Loans Mortgage Loan 3 — Questions and Answers
Question 1: What is a 'balloon mortgage'?
- A mortgage with gradually increasing payments
- A loan with small regular payments followed by a large lump-sum payment at the end (Correct answer)
- A mortgage that pays off faster than scheduled
- A loan with no down payment requirement
Correct answer: A loan with small regular payments followed by a large lump-sum payment at the end
A balloon mortgage requires relatively small payments during the loan term, with the remaining balance due as a large single payment at maturity.
Question 2: Which type of refinance allows a homeowner to borrow more than they owe and receive the difference in cash?
- Rate-and-term refinance
- Streamline refinance
- Cash-out refinance (Correct answer)
- Short refinance
Correct answer: Cash-out refinance
A cash-out refinance replaces the existing mortgage with a larger loan, giving the borrower the equity difference in cash.
Question 3: What is the 'due-on-sale' clause in a mortgage?
- A clause requiring the borrower to sell the home within a set period
- A provision allowing the lender to demand full repayment when the property is sold (Correct answer)
- A penalty for selling the home before the mortgage matures
- A clause that reduces the rate when the home is sold
Correct answer: A provision allowing the lender to demand full repayment when the property is sold
The due-on-sale clause lets the lender call the entire loan balance due immediately if the borrower transfers or sells the property.
Question 4: A mortgage with a 30-year term and a fixed rate of 7% on a $300,000 loan—which amortization outcome is true?
- Most of the early payments go toward principal
- Early payments consist mainly of interest (Correct answer)
- Each payment is split equally between principal and interest
- The principal balance never decreases in the first year
Correct answer: Early payments consist mainly of interest
In early amortization, most of each payment covers interest because the outstanding principal balance is at its highest.
Question 5: What does 'escrow' typically cover in a mortgage payment?
- Only homeowner's insurance
- Principal and interest only
- Property taxes and homeowner's insurance held by the lender (Correct answer)
- Closing costs paid upfront
Correct answer: Property taxes and homeowner's insurance held by the lender
An escrow account holds funds collected monthly by the lender to pay property taxes and homeowner's insurance on the borrower's behalf.
Question 6: Which government agency backs FHA mortgage loans?
- Fannie Mae
- Freddie Mac
- The Department of Housing and Urban Development (HUD) (Correct answer)
- The Federal Reserve
Correct answer: The Department of Housing and Urban Development (HUD)
FHA loans are insured by the Federal Housing Administration, which operates under the U.S. Department of Housing and Urban Development (HUD).
Question 7: What is the maximum debt-to-income (DTI) ratio typically accepted for a conventional mortgage?
- 28%
- 36%
- 43% (Correct answer)
- 50%
Correct answer: 43%
Conventional lenders generally use a 43% back-end DTI ceiling, though some automated systems may allow up to 50% with strong compensating factors.
Loans Mortgage Loan 3
What is a 'balloon mortgage'?