AFC Housing and Real Estate Finance 4 — Questions and Answers
Question 1: A homeowner with a $250,000 mortgage balance has a home valued at $200,000. This situation is best described as:
- Positive equity
- Being underwater or upside-down (Correct answer)
- A conforming loan scenario
- A jumbo loan situation
Correct answer: Being underwater or upside-down
When the mortgage balance exceeds the home's market value, the homeowner is said to be underwater or upside-down on their mortgage.
Question 2: Which federal law requires lenders to disclose the Annual Percentage Rate (APR) and total finance charges to borrowers before loan closing?
- Real Estate Settlement Procedures Act (RESPA)
- Truth in Lending Act (TILA) (Correct answer)
- Fair Housing Act
- Home Mortgage Disclosure Act (HMDA)
Correct answer: Truth in Lending Act (TILA)
TILA (Regulation Z) mandates disclosure of the APR and total cost of credit so borrowers can compare loan offers.
Question 3: A 5/1 ARM mortgage means the interest rate is fixed for the first:
- 5 months, then adjusts monthly
- 1 year, then adjusts every 5 years
- 5 years, then adjusts annually (Correct answer)
- 5 years, then converts to a fixed rate
Correct answer: 5 years, then adjusts annually
In a 5/1 ARM, the rate is fixed for 5 years and then adjusts once per year based on a benchmark index plus margin.
Question 4: Which type of deed provides the GREATEST protection to a home buyer because the seller warrants the title against ALL prior claims?
- Quitclaim deed
- Special warranty deed
- Bargain and sale deed
- General warranty deed (Correct answer)
Correct answer: General warranty deed
A general warranty deed guarantees the title against all defects and encumbrances, even those arising before the seller owned the property.
Question 5: A client is considering a 15-year mortgage versus a 30-year mortgage for the same loan amount at the same interest rate. Which statement is MOST accurate?
- The 15-year loan has lower monthly payments but higher total interest paid
- The 30-year loan builds equity faster
- The 15-year loan has higher monthly payments but significantly less total interest paid (Correct answer)
- Both loans result in similar total interest costs
Correct answer: The 15-year loan has higher monthly payments but significantly less total interest paid
A 15-year mortgage has higher monthly payments but dramatically reduces total interest paid because the principal is repaid in half the time.
Question 6: Under RESPA, within how many business days of receiving a complete mortgage application must a lender provide a Loan Estimate?
- 1 business day
- 3 business days (Correct answer)
- 5 business days
- 7 business days
Correct answer: 3 business days
RESPA (as implemented through TRID rules) requires lenders to deliver or mail the Loan Estimate within 3 business days of receiving a complete application.
Question 7: A housing counselor's client wants to calculate their debt-to-income (DTI) ratio for a mortgage. Their gross monthly income is $5,000 and total monthly debt payments (including proposed PITI) are $1,750. What is their back-end DTI?
- 28%
- 30%
- 35% (Correct answer)
- 38%
Correct answer: 35%
Back-end DTI = total monthly debts ÷ gross monthly income = $1,750 ÷ $5,000 = 35%.
AFC Housing and Real Estate Finance 4
A homeowner with a $250,000 mortgage balance has a home valued at $200,000.
This situation is best described as: