Sell My House House Buying 3 — Questions and Answers
Question 1: What is the debt-to-income (DTI) ratio, and why do lenders care about it?
- The ratio of home price to income, used to set listing price
- Monthly debt payments divided by gross income, used to assess repayment ability (Correct answer)
- The ratio of down payment to loan amount
- Annual taxes divided by income, used to determine escrow
Correct answer: Monthly debt payments divided by gross income, used to assess repayment ability
DTI compares monthly debt obligations to gross monthly income; most conventional lenders prefer a DTI below 43%.
Question 2: In a bidding war, what does an 'escalation clause' allow a buyer to do?
- Increase the down payment automatically if rates rise
- Automatically raise their offer up to a set maximum if competing offers come in (Correct answer)
- Extend the closing date if needed
- Cancel the deal without penalty if another buyer wins
Correct answer: Automatically raise their offer up to a set maximum if competing offers come in
An escalation clause automatically increases a buyer's offer by a set increment above competing offers, up to a maximum cap.
Question 3: What is the role of escrow in a home purchase?
- A type of home inspection focusing on the foundation
- A neutral third party that holds funds and documents until closing conditions are met (Correct answer)
- The legal process of transferring property ownership
- An insurance policy for the buyer's down payment
Correct answer: A neutral third party that holds funds and documents until closing conditions are met
Escrow is managed by a neutral third party (often a title or escrow company) that holds earnest money and documents until all conditions are fulfilled.
Question 4: What typically happens to the earnest money if the seller backs out of an accepted deal?
- The buyer loses it
- The buyer gets it back and may sue for damages (Correct answer)
- It is split evenly between buyer and seller
- It is forfeited to the listing agent
Correct answer: The buyer gets it back and may sue for damages
If the seller wrongfully backs out, the buyer is entitled to a refund of earnest money and may have grounds to sue for specific performance or damages.
Question 5: What is 'points' in the context of a mortgage?
- A credit score metric used during underwriting
- Fees paid upfront to the lender to lower the interest rate (Correct answer)
- The number of years left on a fixed-rate loan
- Penalties charged for paying off a loan early
Correct answer: Fees paid upfront to the lender to lower the interest rate
Mortgage points (also called discount points) are prepaid interest — each point equals 1% of the loan amount and typically lowers the rate by 0.25%.
Question 6: Which of the following is NOT typically included in a standard homeowners insurance policy?
- Fire damage
- Theft
- Flood damage (Correct answer)
- Wind damage
Correct answer: Flood damage
Standard homeowners insurance does not cover flood damage; buyers in flood-prone areas must purchase a separate flood insurance policy.
Question 7: What is the purpose of a 'rate lock' when securing a mortgage?
- It prevents the borrower from refinancing for a set period
- It guarantees the interest rate will not change during a specified period before closing (Correct answer)
- It locks the home price so the seller cannot renegotiate
- It restricts the lender from changing loan terms after pre-approval
Correct answer: It guarantees the interest rate will not change during a specified period before closing
A rate lock protects the borrower from rising interest rates between the loan application and closing, typically for 30 to 60 days.
Sell My House House Buying 3
What is the debt-to-income (DTI) ratio, and why do lenders care about it?