Real Estate License Financing — Questions and Answers
Question 1: Which clause in a mortgage allows the lender to demand full repayment if the borrower sells the property?
- Acceleration clause
- Due-on-sale clause (Correct answer)
- Defeasance clause
- Subordination clause
Correct answer: Due-on-sale clause
A due-on-sale (alienation) clause lets the lender call the loan due when the property is transferred.
Question 2: What does PITI stand for in a monthly mortgage payment?
- Principal, Interest, Taxes, Insurance (Correct answer)
- Payment, Interest, Term, Income
- Principal, Income, Title, Insurance
- Premium, Interest, Taxes, Interest
Correct answer: Principal, Interest, Taxes, Insurance
PITI is the sum of principal, interest, property taxes, and homeowner's insurance.
Question 3: A loan that requires a large lump-sum payment at the end of the term is called a:
- Amortized loan
- Balloon loan (Correct answer)
- Adjustable-rate loan
- Wraparound loan
Correct answer: Balloon loan
A balloon loan has small periodic payments with a large final balloon payment.
Question 4: The federal law requiring lenders to disclose the true cost of credit, including APR, is:
- RESPA
- ECOA
- Truth in Lending Act (Regulation Z) (Correct answer)
- Fair Housing Act
Correct answer: Truth in Lending Act (Regulation Z)
The Truth in Lending Act, implemented by Regulation Z, mandates APR and finance-charge disclosure.
Question 5: In a buydown, what is reduced for the borrower?
- The principal balance
- The interest rate (Correct answer)
- The loan term
- The property taxes
Correct answer: The interest rate
A buydown pays points upfront to lower the borrower's interest rate, often temporarily.
Question 6: Which type of loan adjusts the interest rate periodically based on an index?
- Fixed-rate mortgage
- Adjustable-rate mortgage (ARM) (Correct answer)
- Term loan
- Purchase-money mortgage
Correct answer: Adjustable-rate mortgage (ARM)
An ARM's rate changes over time as the underlying index moves, within set caps.
Question 7: Private mortgage insurance (PMI) is typically required when the down payment is less than:
- 5%
- 10%
- 15%
- 20% (Correct answer)
Correct answer: 20%
Lenders require PMI on conventional loans when the borrower puts down under 20%.
Question 8: A VA loan is a government-backed mortgage available primarily to:
- First-time buyers only
- Eligible veterans and service members (Correct answer)
- Rural property buyers
- Low-income borrowers
Correct answer: Eligible veterans and service members
VA loans are guaranteed by the Department of Veterans Affairs for qualifying veterans and military members.
Question 9: What is the loan-to-value (LTV) ratio if a buyer borrows $160,000 on a $200,000 home?
- 60%
- 70%
- 80% (Correct answer)
- 90%
Correct answer: 80%
LTV equals loan divided by value: 160,000 / 200,000 = 80%.
Question 10: Which entity is a secondary mortgage market participant that buys loans from lenders?
- FHA
- Fannie Mae (Correct answer)
- HUD
- Regulation Z
Correct answer: Fannie Mae
Fannie Mae purchases mortgages in the secondary market, providing lenders liquidity.
Question 11: An FHA loan is insured by the:
- Federal Housing Administration (Correct answer)
- Federal Reserve
- Veterans Affairs
- Department of the Treasury
Correct answer: Federal Housing Administration
FHA loans are insured by the Federal Housing Administration, allowing lower down payments.
Question 12: A point paid to a lender at closing typically equals what percentage of the loan amount?
- 0.5%
- 1% (Correct answer)
- 2%
- 5%
Correct answer: 1%
One discount or origination point equals 1% of the loan amount.
Question 13: When a seller finances the buyer's purchase directly, it is called a:
- Wraparound loan
- Purchase-money mortgage (Correct answer)
- Bridge loan
- Construction loan
Correct answer: Purchase-money mortgage
A purchase-money mortgage is seller financing where the seller acts as the lender.
Question 14: Hypothecation in financing refers to:
- Pledging property as collateral without giving up possession (Correct answer)
- Transferring title to the lender
- Refinancing an existing loan
- Paying off a loan early
Correct answer: Pledging property as collateral without giving up possession
Hypothecation lets a borrower pledge property as security while retaining possession and use.
Question 15: The clause that allows a lender to declare the entire loan balance due upon default is the:
- Acceleration clause (Correct answer)
- Defeasance clause
- Prepayment clause
- Habendum clause
Correct answer: Acceleration clause
An acceleration clause makes the full balance immediately due if the borrower defaults.
Question 16: Usury laws are designed to limit:
- Loan terms
- Maximum interest rates charged (Correct answer)
- Down payment amounts
- Property tax rates
Correct answer: Maximum interest rates charged
Usury laws cap the maximum interest rate a lender may legally charge.
Question 17: In a deed of trust, the party who holds title on behalf of the lender is the:
- Trustor
- Beneficiary
- Trustee (Correct answer)
- Grantor
Correct answer: Trustee
The trustee holds bare legal title until the loan is repaid in a deed of trust.
Question 18: The Equal Credit Opportunity Act (ECOA) prohibits discrimination in lending based on all EXCEPT:
- Race
- Religion
- Creditworthiness (Correct answer)
- Marital status
Correct answer: Creditworthiness
ECOA bars discrimination on prohibited bases but lenders may consider actual creditworthiness.
Question 19: A loan that combines an existing mortgage with a new one into a single payment is a:
- Balloon loan
- Wraparound mortgage (Correct answer)
- Bridge loan
- Term loan
Correct answer: Wraparound mortgage
A wraparound mortgage wraps the existing loan into a new, larger loan with one payment.
Question 20: RESPA primarily regulates:
- Interest rate caps
- Settlement and closing cost disclosures (Correct answer)
- Property appraisals
- Zoning compliance
Correct answer: Settlement and closing cost disclosures
The Real Estate Settlement Procedures Act governs disclosure of settlement and closing costs.
Question 21: Amortization of a loan refers to:
- Paying interest only each month
- Gradual repayment of principal and interest over time (Correct answer)
- Increasing the loan balance
- A single lump-sum payment
Correct answer: Gradual repayment of principal and interest over time
Amortization is the systematic repayment of principal and interest over the loan term.
Question 22: A bridge loan is typically used to:
- Finance new construction
- Cover the gap between buying a new home and selling the old one (Correct answer)
- Refinance at a lower rate
- Pay property taxes
Correct answer: Cover the gap between buying a new home and selling the old one
A bridge loan provides short-term financing until the borrower's existing property sells.
Question 23: If a borrower defaults, the legal process by which a lender forces sale of the property is:
- Redemption
- Foreclosure (Correct answer)
- Subordination
- Novation
Correct answer: Foreclosure
Foreclosure is the legal process allowing a lender to sell the secured property after default.
Question 24: The right of a defaulted borrower to reclaim property before a foreclosure sale is the:
- Equitable right of redemption (Correct answer)
- Statutory right of reversion
- Right of survivorship
- Right of first refusal
Correct answer: Equitable right of redemption
The equitable right of redemption lets a borrower reclaim the property by paying the debt before the sale.
Question 25: A subordination clause in a mortgage:
- Accelerates the loan
- Changes the lien's priority position (Correct answer)
- Forgives the debt
- Increases the interest rate
Correct answer: Changes the lien's priority position
A subordination clause allows a lien to take a lower priority than a later loan.
Question 26: Which loan feature protects an ARM borrower by limiting how much the rate can rise?
- Margin
- Index
- Interest rate cap (Correct answer)
- Buydown
Correct answer: Interest rate cap
An interest rate cap limits how much an ARM's rate can increase per adjustment or over the loan's life.
Question 27: A conventional loan is one that is:
- Insured by the FHA
- Guaranteed by the VA
- Not insured or guaranteed by a government agency (Correct answer)
- Issued only by the federal government
Correct answer: Not insured or guaranteed by a government agency
Conventional loans are not backed by FHA, VA, or other government insurance programs.
Question 28: The difference between the ARM index and the rate charged to the borrower is the:
- Cap
- Margin (Correct answer)
- Point
- Buydown
Correct answer: Margin
The margin is the fixed percentage added to the index to determine the ARM's interest rate.
