AFC Housing and Real Estate Finance 2 — Questions and Answers
Question 1: Which type of mortgage is insured by the Federal Housing Administration (FHA) and is known for accepting lower down payments?
- VA Loan
- USDA Loan
- FHA Loan (Correct answer)
- Conventional Conforming Loan
Correct answer: FHA Loan
FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5% for borrowers with qualifying credit scores.
Question 2: The back-end debt-to-income (DTI) ratio includes:
- Only housing expenses relative to gross income
- All monthly debt obligations (housing, car, student loans, etc.) divided by gross monthly income (Correct answer)
- Total annual debt divided by annual net income
- All monthly expenses including groceries and utilities divided by gross income
Correct answer: All monthly debt obligations (housing, car, student loans, etc.) divided by gross monthly income
The back-end DTI includes all recurring monthly debt payments (housing, auto, student loans, credit cards, etc.) divided by gross monthly income.
Question 3: What is the purpose of a home appraisal in the mortgage process?
- To inspect the home for structural defects and safety issues
- To establish an independent estimate of the property's market value for the lender (Correct answer)
- To verify the buyer's income and employment history
- To survey the property boundaries and legal description
Correct answer: To establish an independent estimate of the property's market value for the lender
An appraisal provides the lender with an independent professional opinion of the property's market value to ensure the loan amount is appropriate.
Question 4: Which of the following best describes the 'rent vs. buy' analysis an AFC financial counselor would perform for a client?
- Comparing only monthly rent to the monthly mortgage payment
- Comparing total costs of renting (including opportunity cost) versus owning (including transaction costs, taxes, maintenance) over a defined time horizon (Correct answer)
- Advising clients to always buy because real estate appreciates
- Calculating the client's credit score to determine mortgage eligibility
Correct answer: Comparing total costs of renting (including opportunity cost) versus owning (including transaction costs, taxes, maintenance) over a defined time horizon
A thorough rent vs. buy analysis accounts for all ownership costs—mortgage, taxes, insurance, maintenance, transaction costs—compared to renting, factoring in the client's time horizon and opportunity cost of the down payment.
Question 5: A client is 'underwater' on their mortgage. This means:
- The home has suffered flood damage
- The outstanding mortgage balance exceeds the current market value of the home (Correct answer)
- The client has missed three or more mortgage payments
- The mortgage interest rate is above the current market rate
Correct answer: The outstanding mortgage balance exceeds the current market value of the home
Being underwater (or 'upside down') means a homeowner owes more on the mortgage than the home is currently worth, resulting in negative equity.
Question 6: Title insurance protects against:
- Damage to the home from natural disasters
- Future property tax increases after purchase
- Defects or disputes in the property's ownership history that existed prior to purchase (Correct answer)
- The lender's loss if the borrower defaults on the mortgage
Correct answer: Defects or disputes in the property's ownership history that existed prior to purchase
Title insurance protects buyers and lenders from financial loss due to prior defects in the property title, such as liens, errors, fraud, or undisclosed heirs.
AFC Housing and Real Estate Finance 2
Which type of mortgage is insured by the Federal Housing Administration (FHA) and is known for accepting lower down payments?