Mortgage General Mortgage Knowledge 4 — Questions and Answers
Question 1: If a borrower has a 30-year fixed mortgage at 7% interest, what remains constant throughout the loan?
- The monthly payment amount and interest rate (Correct answer)
- Only the property tax portion
- Only the principal balance
- The escrow contribution only
Correct answer: The monthly payment amount and interest rate
With a 30-year fixed-rate mortgage, both the interest rate and the principal-and-interest portion of the monthly payment remain unchanged for the life of the loan.
Question 2: What is 'loan-to-value' (LTV) ratio?
- The ratio of down payment to total loan cost
- The percentage of the property's value that the loan represents (Correct answer)
- The ratio of monthly payment to home value
- The proportion of the loan amount to the borrower's annual income
Correct answer: The percentage of the property's value that the loan represents
LTV is calculated by dividing the loan amount by the property's appraised value; a lower LTV indicates more equity and less risk for the lender.
Question 3: Under the Real Estate Settlement Procedures Act (RESPA), what is prohibited?
- Charging an origination fee
- Paying kickbacks or referral fees between settlement service providers (Correct answer)
- Requiring title insurance
- Collecting escrow for property taxes
Correct answer: Paying kickbacks or referral fees between settlement service providers
RESPA prohibits kickbacks and unearned fees between settlement service providers (e.g., realtors, lenders, and title companies) that inflate consumer costs.
Question 4: What is a 'short sale' in real estate?
- Selling a home within one year of purchase
- Selling a home for less than the outstanding mortgage balance with lender approval (Correct answer)
- A quick cash sale that closes in under 30 days
- A sale where the buyer pays less than the listing price
Correct answer: Selling a home for less than the outstanding mortgage balance with lender approval
A short sale occurs when a homeowner sells the property for less than what is owed on the mortgage, requiring the lender's approval to accept the reduced payoff.
Question 5: What is an 'assumption' of a mortgage?
- A lender's estimate of future property taxes
- A buyer taking over the seller's existing mortgage terms and balance (Correct answer)
- The lender's assumption that the borrower will default
- Pre-qualifying for a loan before finding a property
Correct answer: A buyer taking over the seller's existing mortgage terms and balance
An assumable mortgage allows a buyer to take over the seller's existing loan, including its interest rate and remaining balance, subject to lender approval.
Question 6: Which federal law requires lenders to disclose the Annual Percentage Rate (APR) to borrowers?
- The Fair Housing Act
- The Community Reinvestment Act
- The Truth in Lending Act (TILA) (Correct answer)
- The Equal Credit Opportunity Act
Correct answer: The Truth in Lending Act (TILA)
TILA requires lenders to clearly disclose the APR and other loan terms to help borrowers understand the true cost of borrowing.
Question 7: What is a 'prepayment penalty' on a mortgage?
- A fee charged for making payments early or paying off the loan before its term ends (Correct answer)
- A penalty for missing a payment
- An additional charge for refinancing with the same lender
- A fee assessed when property values decline
Correct answer: A fee charged for making payments early or paying off the loan before its term ends
A prepayment penalty is a fee some lenders charge if the borrower pays off all or a substantial portion of the mortgage before the scheduled maturity date.
Mortgage General Mortgage Knowledge 4
If a borrower has a 30-year fixed mortgage at 7% interest, what remains constant throughout the loan?