FinanceIntermediateCalifornia Exam

What does it mean when a buyer is 'pre-approved' for a mortgage?

AThe buyer has received an informal estimate of borrowing capacity without documentation review, per standard amortization and lending convention

BThe lender has reviewed the buyer's financial documents and issued a conditional commitment to lend a specific amountCorrect

CThe buyer has been approved for a specific property, under standard California mortgage lending practice

DThe buyer's credit score has been checked only, as typically calculated in residential loan underwriting

Why The lender has reviewed the buyer's financial documents and issued a conditional commitment to lend a specific amount Is Correct

Answer B: The lender has reviewed the buyer's financial documents and issued a conditional commitment to lend a specific amount

Pre-approval involves the lender reviewing the buyer's actual financial documents (pay stubs, tax returns, bank statements, credit report) and issuing a conditional commitment to lend up to a specified amount. It is more definitive than pre-qualification and stronger in the eyes of sellers.

Exam Tip: Finance

Finance questions often involve calculations. Master the T-bar method, understand the difference between conventional and government-backed loans, and know key ratios like LTV and DTI.

Key Finance Terms in This Question

Amortization

The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.

Pre-Approval

A lender's conditional commitment to loan a specific amount to a borrower, based on verified income, credit, and assets.

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Key Terms to Know

Pre-Approval

A lender's conditional commitment to loan a specific amount to a borrower, based on verified income, credit, and assets.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.

Loan-to-Value Ratio (LTV)

The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.

Discount Points

Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.

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