PSI Real Estate Financing MCQ 5 — Questions and Answers
Question 1: An FHA loan requires a minimum down payment of 3.5% when the borrower's credit score is:
- At least 500
- At least 580 (Correct answer)
- At least 620
- At least 640
Correct answer: At least 580
FHA requires a minimum 580 credit score for the 3.5% down payment; borrowers with scores between 500–579 must put down at least 10%.
Question 2: What is 'negative amortization' in a mortgage loan?
- A loan that charges a prepayment penalty when paid off early
- When monthly payments are insufficient to cover interest, causing the loan balance to increase (Correct answer)
- A declining balance loan that pays off faster than scheduled
- When the interest rate decreases after the initial fixed period
Correct answer: When monthly payments are insufficient to cover interest, causing the loan balance to increase
Negative amortization occurs when a borrower's payment does not cover all accrued interest, causing unpaid interest to be added to the loan principal.
Question 3: A lender requires an impound (escrow) account. What funds does the borrower deposit into this account monthly?
- Only mortgage insurance premiums
- Only property taxes
- Property taxes and hazard insurance premiums (Correct answer)
- Principal, interest, taxes, and insurance combined
Correct answer: Property taxes and hazard insurance premiums
An impound/escrow account collects monthly portions of property taxes and hazard (homeowner's) insurance so the lender can pay these obligations on the borrower's behalf.
Question 4: Which of the following loan types does NOT require mortgage insurance regardless of the down payment amount?
- Conventional loan with 10% down
- FHA loan with 20% down
- VA loan (Correct answer)
- USDA Rural Development loan
Correct answer: VA loan
VA loans do not require monthly mortgage insurance premiums regardless of the down payment or LTV ratio, a significant benefit for eligible veterans.
Question 5: What is the primary function of the secondary mortgage market?
- To provide direct loans to homebuyers at below-market rates
- To allow lenders to sell existing loans, replenishing capital to issue new loans (Correct answer)
- To regulate interest rates charged on new mortgages
- To provide mortgage insurance for high-LTV loans
Correct answer: To allow lenders to sell existing loans, replenishing capital to issue new loans
The secondary mortgage market enables lenders to sell originated loans to investors, recovering capital so they can fund additional mortgages for new borrowers.
Question 6: Which disclosure must a lender provide to a borrower within three business days before closing on most residential mortgage transactions under TRID?
- Good Faith Estimate
- Truth-in-Lending Statement
- Closing Disclosure (Correct answer)
- HUD-1 Settlement Statement
Correct answer: Closing Disclosure
TRID requires lenders to provide the Closing Disclosure at least three business days before consummation, giving borrowers time to review final loan terms.
Question 7: A borrower refinances to get a lower interest rate. Under TILA, the borrower has the right to rescind the transaction within how many business days after closing?
- 1 business day
- 3 business days (Correct answer)
- 5 business days
- 10 business days
Correct answer: 3 business days
TILA's right of rescission gives borrowers three business days to cancel a refinance or home equity loan on their primary residence without penalty.
PSI Real Estate Financing MCQ 5
An FHA loan requires a minimum down payment of 3.5% when the borrower's credit score is: