Texas Pre-License - Real Estate Finance Practice Exam Questions
Ramsey is considering an ARM with an initial rate of 5.13%. The margin is 2%, and the initial index rate is 3.13% The initial rate will adjust every four years. The lifetime cap is 3%. What is the highest rate Ramsey could pay?
5.13% plus the lifetime cap of 3% is 8.13%.
Which of these is NOT a requirement for obtaining a VA loan?
A VA loan can be made with no down payment.
Which of these scenarios best describes a contract for deed?
A contract for deed involves a buyer making payments to a seller for a set period of time, after which they will receive the deed. The seller, meanwhile, continues to pay their original lender.
What does a defeasance clause in a deed of trust do?
A defeasance clause in a deed of trust explains that title will transfer to the owner after the mortgage is paid off.
Which of these actions would a mortgage's due-on-sale clause prevent?
A due-on-sale clause prevents a buyer from assuming the mortgage of the seller.
Which of these shows the true cost of a loan and helps consumers compare loans "apples to apples" when they comparison shop?
APR and financing charge
Alberto wants to buy a home whose purchase price is $175,000. What is the least amount he could put down if he is taking out an FHA loan?
Borrowers can get FHA loans with 3.5% down. $175,000 x 0.035 = $6,125.
Eloise's loan is neither insured by the government nor guaranteed by the government. Which of these BEST describes the kind of loan she has?
Conventional loans are neither guaranteed nor insured by the government. Conforming loans CAN be conventional loans, but they must meet other criteria as well.
What is the main difference between credit unions and banks?
Credit unions require customers to be members, tend to put community before profits, but offer the same services as banks.
What is the difference between a 203(b) FHA loan and a 203(k) FHA loan?
FHA 203(b) loans are for buying a home, whereas 203(k) loans include money for renovations.
Which of the following institutions has 11 districts and the purpose to support residential mortgage lending and related community investment?
Federal Home Loan Bank System
What kind of lender is the buyer of a single-family home LEAST likely to have?
Foreign lenders tend to invest in large projects like commercial retail developments. They are unlikely to be interested in single-family homes.
Under what conditions could a lender seek a deficiency judgment?
If a borrower defaults, and the sale of the foreclosed home doesn't cover the loan and expenses of foreclosure, the lender can seek a deficiency judgment.
Which most accurately describes why a lender will require a tax escrow?
If they are paying the taxes, they can be sure they're paid accurately and on time, avoiding the possibility of a tax lien (remember that a property tax lien takes priority over the lender if the property goes into foreclosure).
Which of these statements most accurately describes the 203(b) FHA loan?
It is the most popular kind of FHA loan.
Which of the following is NOT true about FDIC?
It's NOT true that the FDIC only insures small, local depository institutions. The Federal Deposit Insurance Corporation insures all types of deposits held in all FDIC-insured depository institutions.
Your client, Jonathan, wants to sell his house. The property has an encumbrance on it. What should you tell Jonathan?
It's possible to sell the property as is, but if he can't clear the encumbrance, the home may be harder to market.
What is another name for the process of compound interest causing a loan debt to increase, despite a borrower making payments?
Negative amortization
Which of these actions would constitute actual notice?
No, recording a deed creates constructive notice. The answer is that Christine looking up a deed creates actual notice.
Ansel took out an 80-10-10 piggyback loan. The purchase price of the property was $275,000. How much did he put down?
No, the answer is $27,500. Remember that an 80-10-10 piggyback loan means Ansel is financing 80% of the purchase price with one loan (that likely has a lower interest rate), 10% of the property with a second loan (that likely has a higher interest rate), and putting 10% down. To find 10% of $275,000, we multiply it by 0.1: $275,000 x 0.1 = $27,500. You, instead, found 80% of $275,000.
A property is sold in a foreclosure sale. After paying the debt to the lender and fees, there is some profit left over. Which of these statements accurately reflects how that money will be treated?
No, the answer is that any profits would be taxed normally, and so if the property was a primary residence, the former homeowners would be eligible for the capital gains exemption.
What is one advantage of getting an FHA loan?
No, the minimum down payment with an FHA loan is 3.5% down. The answer is that FHA loans are easier to qualify for than other loans. This is a huge advantage for borrowers with lower down payments or other challenges.
In Texas, when a lender wants to foreclose on a property for default due to non-payment, the first step is to:
No, when a lender in Texas wants to foreclose on a property for default in payments, the first step is to send the borrower a notice that gives the borrower at least 20 days to cure the default.
How do REITs mitigate risk for investors?
REITs spread risk across multiple properties.
Why would a lender want to sell their loans on the secondary mortgage market?
Selling their loans allows them to get money faster.
Which of the following loan scenarios is regulated by the CFPB?
The CFPB regulates all consumer financial products (including mortgages), so Heather's loan to purchase an investment property would be regulated by the CFPB. Reverse mortgages, home equity lines of credit, and mobile home loans are exempted from CFPB requirements.
