Real Estate Sales Exam Financing and Mortgages 3 — Questions and Answers
Question 1: A seller agrees to make monthly payments to the buyer who previously owned the property — what type of financing is this?
- Purchase-money mortgage (Correct answer)
- Wraparound mortgage
- Reverse mortgage
- Bridge loan
Correct answer: Purchase-money mortgage
A purchase-money mortgage is created when the seller finances part or all of the purchase price, acting as the lender.
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)
TILA (Regulation Z) requires lenders to disclose the APR and total cost of credit to borrowers.
Question 3: What is a 'balloon mortgage'?
- A loan with payments that decrease over time
- A loan requiring a large lump-sum payment at the end of the term (Correct answer)
- A loan with no interest for the first five years
- A loan with an adjustable rate that resets monthly
Correct answer: A loan requiring a large lump-sum payment at the end of the term
A balloon mortgage has smaller periodic payments with a large final lump-sum payment due at the end of the term.
Question 4: Which ratio compares a borrower's total monthly debt payments to gross monthly income?
- Front-end ratio
- Back-end (total debt-to-income) ratio (Correct answer)
- Loan-to-value ratio
- Debt coverage ratio
Correct answer: Back-end (total debt-to-income) ratio
The back-end DTI ratio includes all monthly debt obligations (housing + other debts) divided by gross monthly income.
Question 5: A home equity line of credit (HELOC) is best described as:
- A fixed-rate second mortgage with one lump-sum disbursement
- A revolving line of credit secured by the borrower's home equity (Correct answer)
- A government-backed loan for first-time buyers
- A short-term bridge loan for buyers between properties
Correct answer: A revolving line of credit secured by the borrower's home equity
A HELOC is a revolving credit line secured by home equity, allowing borrowers to draw and repay as needed.
Question 6: What is 'negative amortization'?
- Paying off a loan faster than scheduled
- Loan balance increases because payments don't cover interest (Correct answer)
- A penalty charged for prepaying a mortgage
- A reduction in the interest rate over time
Correct answer: Loan balance increases because payments don't cover interest
Negative amortization occurs when minimum payments are less than the interest owed, causing the unpaid interest to be added to the principal balance.
Question 7: Which type of loan allows seniors aged 62+ to convert home equity into cash without making monthly mortgage payments?
- Home equity loan
- Reverse mortgage (Correct answer)
- Construction loan
- Bridge loan
Correct answer: Reverse mortgage
A reverse mortgage lets homeowners aged 62 or older convert equity into loan proceeds, with repayment deferred until they sell, move out, or die.
Real Estate Sales Exam Financing and Mortgages 3
A seller agrees to make monthly payments to the buyer who previously owned the property — what type of financing is this?