Arkansas Real Estate License Financing and Settlement Practices 5 — Questions and Answers
Question 1: In Arkansas, which instrument is most commonly used to secure a mortgage loan — a mortgage or a deed of trust?
- Mortgage, because Arkansas is a mortgage theory state
- Deed of trust, because it allows non-judicial foreclosure (Correct answer)
- Both are equally common with no practical difference
- Neither — Arkansas uses land contracts exclusively
Correct answer: Deed of trust, because it allows non-judicial foreclosure
Arkansas commonly uses the deed of trust because it allows a streamlined non-judicial (trustee's sale) foreclosure process.
Question 2: A USDA Rural Development loan is designed for buyers purchasing in:
- Any U.S. location with a valid appraisal
- Rural and certain suburban areas meeting USDA eligibility criteria (Correct answer)
- Only properties within city limits
- Only federally designated opportunity zones
Correct answer: Rural and certain suburban areas meeting USDA eligibility criteria
USDA loans are available for properties in rural and qualifying suburban areas as defined by USDA eligibility maps.
Question 3: Prorations at closing adjust which items between buyer and seller?
- Loan origination fees and discount points
- Prepaid expenses and accrued expenses such as taxes and HOA dues (Correct answer)
- Earnest money deposits and down payments
- Title insurance premiums and survey costs
Correct answer: Prepaid expenses and accrued expenses such as taxes and HOA dues
Prorations divide ongoing expenses like property taxes and HOA dues between buyer and seller based on the closing date.
Question 4: Which disclosure is required by the Truth in Lending Act (TILA) and must be provided before loan consummation?
- HUD-1 Settlement Statement
- Closing Disclosure
- TILA Disclosure (Reg Z disclosures) (Correct answer)
- Good Faith Estimate
Correct answer: TILA Disclosure (Reg Z disclosures)
TILA/Regulation Z requires disclosures of the APR, finance charge, total payments, and payment schedule before consummation.
Question 5: A borrower has a debt-to-income ratio (DTI) of 50%. Most conventional loan guidelines require a back-end DTI of no more than:
- 28%
- 36%
- 43–45% (Correct answer)
- 55%
Correct answer: 43–45%
Most conventional loan programs through Fannie Mae/Freddie Mac cap the back-end DTI at 43–45%, though some DU approvals may allow higher.
Question 6: The Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on all of the following EXCEPT:
- Race and national origin
- Sex and marital status
- Credit score and ability to repay (Correct answer)
- Religion and age (if 40 or older)
Correct answer: Credit score and ability to repay
ECOA prohibits discrimination based on protected classes, but lenders may lawfully consider creditworthiness factors like credit score and ability to repay.
Question 7: Which of the following best describes an escrow account in the context of a residential mortgage?
- An account holding the seller's proceeds until deed recordation
- A lender-held account from which property taxes and insurance are paid on the borrower's behalf (Correct answer)
- An attorney trust account for earnest money
- A savings account the borrower maintains for future repairs
Correct answer: A lender-held account from which property taxes and insurance are paid on the borrower's behalf
A mortgage escrow account is managed by the lender to collect and pay property taxes and homeowner's insurance on the borrower's behalf.
Arkansas Real Estate License Financing and Settlement Practices 5
In Arkansas, which instrument is most commonly used to secure a mortgage loan — a mortgage or a deed of trust?