AFC Housing and Real Estate Finance 1 — Questions and Answers
Question 1: What does the term 'amortization' refer to in the context of a mortgage?
- The process of building home equity through market appreciation
- The gradual repayment of a loan through scheduled principal and interest payments (Correct answer)
- The cost of homeowners insurance over the life of the loan
- The lender's fee for originating the mortgage
Correct answer: The gradual repayment of a loan through scheduled principal and interest payments
Amortization is the process by which a borrower repays a loan over time through regular payments that cover both principal and interest.
Question 2: A client's front-end debt-to-income (DTI) ratio is calculated using:
- Total monthly debt payments divided by gross monthly income
- Monthly housing costs only divided by gross monthly income (Correct answer)
- Net monthly income divided by total housing costs
- Monthly housing costs divided by net monthly income
Correct answer: Monthly housing costs only divided by gross monthly income
The front-end DTI ratio compares only housing-related costs (principal, interest, taxes, insurance) to gross monthly income.
Question 3: What is Private Mortgage Insurance (PMI) and when is it typically required?
- Insurance that protects the buyer if the home is damaged; required on all mortgages
- Insurance that protects the lender; typically required when the down payment is less than 20% (Correct answer)
- Insurance that covers mortgage payments if the borrower loses their job; optional
- Title insurance required at closing for all FHA loans
Correct answer: Insurance that protects the lender; typically required when the down payment is less than 20%
PMI protects the lender against default and is typically required on conventional loans when the borrower's down payment is less than 20% of the purchase price.
Question 4: Which federal law requires lenders to provide borrowers with a Loan Estimate within three business days of receiving a mortgage application?
- Truth in Lending Act (TILA)
- Real Estate Settlement Procedures Act (RESPA)
- TILA-RESPA Integrated Disclosure (TRID) rule (Correct answer)
- Equal Credit Opportunity Act (ECOA)
Correct answer: TILA-RESPA Integrated Disclosure (TRID) rule
The TRID rule (Know Before You Owe mortgage disclosure rule) requires lenders to provide a Loan Estimate within three business days of application.
Question 5: An adjustable-rate mortgage (ARM) with a 5/1 structure means:
- The rate adjusts every 5 months for 1 year
- The rate is fixed for 5 years, then adjusts annually (Correct answer)
- The loan has a 5-year term with 1 adjustment per year
- The down payment is 5% with a 1% origination fee
Correct answer: The rate is fixed for 5 years, then adjusts annually
A 5/1 ARM has a fixed interest rate for the first 5 years, after which the rate adjusts once per year based on a market index.
Question 6: Home equity is calculated as:
- The original purchase price minus the remaining mortgage balance
- The current market value of the home minus the outstanding mortgage balance (Correct answer)
- The total payments made on the mortgage to date
- The appraised value minus the original down payment
Correct answer: The current market value of the home minus the outstanding mortgage balance
Home equity equals the current market value of the property minus any outstanding mortgage or lien balances.
AFC Housing and Real Estate Finance 1
What does the term 'amortization' refer to in the context of a mortgage?