Real Estate Finance & Mortgages 1

Question 1

Loan-to-value (LTV) ratio is calculated as:

Accepted Answer

Loan amount divided by the appraised property value

Answer

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:

Accepted Answer

Less than 20% of the purchase price

Answer

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:

Accepted Answer

A market index plus a margin

Answer

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:

Accepted Answer

The gradual payoff of the loan through scheduled principal and interest payments

Answer

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:

Accepted Answer

A formal review of verified financial documents by the lender

Answer

Pre-approval requires verification of income, assets, and credit, giving the buyer a conditional commitment for a specific loan amount.

Real Estate Practice Test