AFC Housing and Real Estate Finance 5 — Questions and Answers
Question 1: Which of the following BEST describes a home equity line of credit (HELOC)?
- A fixed-rate lump-sum loan secured by home equity
- A revolving credit line secured by home equity with a variable interest rate (Correct answer)
- A government-backed refinance program for underwater homeowners
- An unsecured personal credit line tied to home value
Correct answer: A revolving credit line secured by home equity with a variable interest rate
A HELOC is a revolving line of credit secured by the home's equity, typically with a variable rate and a draw period followed by a repayment period.
Question 2: The process by which a lender takes legal action to reclaim a property due to the borrower's failure to make mortgage payments is called:
- Deficiency judgment
- Deed in lieu
- Foreclosure (Correct answer)
- Short sale
Correct answer: Foreclosure
Foreclosure is the legal process by which a lender terminates a borrower's ownership rights to recover the outstanding loan balance.
Question 3: When a lender requires private mortgage insurance (PMI), it is PRIMARILY to protect against:
- The borrower's death or disability
- Loss in property value due to market downturns
- The lender's loss if the borrower defaults and the home sale doesn't cover the loan (Correct answer)
- Damage to the property from natural disasters
Correct answer: The lender's loss if the borrower defaults and the home sale doesn't cover the loan
PMI protects the lender—not the borrower—against financial loss if the borrower defaults and the foreclosure sale proceeds are insufficient to cover the loan balance.
Question 4: A client purchased a home for $300,000 with 5% down. At what loan-to-value (LTV) ratio can they typically request cancellation of PMI under the Homeowners Protection Act?
- 90% LTV (10% equity)
- 85% LTV (15% equity)
- 80% LTV (20% equity) (Correct answer)
- 75% LTV (25% equity)
Correct answer: 80% LTV (20% equity)
The Homeowners Protection Act requires lenders to cancel PMI when the loan balance reaches 80% LTV based on the original purchase price and payment schedule.
Question 5: A seller agrees to accept less than the full mortgage balance owed, with the lender's approval, to avoid foreclosure. This arrangement is known as a:
- Deed in lieu of foreclosure
- Short sale (Correct answer)
- Loan modification
- Forbearance agreement
Correct answer: Short sale
A short sale occurs when the lender agrees to accept less than the full payoff amount from a home sale, allowing the homeowner to avoid formal foreclosure.
Question 6: Which of the following closing costs is TYPICALLY prepaid at settlement and placed into an escrow impound account?
- Loan origination fee
- Title insurance premium
- Property taxes and homeowners insurance (Correct answer)
- Appraisal fee
Correct answer: Property taxes and homeowners insurance
Lenders typically collect an initial deposit for property taxes and homeowners insurance at closing to establish an escrow (impound) account for ongoing payments.
Question 7: A financial counselor advises a client about the community property rule in applicable states. Which statement about community property and mortgages is MOST accurate?
- Only the higher-earning spouse's income counts toward mortgage qualification
- Both spouses' debts may be considered even if only one applies for the mortgage (Correct answer)
- Community property states require both spouses to appear on the mortgage note
- Community property protections eliminate the need for title insurance
Correct answer: Both spouses' debts may be considered even if only one applies for the mortgage
In community property states, a lender may consider the debts of both spouses when evaluating one spouse's mortgage application, even if the other spouse is not a co-borrower.
AFC Housing and Real Estate Finance 5
Which of the following BEST describes a home equity line of credit (HELOC)?