Real Estate Finance & Mortgages 1 — Questions and Answers
Question 1: Loan-to-value (LTV) ratio is calculated as:
- Loan amount divided by the borrower's income
- Loan amount divided by the appraised property value (Correct answer)
- Monthly payment divided by gross income
- Down payment divided by purchase price
Correct answer: Loan amount divided by the appraised property value
LTV = loan amount ÷ appraised value, expressed as a percentage; a higher LTV represents more risk to the lender.
Question 2: Private Mortgage Insurance (PMI) is typically required when the borrower's down payment is:
- More than 20% of the purchase price
- Less than 20% of the purchase price (Correct answer)
- Equal to the loan amount
- Less than 10% on FHA loans only
Correct answer: Less than 20% of the purchase price
PMI protects the lender when the borrower puts down less than 20%, compensating for the higher default risk associated with a high LTV loan.
Question 3: In an adjustable-rate mortgage (ARM), the interest rate is tied to:
- The prime rate set by the Federal Reserve directly
- A market index plus a margin (Correct answer)
- The borrower's credit score
- The original purchase price
Correct answer: A market index plus a margin
ARM rates are calculated by adding a fixed margin to a benchmark index (such as SOFR or Treasury rates), causing the rate to fluctuate over time.
Question 4: Amortization in a mortgage refers to:
- The process of increasing the loan balance over time
- The gradual payoff of the loan through scheduled principal and interest payments (Correct answer)
- Refinancing to a lower rate
- Converting an ARM to a fixed rate
Correct answer: The gradual payoff of the loan through scheduled principal and interest payments
Amortization is the repayment schedule that systematically reduces the loan principal over its term through regular equal payments.
Question 5: Mortgage pre-approval differs from pre-qualification because pre-approval involves:
- Only a verbal income estimate
- A formal review of verified financial documents by the lender (Correct answer)
- A home inspection
- A title search
Correct answer: A formal review of verified financial documents by the lender
Pre-approval requires verification of income, assets, and credit, giving the buyer a conditional commitment for a specific loan amount.
Question 6: FHA loans are attractive to first-time buyers primarily because they allow:
- No down payment required
- Down payments as low as 3.5% with lower credit score requirements (Correct answer)
- No mortgage insurance
- Unlimited loan amounts
Correct answer: Down payments as low as 3.5% with lower credit score requirements
FHA loans, insured by the Federal Housing Administration, allow down payments as low as 3.5% and accept lower credit scores than conventional loans.
Real Estate Finance & Mortgages 1
Loan-to-value (LTV) ratio is calculated as: