PSI Real Estate Financing 3 — Questions and Answers
Question 1: A seller allows the buyer to take over payments on the existing mortgage without formally qualifying for a new loan. This is known as:
- Novation
- Assumption (Correct answer)
- Assignment
- Subordination
Correct answer: Assumption
Assumption occurs when a buyer takes over the seller's existing mortgage obligation, subject to lender approval in most cases.
Question 2: Which clause in a mortgage allows the lender to demand full repayment if the property is sold?
- Subordination clause
- Defeasance clause
- Due-on-sale clause (Correct answer)
- Prepayment clause
Correct answer: Due-on-sale clause
The due-on-sale (or alienation) clause requires the entire loan balance to be paid when the property is transferred to a new owner.
Question 3: A lender charges 2 discount points on a $300,000 loan. How much does the borrower pay in points?
- $3,000
- $6,000 (Correct answer)
- $9,000
- $12,000
Correct answer: $6,000
Each point equals 1% of the loan amount; 2 points × 1% × $300,000 = $6,000.
Question 4: In a deed of trust, who holds legal title to the property until the loan is repaid?
- The borrower (trustor)
- The lender (beneficiary)
- The trustee (Correct answer)
- The escrow company
Correct answer: The trustee
In a deed of trust, the trustee holds legal title on behalf of the lender until the borrower satisfies the debt.
Question 5: What type of loan features payments that start low and gradually increase over time to match anticipated income growth?
- Balloon mortgage
- Interest-only loan
- Graduated payment mortgage (GPM) (Correct answer)
- Reverse mortgage
Correct answer: Graduated payment mortgage (GPM)
A graduated payment mortgage (GPM) starts with lower payments that increase at set intervals, designed for borrowers who expect their income to rise.
Question 6: Which government-sponsored enterprise was created to provide a secondary market for conventional mortgages?
- FHA
- VA
- Fannie Mae (FNMA) (Correct answer)
- HUD
Correct answer: Fannie Mae (FNMA)
Fannie Mae (Federal National Mortgage Association) was created to purchase conventional mortgages and provide liquidity in the secondary mortgage market.
Question 7: A borrower's monthly gross income is $5,000. If their proposed housing payment is $1,400, what is their front-end (housing) ratio?
- 22%
- 24%
- 28% (Correct answer)
- 36%
Correct answer: 28%
Front-end ratio = housing payment ÷ gross income = $1,400 ÷ $5,000 = 28%.
PSI Real Estate Financing 3
A seller allows the buyer to take over payments on the existing mortgage without formally qualifying for a new loan.
This is known as: