Arkansas Real Estate License Financing and Settlement Practices 3 — Questions and Answers
Question 1: A seller in Arkansas agrees to pay points on the buyer's behalf to reduce the interest rate. This arrangement is called a:
- Seller concession
- Buydown (Correct answer)
- Assumption
- Subordination
Correct answer: Buydown
A buydown occurs when the seller (or buyer) pays discount points upfront to permanently or temporarily reduce the loan's interest rate.
Question 2: What does the Annual Percentage Rate (APR) represent on a mortgage loan?
- The note rate charged on the principal balance
- The total cost of the loan including fees expressed as a yearly rate (Correct answer)
- The maximum rate allowed under usury law
- The rate used to calculate the monthly payment
Correct answer: The total cost of the loan including fees expressed as a yearly rate
APR includes the interest rate plus finance charges and fees, expressed as an annual rate to allow loan comparisons.
Question 3: Which of the following best describes a conventional loan?
- A loan guaranteed by the VA
- A loan insured by the FHA
- A loan not insured or guaranteed by a government agency (Correct answer)
- A loan issued by a government agency directly
Correct answer: A loan not insured or guaranteed by a government agency
A conventional loan is one that is not backed by a government program such as FHA, VA, or USDA.
Question 4: On the Closing Disclosure, which section shows how much the buyer and seller each receive or owe at closing?
- Section A — Origination Charges
- Section K — Due from Borrower at Closing
- Section L — Paid Already by or on Behalf of Borrower
- The Summaries of Transactions section (Correct answer)
Correct answer: The Summaries of Transactions section
The Summaries of Transactions section of the Closing Disclosure shows the complete accounting for both the buyer and seller.
Question 5: In a purchase transaction, earnest money deposited by the buyer is typically shown on the Closing Disclosure as a:
- Debit to the buyer
- Credit to the buyer (Correct answer)
- Debit to the seller
- Credit to both buyer and seller
Correct answer: Credit to the buyer
Earnest money already paid by the buyer reduces the cash needed at closing, so it appears as a credit to the buyer.
Question 6: Arkansas uses the 'title theory' or 'lien theory' for mortgages?
- Title theory — lender holds title
- Lien theory — borrower holds title, lender has a lien (Correct answer)
- Intermediate theory depending on loan type
- Dual theory requiring court confirmation
Correct answer: Lien theory — borrower holds title, lender has a lien
Arkansas is a lien theory state, meaning the borrower retains title and the lender holds a lien against the property as security.
Question 7: A property's appraised value is $250,000, and the lender requires an 80% LTV. What is the maximum loan amount?
- $180,000
- $200,000 (Correct answer)
- $210,000
- $225,000
Correct answer: $200,000
$250,000 × 0.80 = $200,000 maximum loan at 80% loan-to-value.
Arkansas Real Estate License Financing and Settlement Practices 3
A seller in Arkansas agrees to pay points on the buyer's behalf to reduce the interest rate.
This arrangement is called a: