N. Financing and Settlement

Question 1

The Baxters are looking at a $425,000 home near Camelback Mountain in Phoenix, Arizona. They have $90,000 in savings to use as a down payment. What loan type(s) would likely be the best option for them?

A. FHA
B. VA
C. FHA, VA, or conventional
D. Conventional

Answer 1

D. Conventional

A $90,000 down payment would be a little more than 20% down ($90,000 ÷ $425,000 = 0.212, or 21.2%). The Baxters should qualify for a conventional loan with that much to put down on the home.

Question 2

Charles is selling his property to Seth. Charles paid off his own mortgage on the property years ago, so he’s in a position to provide 100% financing for Seth’s purchase. Seth will make payments to Charles while Charles retains the property title. What’s this an example of?

A. Purchase money mortgage
B. Wrap-around mortgage
C. Land contract
D. A straight-term loan

Answer 2

C. Land contract

The seller retains the title in a land contract. When the loan balance is paid in full, the seller gives the buyer the title. While the loan is being repaid, Seth has equitable title. When the loan balance is paid in full, Charles will give Seth the full title to the property.

Question 3

When the deed of trust is used as the security instrument for a mortgage loan, which of the following is a true statement?

A. The bank gives title to the borrower while the loan is being paid off.
B. It is much easier for a lender to foreclose on a property.
C. A promissory note the borrower has signed gives the lender the right to seize and sell the house should the borrower default.
D. The borrower is considered the owner of the home.

Answer 3

B. It is much easier for a lender to foreclose on a property.

In a deed of trust situation, a third party (the trustee) typically holds title to the property until the loan is paid, so option A is incorrect. A promissory note is the borrower’s promise to repay the loan; the security instrument used determines the lender’s rights in case of borrower default, making option C incorrect. Option D states the same thing as option A; in a deed of trust situation, the borrower has equitable title to the property, but not legal ownership. Because the lender (or the trustee) holds title to a mortgaged property in a deed of trust situation, the lender can usually foreclose using the simpler non-judicial foreclosure process. Option B is correct.

When a deed of trust is used, title to the property is held by a third party (the trustee), generally making it possible for the lender to foreclose using a non-judicial process.

Question 4

If Acme Bank, a primary lender, wants to sell its loans on the secondary market, it would be easier for it to do so if its loans meet ______.

A. FDIC guidelines
B. Fannie Mae and Freddie Mac guidelines
C. FHA guidelines
D. VA guidelines

Answer 4

B. Fannie Mae and Freddie Mac guidelines

If Acme Bank meets Fannie Mae and Freddie Mac guidelines, its loans are conforming and are easier to sell on the secondary market.

Question 5

Sam’s not very good with planning for his expenses. He has a mortgage payment that includes his property taxes and property insurance, so he can knock those all out with his mortgage payment every month. Sam’s also happy to know that his monthly payment will remain the same for the life of his loan. What type of mortgage does Sam have?

A. Straight
B. Budget
C. Amortized
D. Adjustable

Answer 5

B. Budget

The type of mortgage Sam has includes principal, interest, tax, and insurance (PITI). Straight mortgages involve interest-only payments until the end of the loan term, when the entire principal balance comes due. Sam definitely doesn’t plan ahead enough for this, so option A is out. Amortized loans don’t necessarily include tax and insurance payments, so option C isn’t viable, either. An adjustable rate loan may include taxes and insurance, but the payment will fluctuate based on the current index rate it’s associated with, and we know that Sam’s payments will remain stable throughout the life of his loan, so option D is not correct. Sam’s mortgage will help him “budget” his monthly expenses by combining PITI into one payment. Option B is the correct answer.

Question 6

Upon examination of his mortgage document, Jared finds a clause stating he’ll owe additional interest if he pays off his loan within one year of the loan origination date. What type of penalty does this describe?

A. Alienation
B. Acceleration
C. Repayment
D. Defeasance

Answer 6

C. Repayment

The prepayment penalty clause puts the borrower on notice that if the loan is paid off before a specified period of time, the borrower may owe the lender additional interest.

Question 7

Morae’s lender tells her that her FHA loan has a maximum debt ratio of 43% and a maximum housing ratio of 33%. What does this mean?

A. The home Morae purchases can’t be valued at more than 43% of her gross income and she can’t finance more than 33% of the home’s value.
B. Morae’s down payment must equal the difference between the maximum housing ratio and the debt ratio (43% - 33%, or 10 %).
C. Morae’s monthly housing costs can’t exceed 33% of her gross monthly income and her total recurring monthly debt can’t exceed 43% of her gross monthly income.
D. Morae’s total recurring monthly debt can’t exceed 33% of her gross monthly income and her total housing costs can’t exceed 43% of her gross monthly income.

Answer 7

C. Morae’s monthly housing costs can’t exceed 33% of her gross monthly income and her total recurring monthly debt can’t exceed 43% of her gross monthly income.

Housing and debt ratios don’t restrict the purchase price related to gross income or the amount that can be financed, so option A is incorrect. A loan down payment is a specified percentage of a home’s purchase price depending on the loan type and the lender, so option B isn’t correct. The maximum housing ratio of 33% is the Morae’s total monthly housing costs (mortgage payment, insurance, taxes, and any homeowner association fees) divided by the monthly pre-tax income, and the maximum debt ratio of 43% is the Morae’s total recurring monthly debt, including proposed housing costs, divided by the monthly pre-tax income. Option D is incorrect because the ratios are flipped.

Question 8

Callum is working with Darby, who received an honorable discharge from the Air Force. Callum’s preparing to discuss options for down payment assistance with Darby. Which of the following would be Callum’s best resource for information for this specific client?

A. Department of Human Services
B. USDA Rural Development Program
C. Department of Veterans Affairs
D. Real Estate Assessment Center

Answer 8

C. Department of Veterans Affairs

Question 9

Jeffrey has accepted an offer of $299,000 for his house. The buyer is making a $50,000 down payment, and the buyer’s appraisal came in at $300,000. On what number will the buyer’s lender base the loan-to-value ratio?

A. $300,000
B. $299,000
C. $249,000
D. There’s no way to tell given the data provided.

Answer 9

B. $299,000

Lenders use the lesser of the sales price or appraised value.

Question 10

Bonnie has a mortgage on her investment property, but she allows the homeowners insurance to lapse. Which of these is a possible consequence of this action?

A. The lender can sue Bonnie.
B. Bonnie won’t be allowed to pay off her loan early.
C. The lender can place Bonnie’s loan in default.
D. Bonnie’s mortgage loan interest rate will increase.

Answer 10

C. The lender can place Bonnie’s loan in default.

Lenders have other means of forcing compliance with loan requirements, so they typically wouldn’t file a lawsuit, making option A incorrect. Lenders can’t prevent borrowers from paying off a loan early, even if a prepayment penalty is in effect, eliminating option B. Lenders don’t increase interest rates based on borrowers’ failure to meet the loan’s obligations, so option D is incorrect. Option C is correct. The lender can place Bonnie’s loan in default (saying she failed to live up to the conditions placed on the loan) and will likely institute a force-place insurance policy on the property to protect the lender’s interests.

The lender’s investment is at risk when homeowners insurance is allowed to lapse. A continued lapse can lead to default, because lenders don’t like it when their assets aren’t protected.

Question 11

Celia was obtaining a conventional loan, and she put $50,000 down as a down payment. Why might her lender also require her to obtain private mortgage insurance (PMI)?

A. PMI is triggered at the $50,000 down payment amount.
B. She has poor credit.
C. Her down payment of $50,000 isn’t at least 20% of her loan amount.
D. Her lender is a subprime lender.

Answer 11

C. Her down payment of $50,000 isn’t at least 20% of her loan amount.

When loan-to-value ratios exceed 80% on a conventional loan, lenders may require PMI.

Question 12

The purpose of the Truth in Lending Act (TILA) is to ______.

A. Require lenders to treat all applicants fairly, regardless of their religion, race, color, national origin, age, disability, or familial status
B. Require lenders to make disclosures that allow consumers to compare the costs of making a purchase using credit from different lenders, and to compare those with the cost of using cash
C. Require lenders to publicly disclose all data regarding credit applicants and the disposition of mortgage loan applications
D. Require lenders to treat others as they would treat themselves

Answer 12

B. Require lenders to make disclosures that allow consumers to compare the costs of making a purchase using credit from different lenders, and to compare those with the cost of using cash

The Truth in Lending Act impacts lending disclosures, not discrimination, so option A is incorrect. Lenders are prohibited from publicly disclosing credit applicant data and loan application disposition, so option C is out. While the golden rule is a nice thought, it doesn’t apply (by law) to lenders, so we can eliminate option D. Truth in lending laws require lenders to disclose credit costs and terms so consumers can make informed borrowing decisions, making option B the correct answer.

