PSI Real Estate Financing 2 — Questions and Answers
Question 1: A buyer obtains a loan where the interest rate adjusts periodically based on a market index. What type of loan is this?
- Fixed-rate mortgage
- Adjustable-rate mortgage (ARM) (Correct answer)
- Balloon mortgage
- Wraparound mortgage
Correct answer: Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage (ARM) has an interest rate that changes at set intervals based on a specified market index.
Question 2: Which federal law requires lenders to disclose the Annual Percentage Rate (APR) to borrowers?
- RESPA
- ECOA
- Truth in Lending Act (TILA) (Correct answer)
- Fair Housing Act
Correct answer: Truth in Lending Act (TILA)
The Truth in Lending Act (TILA) mandates that lenders disclose the APR and total cost of credit to borrowers.
Question 3: A homeowner borrows $50,000 using their home's equity as collateral to fund a renovation. This is best described as a:
- Purchase money mortgage
- Home equity loan (Correct answer)
- Construction loan
- Bridge loan
Correct answer: Home equity loan
A home equity loan allows homeowners to borrow against the equity built up in their property.
Question 4: What is the primary purpose of private mortgage insurance (PMI)?
- To protect the borrower from foreclosure
- To protect the lender if the borrower defaults (Correct answer)
- To guarantee the property's appraised value
- To cover homeowner's insurance costs
Correct answer: To protect the lender if the borrower defaults
PMI protects the lender — not the borrower — in the event the borrower defaults on the loan.
Question 5: A mortgage where the monthly payment does not fully amortize the loan over its term, resulting in a large final payment, is called a:
- Fully amortized loan
- Balloon mortgage (Correct answer)
- Graduated payment mortgage
- Reverse mortgage
Correct answer: Balloon mortgage
A balloon mortgage has a large lump-sum payment due at the end of the loan term because monthly payments don't fully pay off the balance.
Question 6: Under the Equal Credit Opportunity Act (ECOA), a lender may NOT discriminate based on which of the following?
- Credit score
- Debt-to-income ratio
- Marital status (Correct answer)
- Employment history
Correct answer: Marital status
ECOA prohibits credit discrimination based on marital status, race, sex, religion, national origin, age, or receipt of public assistance.
Question 7: What is the loan-to-value (LTV) ratio for a property appraised at $200,000 with a $160,000 loan?
- 60%
- 70%
- 80% (Correct answer)
- 90%
Correct answer: 80%
LTV = loan amount ÷ appraised value = $160,000 ÷ $200,000 = 80%.
PSI Real Estate Financing 2
A buyer obtains a loan where the interest rate adjusts periodically based on a market index.
What type of loan is this?