Unit 12 Exam

Question 1

Match the following with the proper definition:

DTI
PITI
FHA
LTV
FICO

A)
Percentage of a homebuyer’s income used to repay debt

B)
Percentage of the property’s value that the lender is willing to lend

C)
Homeowner’s expenses

D)
Developed software to create credit scores

E)
Government-sponsored loan program

Answer 1

DTI = A
PITI = C
FHA = E
LTV = B
FICO = D

Question 2

The payments on all debts—normally including long-term debt such as car payments, student loans, or other mortgages—should not exceed 36% of monthly income.

Answer 2

True

Question 3

Funds in individual retirement accounts (IRAs) can never be used for a down payment on a home.

Answer 3

False

Question 4

Match the following with the correct definition:

Usury

Promissory note

Discount point

Loan origination fee

Prepayment penalty

A)
A borrower’s written promise to pay a debt

B)
A charge to increase the lender’s yield (rate of return) on its investment

C)
Charging interest in excess of the maximum rate allowed by law

D)
A charge by the lender to cover the expenses involved in generating the loan

E)
A fee assessed against the unearned portion of the interest for any payments made ahead of schedule

Answer 4

Usury = C

Promissory note = A

Discount point = B

Loan origination fee = D

Prepayment penalty = E

Question 5

Lenders may charge prepayment penalties on mortgage loans insured or guaranteed by the federal government.

Answer 5

False

Question 6

The promissory note is called the note or financing instrument

Answer 6

True

Question 7

Match the Following with either Mortgage or Deed of Trust:

A)
If the borrower defaults, the lender must go through a formal foreclosure proceeding to obtain legal title.

B)
The lender has the right to immediate possession of and rents from the property if the borrower defaults

C)
The borrower gives legal title to a designated individual and retains equitable title.

D)
The borrower retains both legal and equitable title.

Answer 7

Mortgage = A,D

Deed of Trust = B,C

Question 8

Match the Following with definitions: Acceleration Clause, Beneficiary, Assignment of Mortgage, Defeasance Clause, Trustor:

A)
Provision that requires lender to execute a satisfaction (release or discharge) when the note has been fully paid

B)
Lender under a deed of trust

C)
Clause that allows the note to be sold to a third party

D)
Statement that allows lender to declare the entire debt due and payable immediately

E)
Borrower under a deed of trust

Answer 8

Acceleration clause = D

Beneficiary = B

Assignment of mortgage = C

Defeasance clause = A

Trustor = E

Question 9

Under a deed of trust, the trustor retains equitable title.

Answer 9

True

Question 10

In a lien theory state, a mortgagor actually gives legal title to the mortgagee (or some other designated individual) and retains equitable title.

Answer 10

False.

That is Title Theory State where the Mortgagee or Lender obtains legal title

Question 11

Which mortgage loan appears to offer the best option for Molly?

A)
ARM

B)
Fixed-rate

Answer 11

Explanation
The answer is fixed-rate. The fixed-rate mortgage appears to be the better option. There is only a $72.90 monthly difference between the two loans, which is not enough to make the risk of a very high potential adjustment on the ARM worth it.

Question 12

What factor could make the adjustable-rate mortgage (ARM) the better option?

A)
The guaranteed increase in property value would help Molly sell the property after only one year.

B)
If the interest rate went up, the payment on the ARM would stay the same.

C)
If the interest rate went down, the payment on the ARM would go down as well.

D)
The guaranteed increase to 8% would make this loan a better choice.

Answer 12

Explanation
The answer is if the interest rate went down, the payment on the ARM would go down as well. Molly could also used the difference between the fixed-rate loan and the ARM to pay down principal on the ARM every month, the ARM’s loan term would be that much shorter.

Question 13

Match the Following, Straight, Balloon, ARM, GEM, Reverse mortgage, Amortized:

A)
Rapid-payoff mortgage

B)
Begins at one rate of interest and adjusts during loan term

C)
Final payment is larger than others

D)
For homeowners 62 or older to borrow against home equity

E)
Mortgagor pays the same amount each month with some going to principal and some to interest

F)
Interest-only loan

Answer 13

Straight = F

Balloon = C

ARM = B

GEM = A

Reverse mortgage = D

Amortized = E

Question 14

A balloon payment will be required in a partially amortized loan.

Answer 14

True

Question 15

A straight loan is also called a fully amortized loan.

Answer 15

False

Question 16

Match the following
Strict, Nonjudicial, Judicial with its definition:

A)
The security instrument contains a power-of-sale clause.

B)
A court-ordered deadline for payment of the defaulted debt passes with the debt unpaid, allowing the title to be awarded to the lender; no sale is required.

C)
The property may be ordered sold to the highest bidder following a court hearing.

Answer 16

Strict = B

Nonjudicial = A

Judicial = C

Question 17

Judicial foreclosure allows property to be sold without a court order after the mortgagee has given sufficient public notice.

Answer 17

False

Question 18

Nonjudicial foreclosure procedures may be used when the security instrument contains a power-of-sale clause.

Answer 18

True

Question 19

Match the following with either Basic Form or Broad Form of Homeowners Insurance:

Collapse of the building

Falling objects

Damage from smoke

Damage to plumbing

Damage by aircraft

Fire and lightning

Vandalism and theft

Answer 19

Collapse of the building = Broad

Falling objects = Broad

Damage from smoke = Basic

Damage to plumbing = Broad

Damage by aircraft = Basic

Fire and lightning = Basic

Vandalism and theft = Basic

Question 20

Match the following Congress, Army Corps of Engineers, Federal Emergency Management Agency with the correct definition:

A)
Administers the flood program

B)
Prepared maps identifying flood-prone areas

C)
Established the National Flood Insurance Program

Answer 20

Congress = C

Army Corps of Engineers = B

Federal Emergency Management Agency = A

Question 21

The Federal Emergency Management Agency (FEMA) administers the National Flood Insurance Program.

Answer 21

True

Question 22

The MOST common homeowners insurance policy is called a broad form.

Answer 22

False.

Question 23

Under the oldest kind of land contract, when does the vendor give the deed to the vendee?

A)
When the contract for deed is approved by the parties

B)
At the closing

C)
When the contract is fulfilled and all payments have been made

D)
After the first year’s real estate taxes are paid

Answer 23

Explanation
The answer is when the contract is fulfilled and all payments have been made. In the oldest form of land (installment) contract arrangement, the vendor (seller) does not have to give a deed to the vendee (purchaser) until the last payment has been made. A number of states have softened the harsh effect of the traditional land contract by providing for equitable title in the buyer after as little as one year of successfully making loan payments.

Question 24

An alienation clause is also known as

A)
a call clause.

B)
all of these.

C)
a due-on-sale clause.

D)
a resale clause.

Answer 24

Explanation
The answer is all of these. The lender may want to prevent a future purchaser of the property from being able to assume the loan, particularly if the original interest rate is low. For this reason, most lenders include an alienation clause (also known as a resale clause, due-on-sale clause, or call clause) in the note.

Question 25

What type of foreclosure is sometimes called friendly foreclosure?

A)
Strict foreclosure
B)
Deed in lieu of foreclosure
C)
Short sale
D)
Redemptive foreclosure

Answer 25

Explanation
The answer is deed in lieu of foreclosure. As an alternative to foreclosure, a lender may be willing to accept a deed in lieu of foreclosure from the borrower. This is sometimes known as a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit. The deed in lieu of foreclosure eliminates any equity that the homeowner may have had in the property.

Question 26

Charging more interest than is legally allowed is called

A)
steering.

B)
leveraging.

C)
commingling.

D)
usury.

Answer 26

Explanation

The answer is usury. Usury

Question 27

Who is entitled to a reverse mortgage?

A)
A homebuyer who cannot qualify for a regular loan

B)
The owner of an unencumbered home

C)
An investor who rents a home only to senior citizens

D)
A homeowner age 62 or older

Answer 27

Explanation

The answer is a homeowner age 62 or older. Reverse mortgages are available to homeowners age 62 or older.

Question 28

The mortgagee foreclosed on a property after the borrower defaulted on the loan payments. The unpaid balance of the loan at the time of the foreclosure sale was $140,000, but at the foreclosure sale, the house sold for only $129,000. If permitted by state law, what must the lender do to recover the $11,000 the borrower still owes?

A)
Sue for specific performance

B)
Sue for damages

C)
Seek a judgment by default

D)
Seek a deficiency judgment

Answer 28

Explanation
The answer is seek a deficiency judgment. A deficiency judgment entitles the mortgagee to a personal judgment against the borrower for the unpaid balance when a foreclosure sale does not produce enough cash to pay the loan balance in full after deducting expenses and accrued unpaid interest. It may also be obtained against any endorsers or guarantors of the note and against any owners of the mortgaged property who assumed the debt by written agreement.

Question 29

When a property is mortgaged, the owner must sign which two separate instruments?

A)
Promissory note and tax document

B)
Deed of trust and priority document

C)
Deed of trust and alienation clause

D)
Promissory note and mortgage/deed of trust

Answer 29

Explanation
The answer is promissory note and mortgage/deed of trust. The promissory note is the financing instrument and the mortgage or deed of trust is the security instrument.

Question 30

As directed by the Dodd-Frank Act, new mortgage disclosure rules were issued in 2014 by

A)
the Consumer Financial Protection Bureau.

B)
the Department of Veterans Affairs.

C)
the Federal Emergency Management Agency.

D)
the Department of Housing and Urban Development.

Answer 30

Explanation
The answer is the Consumer Financial Protection Bureau. CFPB issued the mortgage disclosure rules that took effect January 10, 2014.

Question 31

Discount points paid to a lender are used to

A)
cover the expenses in generating the loan.

B)
increase the lender’s yield (rate of return) on its investment and cover the expenses in generating the loan.

C)
increase the lender’s yield (rate of return) on its investment.

D)
provide a higher interest to the borrower.

Answer 31

Explanation
The answer is increase the lender’s yield (rate of return) on its investment. Discount points paid to a lender are used to increase the lender’s yield (rate of return) on its investment.

Question 32

After a foreclosure sale, what responsibility does the purchaser at the sale have for the mortgage and any junior liens?

A)
The purchaser has no responsibility because the purchaser receives the property title without the mortgage and junior liens.

B)
The purchaser pays off the mortgage after the sale, but the junior lienholders receive nothing.

C)
The purchaser must pay off both the mortgage and junior lienholders after the sale.

D)
The mortgage holder receives funds from the sale, but the purchaser must pay off the junior lienholders to obtain title.

Answer 32

Explanation
The answer is the purchaser has no responsibility because the purchaser receives the property title without the mortgage and junior liens. The proceeds from the sale are used to pay off the mortgage and junior lienholders. If the proceeds are insufficient, and state law permits, these creditors can seek a deficiency judgment against the original owner for the remaining debt. The purchaser at the sale is not involved unless the purchaser is a mortgage or lienholder.

Question 33

Which of the following is TRUE about a note?

A)
It is common law.

B)
It is a negotiable instrument.

C)
It is a nonnegotiable instrument.

D)
It is required by statute.

Answer 33

Explanation
The answer is it is a negotiable instrument. Promissory notes are always negotiable contracts between the lender and the borrower.

Question 34

Which of the following is TRUE about a note?

A)
It is common law.

B)
It is a negotiable instrument.

C)
It is a nonnegotiable instrument.

D)
It is required by statute.

Answer 34

Explanation
The answer is it is a negotiable instrument. Promissory notes are always negotiable contracts between the lender and the borrower.

Question 35

Which of the following is an example of a negotiable instrument?

A)
Statutory law

B)
Property taxes

C)
Subordination agreement

D)
Note

Answer 35

Explanation

The answer is note. A note is a negotiable instrument, such as a check or bank draft.

Question 36

A borrower defaulted on a mortgage loan, leaving an unpaid balance of $95,000. After receiving only $85,000 from the sale of the property, the lender filed for

A)
a lis pendens.

B)
a satisfaction.

C)
a release deed.

D)
a deficiency judgment.

Answer 36

Explanation
The answer is a deficiency judgement. A deficiency results when the foreclosed property does not bring enough money to fully repay the loan; the mortgagor may be entitled to a personal judgment against the borrower for the unpaid balance. Lis pendens gives notice that the property is the subject of legal action. A satisfaction indicates that the loan was fully repaid.

Question 37

The general types of foreclosure proceedings are

A)
judicial, nonjudicial, and strict repossession.

B)
judicial and nonjudicial.

C)
judgmental and nonjudgmental.

D)
judicial, nonjudicial, and strict foreclosure.

Answer 37

Explanation
The answer is judicial, nonjudicial, and strict foreclosure. Judicial foreclosure allows the property to be sold by court order after the mortgagee has given sufficient public notice.

Question 38

Most adjustable-rate mortgages (ARMs) have two types of rate caps called

A)
periodic and life of the loan.

B)
index and margin.

C)
discount and index.

D)
monthly and annual.

Answer 38

Explanation
The answer is periodic and life of the loan. A periodic rate cap limits the amount the rate may increase over a stated term, usually a year. A life-of-the-loan rate cap limits the amount the rate may increase over the entire life of the loan.

Question 39

If the lender wants to call the entire note due and payable if the borrower stops making payments, the security instrument must include

A)
an alienation clause.

B)
an acceleration clause.

C)
a prepayment clause.

D)
a defeasance clause.

Answer 39

Explanation
The answer is an acceleration clause. The acceleration clause permits the lender to declare the entire note due upon default by the borrower. The alienation clause is also called the due on sale clause, permitting the lender to declare the entire note due if the property is sold, and thus preventing a loan assumption.

Question 40

What does the loan origination fee cover?

A)
Broker’s commission

B)
Costs involved in generating the loan

C)
Attorney’s opinion of title

D)
Seller’s agreed upon repairs

Answer 40

Explanation
The answer is costs involved in generating the loan. Most lenders charge origination fees to cover the expenses involved in generating the loan. A loan origination fee is not prepaid interest; it is a charge that must be paid to the lender. The typical loan origination fee is 1% of the loan amount, although origination fees may range from 1 to 3 points (1 point equals 1% of the loan amount).

Question 41

In one state, a lender holds a lien on real property offered as collateral for a loan. The borrower retains both legal and equitable title to real property. If the borrower defaults on the loan, the lender must go through formal foreclosure proceedings to recover the debt. This state can be BEST characterized as what kind of state?

A)
Title theory

B)
Intermediate theory

C)
Lien theory

D)
Mortgage theory

Answer 41

Explanation
The answer is lien theory. This state is a lien theory state. The court is enlisted to order and oversee the mortgage foreclosure procedure.

Question 42

The note includes all of the following EXCEPT

A)
method of payment.

B)
time frame of payment.

C)
rate of interest.

D)
loan origination fee.

Answer 42

Explanation
The answer is loan origination fee. The note generally states the amount of the debt, the time and method of payment, and the rate of interest. The loan origination fee is to cover the expenses involved in generating the loan, which include the loan officer’s salary, paperwork, and the lender’s other costs of doing business.

Question 43

A deed in lieu of foreclosure is also known as

A)
rent to own.

B)
redemption foreclosure.

C)
opting out.

D)
friendly foreclosure.

Answer 43

Explanation
The answer is friendly foreclosure. A deed in lieu of foreclosure is also called a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit.

Question 44

A buyer is purchasing a condominium unit in a subdivision and obtains financing from a local bank. In this situation, which of the following BEST describes this buyer?

A)
Mortgagor

B)
Grantor

C)
Lessor

D)
Mortgagee

Answer 44

Explanation
The answer is mortgagor. What is implied is a “mortgage loan.” A lender (mortgagee) always receives a mortgage (document); the borrower (mortgagor) always gives one in order to get the loan.

Question 45

In mortgage lending, a borrower is required to pledge specific real property as security (collateral) for the loan in a practice called

A)
debt-collateralization.

B)
hypothecation.

C)
equitable collateralization.

D)
hypo-collateralization.

Answer 45

Explanation
The answer is hypothecation. In mortgage lending, a borrower is required to pledge specific real property as security (collateral) for the loan, a practice called hypothecation.

Question 46

How does an acceleration clause help lenders?

A)
It results in a deed in lieu of foreclosure rather than the default process.

B)
It sets out the provisions for the impound account.

C)
Lenders would rather foreclose on property than hold a long-term loan.

D)
Without the acceleration clause, lenders would have to sue the borrower for every overdue payment.

Answer 46

Explanation
The answer is without the acceleration clause, lenders would have to sue the borrower for every overdue payment. A lender’s purpose is to make long-term loans, not foreclose. The impound account is set up under a different provision of the loan.

Question 47

A home is purchased using a fixed-rate, fully amortized mortgage loan. Which statement regarding this mortgage is TRUE?

A)
Each mortgage payment amount is the same.
B)
The principal amount in each payment is greater than the interest amount.
C)
Each mortgage payment reduces the principal by the same amount.
D)
A balloon payment will be made at the end of the loan.

Answer 47

Explanation
The answer is each mortgage payment amount is the same. In a fully amortized loan, there will be no balloon payment. Each mortgage payment reduces the principal by a slightly different (increasing) amount, but each mortgage (principal plus interest) payment is the same.

Question 48

A loan that provides for the full payment of the principal over the life of the loan is

A)
an amortized loan.

B)
a balloon payment.

C)
a reverse mortgage.

D)
an indexed loan.

Answer 48

Explanation
The answer is an amortized loan. An amortized loan is paid off in regular periodic payments that include both principal and interest over a term of years.

Question 49

To institute a nonjudicial foreclosure, the trustee or mortgagee may be required to record a notice of

A)
default at the county recorder’s office.

B)
default at the state records office.

C)
collection foreclosure at the county recorder’s office.

D)
foreclosure at the state records office.

Answer 49

Explanation
The answer is default at the county recorder’s office. To institute a nonjudicial foreclosure, the trustee or mortgagee will send a notice of default to the borrower indicating the amount that must be paid to make the debt current, as well as the action that will be taken if the required payment is not made.

Question 50

A mortgage company charges borrowers a 1.5% loan origination fee. What will the mortgage company charge as a fee if the asking price of a house was $235,000, the sales price is $210,000, and the buyer is making a down payment of $50,000?

A)
$3,150

B)
$2,400

C)
$3,525

D)
$3,750

Answer 50

Explanation
The answer is $2,400. The buyer’s loan origination fee is $2,400: ($210,000 – $50,000) × 1.5% = $2,400. The asking price is not relevant to this problem.

Question 51

A mortgage company charges borrowers a 1.5% loan origination fee. What will the mortgage company charge as a fee if the asking price of a house was $235,000, the sales price is $210,000, and the buyer is making a down payment of $50,000?

A)
$3,150

B)
$2,400

C)
$3,525

D)
$3,750

Answer 51

Explanation
The answer is $2,400. The buyer’s loan origination fee is $2,400: ($210,000 – $50,000) × 1.5% = $2,400. The asking price is not relevant to this problem.

Question 52

The difference between the interest rate that the lender charges and what the investment demands can be made up by charging

A)
discount points.

B)
loan origination fees.

C)
satisfaction fees.

D)
underwriting fees.

Answer 52

Explanation
The answer is discount points. The lender can increase its yield on the investment by charging interest upfront in the form of discount points. Loan origination fees are charged to cover the cost of making the loan. The satisfaction indicates that the loan has been fully repaid.

Question 53

A $2,400 term loan has a 10% annual interest rate. What is the monthly payment?

A)
$32

B)
$20

C)
$24

D)
$12

Answer 53

Explanation
The answer is $20. A term loan is interest only.

$2,400 × 0.10 = $240

240 ÷ 12 = $20 per month

Question 54

The amount of the loan as a percentage of the purchase price of a property is known as

A)
loan-to-value ratio.

B)
acquisition cost.

C)
mortgage insurance.

D)
interest.

Answer 54

Explanation
The answer is loan-to-value ratio. The lower the LTV (the greater the down payment), the less risk is assumed by the lender.

Question 55

The amount of the loan as a percentage of the purchase price of a property is known as

A)

loan-to-value ratio.

B)
acquisition cost.

C)
mortgage insurance.

D)
interest.

Answer 55

Explanation
The answer is loan-to-value ratio. The lower the LTV (the greater the down payment), the less risk is assumed by the lender.

Question 56

When a deed of trust is the security instrument, which party usually chooses the trustee?

A)
The devisee

B)
The county government

C)
The borrower

D)
The lender

Answer 56

Explanation
The answer is the lender. The lender usually also reserves the right to substitute trustees in the event of death or dismissal.

Question 57

The database of consumer claims history available to insurance companies is the

A)
Insurance Policy Information Exchange.
B)
Policy Information Database.
C)
Comprehensive Loss Underwriting Exchange.
D)
Consumer Claims History Database.

Answer 57

Explanation
The answer is Comprehensive Loss Underwriting Exchange. This database, referred to as CLUE, gives insurance companies information that assists in the underwriting and rating process.

Question 58

Lenders charge a loan origination fee to

A)
cover the expenses involved in generating the loan.

B)
guard against losses in the event of a short sale.

C)
guard against charges of usury.

D)
cover the losses involved if the borrower repays the loan before the end of the loan term.

Answer 58

Explanation
The answer is cover the expenses involved in generating the loan. The processing of a mortgage application is called loan origination. When a home loan is originated, a loan origination fee is charged by most lenders to cover the expenses involved in generating the loan.

Question 59

A lender uses which of the following to make a lending decision for a mortgage loan?

A)
Borrower’s debt-to-income ratio

B)
Borrower’s credit score

C)
All of these

D)
Borrower’s credit report

Answer 59

Explanation
The answer is all of these. To determine what a prospective buyer can afford, most home mortgage lenders use a computerized underwriting system that considers various factors, including the loan applicant’s credit report and credit score. Lenders also generally look at a loan applicant’s percentage of debt to income (DTI).

Question 60

Lenders usually look at a loan applicant’s percentage of

A)
principal, interest, taxes, and insurance.

B)
income to income potential.

C)
principal to interest.

D)
debt to income.

Answer 60

Explanation
The answer is debt to income. A homebuyer may be expected to incur a monthly housing payment of no more than 28% of the borrower’s gross monthly income, with monthly payments on all debts no exceeding 36% of gross monthly income.

Question 61

A homeowner’s equity in the property is

A)
constant throughout the period of home ownership.

B)
always an increasing percentage of the property’s market value.

C)
a declining percentage of the property’s market value as mortgage debt declines.

D)
the difference between the property’s market value and the amount still owed on it.

Answer 61

Explanation
The answer is the difference between the property’s market value and the amount still owed on it. Equity in a property can be borrowed against in future or realized on a sale of the property.

Question 62

A credit score can range from

A)
300 to 850.

B)
500 to 1,000.

C)
250 to 550.

D)
100 to 500.

Answer 62

Explanation
The answer is 300 to 850. Lenders will require a minimum credit score for a loan, often depending on whether or not the borrower is making use of a government-sponsored program, or the lender will sell the loan after initiating it.

Question 63

The borrower of the note is called

A)
note holder.

B)
payor.

C)
mortgagor.

D)
payee.

Answer 63

Explanation

The answer is payor. The borrower is known as the maker or payor in the promissory note.

Question 64

In one type of financing, a third party holds legal title to real property offered as collateral for a loan, and the borrower retains the rights of possession and use. If the borrower defaults, the lender is entitled to ask that the third party sell the property. What type of security instrument has been used in this case?

A)
Deed of trust

B)
Mortgage with a power of sale

C)
Installment sales contract

D)
Promissory note

Answer 64

Explanation
The answer is deed of trust. With a deed of trust, the borrower/property owner deeds the property to a third party, called the trustee, to hold on behalf of the lender, called the beneficiary. If the owner (the trustor) defaults in payment of the underlying debt, the beneficiary can notify the trustee to begin foreclosure proceedings.

Question 65

One way in which a homeowner can set aside funds for future real estate taxes and property insurance premiums is to make regular payments into

A)
a savings account set up by the lender.

B)
an escrow account established by the insurance company.

C)
a fund established at the office of the tax assessor.

D)
an impound account set up by the lender.

Answer 65

Explanation
The answer is an impound account set up by the lender. The lender may require that the borrower provide a reserve fund to meet future real estate taxes and property insurance premiums.

Question 66

In a deed of trust, the borrower gives

A)
equitable title to the trustee.
B)
marketable title to the county assessor.
C)
legal title to the trustee.
D)
vested title to the county assessor.

Answer 66

Explanation

The answer is legal title to the trustee. With a deed of trust, the borrower gives legal title to the trustee.

Question 67

A basic form homeowners insurance policy provides property coverage against

A)
fire, lightning, and smoke damage.

B)
floods.

C)
falling objects.

D)
damage due to the weight of ice, snow, or sleet.

Answer 67

Explanation
The answer is fire, lightning, and smoke damage. A basic form policy covers fire, lightning, and smoke damage, among other hazards. A broad-form policy generally covers the hazards of falling objects and damage due to the weight of ice, snow, or sleet. Flood damage is covered under a separate flood insurance policy.

Question 68

The mortgage disclosure rules issued by the Consumer Financial Protection Bureau, which took effect in 2014, require a mortgage lender to do all of the following EXCEPT

A)
require maximum insurance coverage by the borrower.
B)
respond quickly when a borrower asks about paying off the loan.
C)
quickly resolve complaints, generally within 30 to 45 days.
D)
give two months’ warning if an adjustable-rate mortgage will have a rate change.

Answer 68

Explanation
The answer is require maximum insurance coverage by the borrower. The lender may not charge for insurance the borrower doesn’t need or over-charge for insurance the lender provides if the borrower fails to do so.

Question 69

Parties to lending agreements are referred to by different terms. Which of these refers to the same party?

A)
Borrower = beneficiary
B)
Trustor = mortgagee
C)
Trustee = borrower
D)
Borrower = mortgagor

Answer 69

Explanation
The answer is borrow = mortgagor. The person who makes the payments to repay the loan is called the borrower. The person who gave the property as security is called the mortgagor. Both are the same person.

Question 70

A building was sold for $715,000. Earnest money in the amount of $65,000 was deposited in escrow, and the buyer obtained a new loan for the balance of the purchase price. The lender charged two discount points on the loan. What was the total amount of cash used by the buyer for this purchase?

A)
$78,000
B)
$73,000
C)
$23,300
D)
$75,000

Answer 70

Explanation
The answer is $78,000. $715,000 sales price – $65,000 earnest money = $650,000 loan balance;

$650,000 × 2% (0.02) discount points = $13,000; $65,000 earnest money + $13,000 discount points =

$78,000 cash used by buyer.

Question 71

A junior lien may become first in priority if the original lender agrees to execute

A)
a subordination agreement.
B)
a second mortgage agreement.
C)
a deed of trust.
D)
a call clause.

Answer 71

Explanation
The answer is a subordination agreement. If the original (first mortgage) lender signs a subordination agreement, another loan made more recently (later) may be allowed to take first place; the original loan then drops to second place in priority.

Question 72

A property sold for $500,000 with a 90% loan, which has a 2% loan origination fee. The cost of the origination fee is

A)
$9,000.
B)
$450.
C)
$4,500.
D)
$900.

Answer 72

Explanation

The answer is $9,000. $500,000 × 0.90 = $450,000 (loan) × 0.02 = $9,000.

Question 73

In a loan that requires periodic payments that do not fully amortize the loan balance by the final payment, what term BEST describes the final payment?

A)
Balloon
B)
Adjustment
C)
Acceleration
D)
Variable

Answer 73

Explanation

The answer is balloon. When the payments made have not paid off the debt, the last payment is a balloon payment.

Question 74

In which type of loan is the loan amount divided into two parts to be paid off separately by periodic interest payments followed by payment of the principal in full at the end of the term?

A)
Amortized
B)
ARM
C)
Balloon
D)
Straight

Answer 74

Explanation
The answer is straight. In a straight or term loan, the borrower makes periodic payments of interest only. At the end of the loan term, the entire original principal debt must be paid.

Question 75

This month, a borrower made the last payment on a mortgage loan. The lender must execute

A)
a promissory note.

B)
a release deed.

C)
a possessory note.

D)
a satisfaction of mortgage.

Answer 75

Explanation
The answer is a satisfaction of mortgage. The promissory note shows that a loan was made. The satisfaction indicates that the loan was fully repaid. Satisfaction of mortgage is also sometimes called a release, but not a release deed.

Question 76

In a PITI loan payment, the funds collected to pay for the taxes and insurance that are held in the lender’s reserve or escrow account belong to

A)
the closing agent.
B)
the broker.
C)
the borrower.
D)
the lender.

Answer 76

Explanation

The answer is the borrower. The lender is holding the money in a reserve and will pay the bills for the borrower.

Question 77

Another name for a promissory note is

A)
capitalization.
B)
hypothecation.
C)
obligatory instrument.
D)
financing instrument.

Answer 77

Explanation
The answer is financing instrument. The promissory note is called the note or financing instrument that is the borrower’s personal promise to repay a debt.

Question 78

What is a major disadvantage to lenders of accepting a deed in lieu of foreclosure?

A)
The lender gains rights to private mortgage insurance.
B)
It is an adverse element in the borrower’s credit history.
C)
The lender takes the real estate subject to all junior liens.
D)
The process is lengthy and involves a lawsuit.

Answer 78

Explanation
The answer is the lender takes the real estate subject to all junior liens. The lender loses rights to FHA or private mortgage insurance or VA guarantees. The process is called friendly foreclosure, because a lawsuit is not involved. It is an adverse element for the borrower, but that does not affect the lender.

Question 79

After a foreclosure sale, the borrower who has defaulted on the loan may seek to pay off the mortgage debt plus any accrued interest and costs under what right?

A)
Defeasance
B)
Statutory redemption
C)
Usury
D)
Equitable redemption

Answer 79

Explanation
The answer is statutory redemption. The redemption of property by paying off the mortgage debt plus interest and other charges after foreclosure is the right of statutory redemption. It is only possible in states that have statutes permitting it. All states, however, permit redemption before the foreclosure sale; this right is the right of equitable redemption.

Question 80

A homebuyer has a mortgage that provides for increasing payments over the life of the loan so that it can be paid off earlier than would be the case with a regular amortized loan. The homebuyer has

A)
a reverse mortgage.
B)
a mortgage with power of sale.
C)
a balloon payment loan.
D)
a growing-equity mortgage.

Answer 80

Explanation
The answer is a growing-equity mortgage. The growing-equity mortgage uses a fixed interest rate, but payments of principal are increased according to an index or schedule. The total payment thus increases, and the loan is paid off more quickly.

Question 81

A prospective buyer needs to borrow money to buy a house. The buyer applies for and obtains a real estate loan from a mortgage company. Then the buyer signs a note and a mortgage. In this example, the mortgage company is

A)
the beneficiary.
B)
the vendor.
C)
the mortgagor.
D)
the mortgagee.
.

Answer 81

Explanation

The answer is the mortgagee. Because it receives the mortgage document, the mortgage company is the mortgagee

Question 82

One afternoon, a client calls a real estate broker. “My lender just told me that my note and mortgage is a negotiable instrument,” says the client. “What does that mean?” Which of these would be the broker’s BEST response?

A)
“Oh no! That means the mortgage can’t be assumed by the next person you sell to.”
B)
“Don’t worry. That means the mortgage can be sold by the lender, but you’re not affected.”
C)
“Uh-oh! That means we have to go back to the sellers and ask them to pay the points.”
D)
“That’s great! It means the lender is willing to negotiate on the interest rate.”

Answer 82

Explanation
The answer is “Don’t worry. That means the mortgage can be sold by the lender, but you’re not affected.” Negotiable instruments are transferable. A note and mortgage will often be sold on the secondary market.

Question 83

A buyer is purchasing a condominium unit in a subdivision and obtains financing from a local bank. In this situation, which of the following BEST describes this buyer?

A)
Mortgagee
B)
Grantor
C)
Mortgagor
D)
Lessor

Answer 83

Explanation
The answer is mortgagor. What is implied is a “mortgage loan.” A lender (mortgagee) always receives a mortgage (document); the borrower (mortgagor) always gives one in order to get the loan.

Question 84

A state in which a mortgage that can be foreclosed is the preferred method of security for a home loan is called a

A)
title theory state.
B)
lien theory state.
C)
statutory title state.
D)
equitable title state.

Answer 84

Explanation
The answer is lien theory state. A mortgage creates a lien on the property used as collateral for a debt. A state in which a deed of trust is the preferred method of security interest for a home loan is called a title theory state.

Question 85

The Consumer Financial Protection Bureau requires mortgage lenders to

A)
allow a borrower to seek review of a decision about a loan workout request.
B)
resolve complaints within 90 business days.
C)
give a borrower three months’ warning if an adjustable-rate mortgage will have a rate change.
D)
refrain from contacting a borrower who is having trouble making mortgage payments in order to avoid a charge of harassment.

Answer 85

Explanation
The answer is allow a borrower to seek review of a decision about a loan workout request. The rules of the Consumer Financial Protection Bureau allow a borrower to seek review of a decision about a loan workout request and require that the lender quickly resolve complaints, generally within 30 to 45 business days; give the borrower two months’ warning if an adjustable-rate mortgage will have a rate change; and work with the borrower, if the borrower is having trouble paying the mortgage, including contacting the borrower to help.

Question 86

What type of law limits the interest rate that is allowed to be charged?

A)
Contract law
B)
Trustee law
C)
The statute of frauds
D)
A usury law

Answer 86

Explanation
The answer is a usury law. A law that set limits on rates of interest that may be charged is a usury law. Usury is charging a higher interest rate than the law allows for a specific kind of loan. Federal law currently exempts federally related residential first mortgage loans from state usury laws.