Question 13

Dawn and Steve are planning to purchase a home, but are wary of the commitment of a mortgage. However, they have no other way to make home ownership a reality, so they decide to educate themselves on the process for obtaining a mortgage loan. Where would you recommend they go for clear, consumer-oriented education on this topic?

A. The loan officer at their local bank
B. A class on finance at the community college
C. The CFPB website
D. A real estate brokerage

Answer 13

C. The CFPB website

Loan offers are in general a good source of information, but to get information directly from the source, this isn’t the best option. Let’s eliminate option A. A class on finance will provide a lot of information, but it’s unlikely to be specifically related to mortgage loans, so option B is out. A real estate brokerage can’t (and shouldn’t) provide specific information related to mortgage loans; their focus is on real estate, which eliminates option D. The CFPB (Consumer Financial Protection Bureau) website provides a tremendous amount of mortgage-related, consumer-oriented information.

Question 14

Lawrence is a buyer closing on a home for which he’s obtaining financing. Which document will give Lawrence an estimate of the costs he’ll likely pay at closing?

A. Closing Disclosure
B. Mortgage Disclosure
C. Buyer Worksheet
D. Loan Estimate

Answer 14

D. Loan Estimate

The Dodd-Frank Act requires that certain information be provided to borrowers during the lending process. At least three days before closing, lenders provide the Closing Disclosure, which details borrowers’ final, not estimated, closing costs, so option A is incorrect. There’s no official document titled “mortgage disclosure” or “buyer worksheet,” so options B and C are out. The Loan Estimate, provided to borrowers within three days of loan application, is an estimate of the buyers’ closing costs, making D the correct answer.

Question 15

What’s the relationship between the Loan Estimate and the Closing Disclosure?

A. Lenders issue the Loan Estimate to verify the figures detailed on the Closing Disclosure.
B. Lenders issue the Loan Estimate at application and Closing Disclosure figures should be similar to those on the Loan Estimate.
C. The Closing Disclosure outlines the lender’s responsibilities to the borrower.
D. Closing Disclosure figures should match Loan Estimate figures exactly.

Answer 15

B. Lenders issue the Loan Estimate at application and Closing Disclosure figures should be similar to those on the Loan Estimate.

The Loan Estimate is issued before the Closing Disclosure, so option A is incorrect. The Closing Disclosure provides loan information to the borrower, so option C is out. Because the Loan Estimate is an estimate of costs and the Closing Disclosure outlines the loan’s final costs, option D is incorrect. The Loan Estimate is issued within three days of the loan application, and the Closing Disclosure is issued at least three days before closing. The figures on these two forms should be close, but won’t match exactly, making option B correct.

Question 16

When Stacy’s clients ask her if she can recommend a mortgage broker, she promptly gives them the name of the best mortgage broker she knows, Gary Jones. Later, she always receives a check from Gary as payment for the referral. Is this legal or illegal under the Real Estate Settlement Procedures Act (RESPA)?

A. This is legal under RESPA because the referral fee didn’t involve granting credit.
B. This is legal under RESPA because Stacy has proven experience with the mortgage broker she referred, so it’s an honest transaction.
C. This is illegal under RESPA because it’s considered a kickback between settlement service providers.
D. This is illegal under RESPA because it’s considered a referral.

Answer 16

C. This is illegal under RESPA because it’s considered a kickback between settlement service providers.

RESPA prohibits licensees from providing or receiving any referral fee or kickback of any type to or from mortgage brokers, bankers, or lenders, no matter the licensee’s experience with the provider, so options A, B, and D are out. Since RESPA prohibits licensees from making any type of payment to a service provider that isn’t strictly for services provided

Question 17

Kara is representing Leo in the sale of his property. Zoe represents the buyers, Trish and Todd Melvin. The closing officer, Regina, has worked closely with all the parties to bring the transaction to a successful close. Which of these statements about commission rebates under RESPA regulations is true?

