Arkansas Real Estate License Property Valuation and Financing 3 — Questions and Answers
Question 1: A VA loan benefit available to eligible veterans in Arkansas does NOT require which of the following?
- Private mortgage insurance (PMI) (Correct answer)
- A certificate of eligibility
- An appraisal
- Evidence of creditworthiness
Correct answer: Private mortgage insurance (PMI)
VA loans do not require PMI regardless of the down payment amount, which is a key advantage for veterans.
Question 2: When using the cost approach, an appraiser estimates a building's replacement cost at $180,000 and total depreciation at $45,000. The land value is $40,000. What is the property's estimated value?
- $175,000 (Correct answer)
- $220,000
- $135,000
- $185,000
Correct answer: $175,000
Value = (Replacement cost − Depreciation) + Land = ($180,000 − $45,000) + $40,000 = $175,000.
Question 3: Which term describes the interest rate used to convert future income into a present value estimate?
- Capitalization rate (Correct answer)
- Discount rate
- Prime rate
- Effective rate
Correct answer: Capitalization rate
The capitalization rate converts a property's net operating income into an estimate of current market value.
Question 4: In Arkansas real estate, a 'buydown' is a financing technique where:
- The buyer pays discount points upfront to reduce the interest rate (Correct answer)
- The lender reduces the principal balance at closing
- The seller pays the buyer's closing costs entirely
- The interest rate adjusts downward annually
Correct answer: The buyer pays discount points upfront to reduce the interest rate
A buydown involves paying discount points at closing to obtain a lower interest rate over the loan term.
Question 5: Which type of depreciation is typically considered incurable because it stems from factors outside the property?
- External obsolescence (Correct answer)
- Functional obsolescence
- Physical deterioration
- Deferred maintenance
Correct answer: External obsolescence
External obsolescence arises from factors outside the property (such as nearby industrial zoning) and is generally incurable by the owner.
Question 6: A lender's requirement that the borrower's total monthly debt payments not exceed a certain percentage of gross monthly income is called the:
- Back-end ratio (total debt-to-income ratio) (Correct answer)
- Front-end ratio
- Loan-to-value ratio
- Debt coverage ratio
Correct answer: Back-end ratio (total debt-to-income ratio)
The back-end (total DTI) ratio includes all monthly debt obligations relative to gross monthly income.
Question 7: Under FIRREA, appraisals for federally related transactions above a certain threshold must be performed by:
- A state-licensed or state-certified appraiser (Correct answer)
- Any licensed real estate agent
- A broker with MAI designation
- An assessor employed by the county
Correct answer: A state-licensed or state-certified appraiser
FIRREA requires that federally related transaction appraisals be conducted by state-licensed or state-certified appraisers.
Arkansas Real Estate License Property Valuation and Financing 3
A VA loan benefit available to eligible veterans in Arkansas does NOT require which of the following?