Which agency is tasked with creating easier-to-use mortgage disclosure forms, aiding in comparison shopping for borrowers, preventing surprises at the closing table, and increasing consumer understanding of how mortgages work?
The Consumer Financial Protection Bureau
Which of these buildings would be MOST likely to be appraised using the cost approach?
The answer is an art museum in Dallas. The cost approach is appropriate for specialized buildings like museums and churches.
What is a mortgage banker?
The correct answer is that a mortgage banker is an entity or person who originates and services mortgage loans using their own funds. They usually provide financing on behalf of large investors.
Which of the following is a difference between Fannie Mae and Freddie Mac?
The only difference between Fannie Mae and Freddie Mac is the sizes of financial institutions they deal with. Fannie Mae deals with larger commercial banks, whereas Freddie Mac works with smaller "thrift" banks.
What are the three types of REITs?
The three kinds of REITs are equity, mortgage, and hybrid.
What are some ways that a loan may be recast after a moratorium to make up the missed payments?
They can do that by increasing the monthly payments by a flat rate, allowing for a balloon payment, or extending the term of the loan
Rachel is applying for a loan, and her lender requires a total debt service ratio below 45%. Her housing expense is estimated to be $2,500, and her other long-term debt obligations are $300. What is the minimum monthly income she needs to qualify?
This is correct. There are a few ways to approach this problem. Use whichever one makes the most sense to you. You are looking for the number when multiplied by 45% will equal $2,500 + $300 (or $2,800). So, written as a math equation this would be: 0.45(x) = $2,800. Divide both sides by 0.45 to isolate x on its own. $2,800 ÷ 0.45 = $6,222.22. Another way to approach this problem - you know your monthly PITI payment, other debt, and desired payment-to-income ratio, so you can use this formula to solve for monthly income: (Monthly debt + Other debt) ÷ Debt-to-income ratio = Monthly income. Let's plug the numbers into our formula: $2,500 + $300 = $2,800. $2,800 ÷ 0.45 = $6,222.22
Which act is designed to promote the informed use of consumer credit?
Truth in Lending Act
What is it called when a lender allows a borrower in financial difficulty to not make principal and/or interest payments for a period of time?
When a lender allows a borrower in financial difficulty to not make principal and/or interest payments for a period of time, it is called a moratorium.
Without a secondary mortgage market, mortgages would be considered:
Without a secondary mortgage market, mortgages would be considered illiquid. Congress created a secondary market where mortgages could be bought and sold. This is known as mortgage liquidity (the relative difficulty of converting an asset to cash without loss of value).
Martin is buying his first home and has obtained a Mortgage Credit Certificate. What does this certificate mean for Martin when filing his taxes?
Yes, a Mortgage Credit Certificate means he may be eligible for a tax credit on his federal income taxes.
Which of the following would increase the amount the buyer pays at closing?
a debit to the buyer
What is a funding fee, in the context of VA loans?
a fee paid at closing to fund the VA loan program
When does a deficiency judgment come into play in a foreclosure?
a foreclosure sale does not cover the outstanding debt.
Lien theory states typically use:
a mortgage is typically used as the security instrument for financing a home purchase.
A lender makes a $100 million loan on a commercial property. Another investor purchases $20 million of the loan. What is this an example of?
a participation agreement
What is a back-end ratio?
a person's total monthly expenses divided by their monthly income.
Termite infestations, mold problems, a falling-in roof, lead-based paint, asbestos, and flood damage are all attributes of what kind of property, according to lender classifications?
a physically distressed property
In seller financing, what does the borrower/buyer sign to commit themselves to repaying the loan to the seller/lender?
a promissory note
Rudy is selling his home. He reaches an agreement with his buyer, Joey, that Rudy will transfer the deed to Joey and Joey will repay him with interest for the sale price of the home. Meanwhile, Rudy's original loan will remain in place. What situation is this describing?
a wraparound mortgage
What is an affirmative easement?
an easement that gives someone the right to use someone else's property or otherwise do something that could affect their neighbor.
The Federal Reserve recently raised the discount rate. What is a possible result from this decision?
an increase in the price of housing loans
What does a REMIC do?
assemble mortgages into pools and issue pass-through certificates, multi-class bonds, or other securities to investors in the secondary mortgage market.
What is the name of a professional whose job is to oversee the performance of and financial reporting on a distressed property purchased as an investment?
asset manager
What is a blanket mortgage?
blanket mortgages use more than one piece of collateral.
How does the VA pay for its loan guarantee program?
by charging a funding fee
How does the FHA pay for its loan guarantee program?
by charging borrowers MIP, or mortgage insurance premiums.
Which of these forms is a title company representative or real estate attorney required to prepare?
closing disclosure
Mortgages that meet Fannie Mae's standard are known as:
conforming loans
Which of these loan types is paid in installments called "draws"?
construction mortgage
Which of the following is a legal instrument that transfers a property's title to a third party (until the loan is paid off) as security for a loan?
deed of trust
Some FHA lenders have the authority to approve FHA loans in-house. This is called:
direct endorsement
The rate at which the Feds loan money to their member banks is called the:
discount rate
For a loan to fall under RESPA, it has to be what is called a(n):
federally related mortgage loan
Loans guaranteed by the Department of Veterans Affairs (VA) usually require a(n):
funding fee
Which of these reasons for foreclosure would allow a former homeowner to access a two-year statutory redemption period?
homeowners whose homes were foreclosed on for unpaid ad valorem taxes get a two-year statutory redemption period in Texas.
Which of these is a goal of the Consumer Financial Protection Bureau?
improve consumer understanding, prevent surprises at the closing table, and create easier-to-use mortgage disclosure forms.
In an amortized loan, interest is paid:
in arrears
In an ARM, to calculate the new rate at an adjustment period, what is added to the margin?
index rate
Sue sells lemonade for 25 cents per cup to save up for a new bike. Sue visits a bike shop, only to find the price of the bike she wants has gone up. The shop owner tells Sue his rent went up, so he has to charge more for bikes. Now Sue charges 75 cents per cup. This situation exemplifies:
inflation
What are the two primary categories of foreclosure?
judicial and nonjudicial
Which of the following are NOT eligible to be sold on the secondary mortgage market?
jumbo loans
According to RESPA, which of the following must lenders provide borrowers within the first three days of receiving a loan application?
lenders must provide a booklet entitled "Settlement Costs and You" that concerns settlement costs, a truth-in-lending statement that indicates total credit costs and the annual percentage rate (APR) of the loan, and a good-faith estimate of settlement costs.
What is the name of the payment a lender allows a borrower to make to temporarily freeze a rate at the time of a loan's approval?
lock-in fee
Which of the following is one of the federal government's monetary powers?
lowering the interest rate for member banks by a half percentage point is an example of the federal government's monetary powers.
Which of the following individuals works with a borrower and multiple lenders to find competitive loan terms?
mortgage broker
When Fannie Mae packages loans to be sold to investors, they are creating:
mortgage-backed securities.
Which of these actions could cause a loan to default?
not paying taxes
What type of title insurance protects a buyer in case of defects on the title?
owner's title insurance
What is a statutory redemption period?
period of time after the sale of a foreclosed property during which the foreclosed party may still recover the property.
Which of these loans would NOT be covered by RESPA?
purchases of vacant land
The Federal Housing Administration allows borrowers to:
put down a smaller down payment than conventional loans.
Stabilized conditions, home foreclosures, and low government interest rates are a sign of which phase of the real estate cycle?
recovery
Interest rates have dropped, and homeowner Charlie wants to take advantage of the new, lower rates to lower his monthly payment. What is the easiest way for him to do so?
refinance his home
Which of these loan types is eligible to be insured by the FHA?
rehabilitation loan
In general, when interest rates fall, property values:
rise
What is a dollar-by-dollar reduction in the appraisal value of a property?
tax exemption
What is meant when a promissory note is described as a negotiable instrument?
that it can be transferred
Which of the following is a government agency charged with insuring mortgages?
the Federal Housing Administration
Which form replaced the Good Faith Estimate and the Initial Truth in Lending?
the Loan Estimate form
What happens to a borrower's PMI when the equity in their property reaches 22%?
the PMI is automatically removed. The borrower doesn't have to be found credit-worthy.
In a lien theory state where mortgages are used as security instruments, what are the borrower and lender called?
the borrower is the mortgagor and the lender is the mortgagee.
What are buyer rebates?
the illegal practice of a buyer receiving money at closing without their lender's knowledge. Note that what makes it illegal is that it's being concealed from the lender that the buyer is getting this money.
In a title theory state, when a borrower defaults on their mortgage payments, who owns the property before the foreclosure sale?
the lender
Ricky's home loan came with two important documents: a promissory note and a security instrument. What do these two documents do?
the promissory note serves as evidence of the debt and documents the terms of the debt repayment and the security instrument identifies the property collateralizing (securing) the note.
In mortgage fraud, the mortgage lender is most commonly:
the victim
In addition to a senior citizen tax deduction, what other benefit is given to seniors to offset school taxes?
their school tax rate my be frozen
What is one reason a borrower in distress might choose to do a deed in lieu of foreclosure?
there will be no deficiency judgment so long as it is written into the agreement that it will be in full satisfaction of the debt.
How many parties are involved in a deed of trust?
three
What is the purpose of PMI?
to protect the lender if the borrower defaults
What does this formula solve for: (PITI + Long-term liabilities) ÷ Gross monthly income?
total debt service ratio
What is forbearance?
when the lender may legally foreclose due to default but chooses not to.