A. Kara can offer part of her commission as a rebate to Regina.
B. Kara can offer a rebate to her client, Leo, but not to the Melvins.
C. Kara is prohibited from offering any rebates.
D. Kara may offer a rebate to both Leo and the Melvins.

Answer 17

D. Kara may offer a rebate to both Leo and the Melvins

RESPA prohibits licensees from offering any kind of rebate or referral fee to third party service providers, so option A is out. RESPA does permit licensees to offer rebates (subject to state licensing laws, however) to both buyers and sellers, so options B and C are incorrect, and option D is the correct response.

Question 18

Gregory and Dianne are American citizens of Cuban origin, and when they’re denied a home loan, they suspect discrimination. Which of the following acts prohibits lender discrimination on the basis of the protected class of national origin?

A. Equal Credit Opportunity Act
B. Community Reinvestment Act
C. Consumer Credit Protection Act
D. Home Mortgage Discrimination Act

Answer 18

A. Equal Credit Opportunity Act

Only one act listed here specifically aims to prevent discrimination. The Community Reinvestment Act encourages lenders to give back to their communities, and that’s not what’s going on here, so option B is out. The Consumer Credit Protection Act provides general guidelines and policies for providing credit, so option C isn’t applicable here. Option D is a little tricky; while it sounds like it might fit the bill, it actually doesn’t exist. This leaves us with option A. Under the Equal Credit Opportunity Act (ECOA), it’s unlawful for any creditor to discriminate against an applicant on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.

Question 19

Ted is in foreclosure but has some equity in his property. An investor suggests that Ted enter into a sales contract with him for a substantially higher price than the investor would actually be paying. The investor pockets the cash and allows the house to be foreclosed on. What sort of scheme is this?

A. Equity skimming
B. Silent second
C. Straw buyer
D. Inflated appraisal

Answer 19

A. Equity skimming

A silent second is when a property buyer obtains a second mortgage without disclosing it to the original lender, often used when the buyer doesn’t have the cash necessary for the down payment. This eliminates option B. Using another person’s name and credit information to obtain a mortgage loan, with or without that person’s knowledge and permission, is referred to as a straw buyer. This eliminates option C. An inflated appraisal typically results from an appraiser artificially inflating the appraised value on a home, making option D incorrect. Option A, equity skimming, is correct. This type of fraud occurs when an investor receives title to a property and intentionally fails to make mortgage payments. The investor often rents the property out until it falls into foreclosure.

Question 20

Jamison, the seller, is closing on his property with Conrad, the buyer. Jamison paid the current year’s property taxes already. Is this a prepaid or accrued expense, and how will it be represented on the settlement statement?

A. The taxes are a prepaid expense and will appear as a buyer debit and a seller credit.
B. The taxes are an accrued expense and will appear as a buyer debit and a seller credit.
C. The taxes are a prepaid expense and will appear as a buyer credit and a seller debit.
D. The taxes are an accrued expense and will appear as a buyer credit and a seller debit.

Answer 20

A. The taxes are a prepaid expense and will appear as a buyer debit and a seller credit.

Prepaid expenses are those that have already been paid, usually by the seller. This eliminates options B and D. An amount in the buyer’s or seller’s debit column represents something that party owes. An amount in the buyer’s or seller’s credit column represents something that party has received or will receive at closing. The amount that Jamison is responsible for up to the closing date will appear as a seller credit since Jamison already paid it. This same amount will appear as a buyer debit

Question 21

A closing agent has several duties to perform both before and after the closing. Which of the following is a task the closing agent must complete during or after the closing?

A. Perform a title search
B. Pay off the existing loan
C. Prepare a closing statement
D. Obtain title insurance

Answer 21

B. Pay off the existing loan

When you see questions about closing, try to think of the order in which tasks would be completed. One of the first steps in the closing process is to perform a title search, because this gives the seller time during the sales process to clear up any title issues. Thus, option A is incorrect. The closing officer presents the closing statement to buyers and sellers at or before closing, so option C is incorrect. In most transactions, title insurance is the seller’s promise that clear title is being provided, so this occurs before closing, too, eliminating option D. Either during or right after the closing takes place, the closing officer will pay off the seller’s existing loan on the property with proceeds funded by the buyer and/or the buyer’s loan.