Arizona Real Estate License Financing and Valuation Principles 3 — Questions and Answers
Question 1: Which document is the promise to repay a debt, separate from the instrument that pledges the property as security?
- Deed of trust
- Promissory note (Correct answer)
- Mortgage
- Reconveyance
Correct answer: Promissory note
The promissory note is the borrower's written promise to repay; the mortgage or deed of trust secures it.
Question 2: In an appraisal, physical, functional, and external are the three types of:
- Appreciation
- Depreciation (Correct answer)
- Amortization
- Capitalization
Correct answer: Depreciation
Depreciation in appraisal is categorized as physical deterioration, functional obsolescence, and external obsolescence.
Question 3: A loan where the payments do not fully repay the principal, leaving a large final payment, is a:
- Fully amortized loan
- Balloon loan (Correct answer)
- Interest-only reverse loan
- Graduated payment loan
Correct answer: Balloon loan
A balloon loan requires a large lump-sum payment of remaining principal at the end of the term.
Question 4: Which financing arrangement has the seller carry back a loan for the buyer instead of a bank?
- Seller financing (Correct answer)
- Blanket mortgage
- Package mortgage
- Construction loan
Correct answer: Seller financing
In seller (owner) financing, the seller extends credit to the buyer, who repays the seller directly.
Question 5: A home appraised at $250,000 with a loan of $200,000 has what loan-to-value ratio?
- 70%
- 75%
- 80% (Correct answer)
- 85%
Correct answer: 80%
LTV = loan / value = $200,000 / $250,000 = 80%.
Question 6: The appraisal principle stating that value is maximized when land is used in its most profitable legal way is:
- Highest and best use (Correct answer)
- Progression
- Regression
- Plottage
Correct answer: Highest and best use
Highest and best use is the legally permissible, physically possible, financially feasible use that yields the greatest value.
Question 7: Private mortgage insurance (PMI) is typically required on a conventional loan when the down payment is:
- Less than 20% (Correct answer)
- Exactly 20%
- More than 20%
- Any amount
Correct answer: Less than 20%
PMI protects the lender and is generally required when the down payment is under 20% (LTV above 80%).
Arizona Real Estate License Financing and Valuation Principles 3
Which document is the promise to repay a debt, separate from the instrument that pledges the property as security?