PSI Real Estate Financing MCQ 2 — Questions and Answers
Question 1: What is the purpose of a 'due-on-sale' clause in a mortgage?
- It reduces the interest rate when the property is sold
- It requires the full loan balance to be paid when ownership transfers (Correct answer)
- It allows the buyer to assume the loan without lender approval
- It extends the loan term upon sale of the property
Correct answer: It requires the full loan balance to be paid when ownership transfers
A due-on-sale (acceleration) clause requires the borrower to repay the entire outstanding balance if the property is transferred or sold.
Question 2: A borrower takes out a home equity line of credit (HELOC). Which statement BEST describes a HELOC?
- A fixed lump-sum loan secured by home equity
- A revolving credit line secured by the borrower's home equity (Correct answer)
- An unsecured personal line of credit tied to home value
- A government-backed second mortgage program
Correct answer: A revolving credit line secured by the borrower's home equity
A HELOC is a revolving line of credit secured by the equity in a home, allowing borrowers to draw and repay funds as needed.
Question 3: Which federal law requires lenders to give borrowers a Loan Estimate within three business days of receiving a mortgage application?
- Truth in Lending Act (TILA)
- Real Estate Settlement Procedures Act (RESPA)
- TILA-RESPA Integrated Disclosure (TRID) rule (Correct answer)
- Equal Credit Opportunity Act (ECOA)
Correct answer: TILA-RESPA Integrated Disclosure (TRID) rule
The TRID rule, effective October 2015, requires lenders to provide a Loan Estimate within three business days of a completed loan application.
Question 4: What does a 'buydown' accomplish in real estate financing?
- It permanently eliminates mortgage insurance premiums
- It temporarily or permanently reduces the mortgage interest rate by paying points upfront (Correct answer)
- It increases the loan-to-value ratio to reduce down payment
- It defers principal payments for the first five years
Correct answer: It temporarily or permanently reduces the mortgage interest rate by paying points upfront
A buydown uses upfront points paid by the buyer, seller, or builder to reduce the borrower's interest rate temporarily (2-1, 3-2-1) or permanently.
Question 5: In a balloon mortgage, what happens at the end of the loan term if the borrower has not refinanced?
- The interest rate converts to a fixed rate for the remaining balance
- The entire remaining principal balance becomes due immediately (Correct answer)
- The lender extends the term automatically for another period
- The monthly payments increase to fully amortize the remaining balance
Correct answer: The entire remaining principal balance becomes due immediately
A balloon mortgage requires a large lump-sum payment of the remaining principal at the end of the term, regardless of how little has been paid down.
Question 6: Which ratio do conventional lenders most commonly use to determine the maximum allowable housing payment relative to gross monthly income?
- Back-end ratio not exceeding 28%
- Front-end ratio not exceeding 28% (Correct answer)
- Debt-to-asset ratio not exceeding 36%
- Loan-to-value ratio not exceeding 80%
Correct answer: Front-end ratio not exceeding 28%
The front-end (housing) ratio compares PITI to gross monthly income; conventional guidelines typically cap it at 28%.
Question 7: A seller agrees to carry back a second mortgage for 10% of the purchase price to help the buyer close the deal. This arrangement is called:
- A bridge loan
- Seller financing or a purchase money mortgage (Correct answer)
- A blanket mortgage
- A participation mortgage
Correct answer: Seller financing or a purchase money mortgage
When the seller extends credit to the buyer as part of the sale, it is seller financing (also called a purchase money mortgage), reducing the buyer's need for outside financing.
PSI Real Estate Financing MCQ 2
What is the purpose of a 'due-on-sale' clause in a mortgage?