Real Estate Sales Exam Financing and Valuation 3 — Questions and Answers
Question 1: What is the primary purpose of private mortgage insurance (PMI)?
- To protect the borrower from foreclosure
- To protect the lender if the borrower defaults (Correct answer)
- To insure the title against defects
- To cover property damage from natural disasters
Correct answer: To protect the lender if the borrower defaults
PMI protects the lender against loss if the borrower defaults when the LTV exceeds 80%.
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) mandates disclosure of the APR so borrowers can compare the true cost of credit.
Question 3: A property sells for $250,000 with a GRM of 100. What is the monthly gross rent?
- $2,000
- $2,500 (Correct answer)
- $3,000
- $1,500
Correct answer: $2,500
GRM = sale price ÷ monthly rent, so monthly rent = $250,000 ÷ 100 = $2,500.
Question 4: Which type of loan requires the borrower to make interest-only payments during a set period, then pay the remaining balance in full?
- FHA loan
- Adjustable-rate mortgage
- Balloon mortgage (Correct answer)
- Reverse mortgage
Correct answer: Balloon mortgage
A balloon mortgage features lower initial payments but requires a large lump-sum payoff at the end of the term.
Question 5: An appraiser uses three comparable sales and makes a +$5,000 adjustment for a garage absent in comp #2. This adjustment is made because:
- The subject property lacks a garage
- Comp #2 is superior to the subject
- Comp #2 is inferior to the subject (Correct answer)
- The adjustment increases the comp's value
Correct answer: Comp #2 is inferior to the subject
When a comparable lacks a feature the subject has, a positive adjustment is added to bring the comp up to the subject's level.
Question 6: What is the difference between the APR and the interest rate on a mortgage?
- APR includes the interest rate plus fees and costs (Correct answer)
- APR is always lower than the interest rate
- APR applies only to adjustable loans
- Interest rate includes discount points; APR does not
Correct answer: APR includes the interest rate plus fees and costs
APR reflects the total cost of borrowing, including the stated interest rate, points, and certain fees, expressed as an annual rate.
Question 7: A property with a value of $400,000 requires a 20% down payment. How much must the buyer borrow?
- $80,000
- $320,000 (Correct answer)
- $300,000
- $360,000
Correct answer: $320,000
Down payment = $400,000 × 20% = $80,000; loan amount = $400,000 – $80,000 = $320,000.
Real Estate Sales Exam Financing and Valuation 3
What is the primary purpose of private mortgage insurance (PMI)?