collecting payments and administering an account are servicing functions. Servicing can remain with the originator after ownership transfers.
Question 21 of 40
A borrower says, 'My loan was sold, so my fixed note rate must now become adjustable.' Which response best evaluates that statement?
Reveal answer
Correct answer: A loan sale transfers ownership; it does not by itself rewrite the note's rate terms.
Ownership transfer and loan terms are distinct. A secondary sale does not itself convert a fixed-rate note to an adjustable-rate note.
Question 22 of 40
A buyer's loan specifies an interest rate that changes according to the agreement's adjustment provisions. Which loan feature is described?
Reveal answer
Correct answer: Adjustable interest rate
An adjustable rate changes under the loan terms. Title retention and portfolio ownership describe different aspects of financing.
Question 23 of 40
Which payment structure retires the entire loan balance by maturity through the scheduled payments?
Reveal answer
Correct answer: Full amortization
Full amortization pays the debt off by maturity through scheduled payments. The other structures leave principal for a final payoff.
Question 24 of 40
A loan requires monthly payments calculated to reduce some principal, but a substantial balance remains due at the stated maturity. Which feature explains the final obligation?
Reveal answer
Correct answer: Balloon payment
A balloon is the larger final payment needed because the regular payment schedule does not retire the whole balance before maturity.
Question 25 of 40
In a transaction using a mortgage, which pairing correctly identifies the parties?
Reveal answer
Correct answer: Mortgagor: borrower; mortgagee: lender
The borrower gives the mortgage and is the mortgagor; the lender receives the mortgage security and is the mortgagee.
Question 26 of 40
A buyer signs both a note and a deed of trust. What is the best explanation for using these separate documents?
Reveal answer
Correct answer: The note states the repayment obligation, while the deed of trust secures it with property.
Debt and security are related but distinct: the note states the promise to pay, and the deed of trust supplies property security.
Question 27 of 40
A buyer wants one participant to arrange loan choices, another to fund the selected new loan, and another to collect payments afterward. Which sequence matches those functions?
Reveal answer
Correct answer: Mortgage broker, originating lender, servicer
Brokers arrange financing, originating lenders fund new loans, and servicers collect payments and administer accounts.
Question 28 of 40
A lender originates a new second mortgage for a homeowner. A trainee calls it secondary-market activity because it is a second lien. What is the best correction?
Reveal answer
Correct answer: The new loan is primary-market activity; lien rank and mortgage-market stage are different concepts.
Primary versus secondary market concerns origination versus trading existing assets. First versus second lien concerns priority, not market stage.
Question 29 of 40
An investor buys an existing mortgage from a bank, then hires the bank to collect payments. Which description accounts for both actions?
Reveal answer
Correct answer: Ownership transfers in the secondary market while the bank performs servicing.
The investor acquires an existing loan in a secondary-market sale. The bank's payment collection is a separate servicing role.
Question 30 of 40
A bank funds a borrower's FHA mortgage. The borrower says FHA must be the direct lender because the loan is federally supported. Which distinction resolves the confusion?
Reveal answer
Correct answer: The bank supplies the loan, while FHA provides mortgage insurance.
The federal statute provides for mortgage insurance. Insurance support does not make FHA the direct lender in the bank-funded transaction.
Question 31 of 40
A lender keeps some newly originated loans and sells others. Which conclusion is best supported?
Reveal answer
Correct answer: The lender can combine origination, portfolio retention, and secondary-market sales.
Financing roles can overlap. A lender can originate loans, retain selected assets, and sell other existing loans.
Question 32 of 40
Which situation is seller financing rather than a seller receiving cash from the buyer's bank loan?
Reveal answer
Correct answer: The seller accepts the buyer's note for an unpaid portion of the price.
Seller financing requires the seller to extend credit. Accepting the buyer's note for unpaid price does that; receiving bank-funded cash does not.
Question 33 of 40
A buyer is comparing two seller-financing offers. Under the first, the seller delivers a deed and retains a secured note. Under the second, the seller retains legal title until contractual performance. Which comparison is correct?
Reveal answer
Correct answer: The first uses seller carryback with title conveyed; the second is a contract-for-deed arrangement.
The first offer separates conveyed ownership from the seller's retained security. The second retains legal title pending the buyer's performance.
Question 34 of 40
In a wraparound arrangement, the buyer pays the wrap lender as agreed, but the wrap lender fails to send payments to the underlying lender. Which conclusion best identifies the problem?
Reveal answer
Correct answer: Payment on the wrap obligation and payment on the underlying debt are separate steps.
The wrap lender remains responsible for underlying loan payments. Receiving the buyer's payment does not itself complete that separate payment step.
Question 35 of 40
Which pair of loan features can coexist without contradiction?
Reveal answer
Correct answer: A fixed interest rate and a balloon payment at maturity
Rate structure and principal repayment structure are separate. A loan can keep a fixed rate yet leave a balloon balance at maturity.
Question 36 of 40
A borrower insists that an unchanged payment address proves the originating lender still owns the loan. What additional fact would most directly resolve ownership?
Reveal answer
Correct answer: Whether ownership of the loan has been sold or otherwise transferred
Ownership depends on whether the loan interest transferred. Payment administration can stay with the original lender after a sale.
Question 37 of 40
A buyer asks Ginnie Mae to originate a home loan because the buyer has heard it supports mortgage financing. Which explanation best redirects the buyer?
Reveal answer
Correct answer: The buyer obtains a loan from an originating lender; Ginnie Mae's described role concerns guarantees on eligible mortgage-backed securities.
Ginnie Mae's security-payment guaranty is distinct from originating a buyer's home loan. Borrowers obtain new financing in the primary market.
Question 38 of 40
A lender advertises a conventional loan that meets applicable Fannie Mae purchase standards but plans to keep it in its portfolio. Which conclusion follows?
Reveal answer
Correct answer: The loan can be conventional and conforming even if the lender does not sell it.
Conforming describes compliance with purchase standards, not a completed sale. Conventional describes the absence of federal insurance or guaranty.
Question 39 of 40
Which fact distinguishes a buyer's loan assumption from an investor's secondary-market purchase of that loan?
Reveal answer
Correct answer: The assuming buyer undertakes the debt; the investor purchases the loan asset.
An assumption concerns undertaking borrower liability. A secondary-market purchase concerns ownership of the lender's loan asset.
Question 40 of 40
A local private lender makes a new secured loan to a homebuyer, then sells that loan to an investment fund. Which classification correctly follows the sequence?
Reveal answer
Correct answer: Primary-market origination followed by a secondary-market sale
Making a new loan to the borrower is primary-market activity, even for a private lender. Selling the existing loan afterward is secondary-market activity.
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