Real Estate Sales Financing and Valuation Questions and Answers — Questions and Answers
Question 1: A buyer is purchasing a home for $400,000 and is making a down payment of $80,000. The lender requires the buyer to pay for private mortgage insurance (PMI). What is the loan-to-value (LTV) ratio, and why is PMI required?
- 75% LTV; PMI is required because the LTV is below 80%.
- 80% LTV; PMI is not required. (Correct answer)
- 20% LTV; PMI is required because the down payment is low.
- 85% LTV; PMI is required because the loan amount is high.
Correct answer: 80% LTV; PMI is not required.
The loan amount is the purchase price minus the down payment ($400,000 - $80,000 = $320,000). The LTV ratio is the loan amount divided by the property value ($320,000 / $400,000), which equals 0.80 or 80%. Private mortgage insurance (PMI) is typically required for conventional loans when the LTV is *above* 80%, meaning the down payment is less than 20%. In this case, the LTV is exactly 80%, so PMI would not be required.
Question 2: An appraiser is using the Sales Comparison Approach to determine the value of a subject property. A comparable property recently sold for $350,000 but has a swimming pool, which is valued at $20,000. The subject property does not have a pool. How should the appraiser adjust the comparable's sale price?
- Add $20,000 to the comparable's price.
- Subtract $10,000 from the subject property's value.
- Add $10,000 to the subject property's value.
- Subtract $20,000 from the comparable's price. (Correct answer)
Correct answer: Subtract $20,000 from the comparable's price.
When using the Sales Comparison Approach, adjustments are made to the sales price of the comparable properties to make them more like the subject property. Since the comparable property is superior to the subject property (it has a pool the subject lacks), the value of that feature ($20,000) must be subtracted from the comparable's sales price to estimate the value of the subject property.
Question 3: Which of the following is a primary feature of an FHA-insured loan that distinguishes it from a typical conventional loan?
- It is available only to veterans of the U.S. military.
- It allows for lower down payments and is more lenient on credit scores. (Correct answer)
- It does not require any form of mortgage insurance.
- It is directly funded by the Federal Housing Administration.
Correct answer: It allows for lower down payments and is more lenient on credit scores.
FHA loans, insured by the Federal Housing Administration, are designed to make homeownership more accessible. They typically allow for lower minimum down payments (as low as 3.5%) and have more flexible credit score requirements compared to conventional loans, which are not government-insured and usually require higher credit scores and down payments to secure the best terms.
Question 4: A homebuyer receives a Loan Estimate from a lender three days after submitting their application. This disclosure, which outlines the estimated costs and terms of the mortgage, is a requirement under which federal law?
- Real Estate Settlement Procedures Act (RESPA)
- Fair Housing Act (FHA)
- Truth in Lending Act (TILA) (Correct answer)
- Equal Credit Opportunity Act (ECOA)
Correct answer: Truth in Lending Act (TILA)
The Truth in Lending Act (TILA), implemented by Regulation Z, requires lenders to provide consumers with clear and standardized disclosures about the terms and costs of credit. The Loan Estimate form is a key disclosure under TILA that helps consumers understand the key features, costs, and risks of a mortgage loan for which they have applied.
Question 5: The process of paying off a loan in regular installments of principal and interest over a set period is known as:
- Depreciation
- Amortization (Correct answer)
- Appreciation
- Capitalization
Correct answer: Amortization
Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment consists of both principal and interest. In the early stages of the loan, a larger portion of the payment goes toward interest, and as the loan matures, more of the payment is applied to the principal balance.
Question 6: A borrower obtains a conventional loan with a 90% loan-to-value (LTV) ratio. The lender requires the borrower to obtain private mortgage insurance (PMI). The primary purpose of PMI is to protect the:
- Borrower from defaulting on the loan.
- Lender against loss if the borrower defaults. (Correct answer)
- Title company from claims against the property.
- Government from losses on insured loans.
Correct answer: Lender against loss if the borrower defaults.
Private Mortgage Insurance (PMI) is a type of insurance that protects the lender, not the borrower. It is typically required on conventional loans when the borrower's down payment is less than 20% (i.e., the LTV is greater than 80%). If the borrower defaults on the loan, PMI reimburses the lender for a portion of their financial loss.
Real Estate Sales Financing and Valuation Questions and Answers
A buyer is purchasing a home for $400,000 and is making a down payment of $80,000.
The lender requires the buyer to pay for private mortgage insurance (PMI).
What is the loan-to-value (LTV) ratio, and why is PMI required?