PSI Real Estate Financing MCQ 3 — Questions and Answers
Question 1: What is the primary purpose of private mortgage insurance (PMI) on a conventional loan?
- It protects the borrower in case of job loss
- It protects the lender against borrower default when LTV exceeds 80% (Correct answer)
- It covers the property for fire and natural disaster damage
- It guarantees the loan is repaid if the borrower dies
Correct answer: It protects the lender against borrower default when LTV exceeds 80%
PMI protects the lender—not the borrower—against financial loss if the borrower defaults when the loan-to-value ratio is above 80%.
Question 2: Under the Homeowners Protection Act, a borrower with a conventional loan can request cancellation of PMI when the LTV ratio reaches:
- 75%
- 78%
- 80% (Correct answer)
- 85%
Correct answer: 80%
Borrowers can request PMI cancellation once the LTV reaches 80% based on original value; lenders must automatically cancel it at 78%.
Question 3: A mortgage that allows the interest rate to adjust periodically based on a market index is called a(n):
- Graduated payment mortgage
- Adjustable-rate mortgage (ARM) (Correct answer)
- Reverse mortgage
- Wraparound mortgage
Correct answer: Adjustable-rate mortgage (ARM)
An adjustable-rate mortgage (ARM) has an interest rate that changes at set intervals based on a specified index plus a margin.
Question 4: Which type of mortgage is specifically designed for senior homeowners to convert home equity into cash without monthly payments?
- Home equity loan
- Reverse mortgage (Correct answer)
- Bridge loan
- Open-end mortgage
Correct answer: Reverse mortgage
A reverse mortgage allows homeowners aged 62 or older to borrow against home equity; repayment is deferred until the borrower sells, moves, or dies.
Question 5: In real estate financing, what does the term 'amortization' refer to?
- The process of increasing loan principal through negative cash flow
- The gradual repayment of a loan through scheduled principal and interest payments (Correct answer)
- The lender's method of setting the annual percentage rate
- A penalty assessed for early repayment of the loan
Correct answer: The gradual repayment of a loan through scheduled principal and interest payments
Amortization is the systematic reduction of a loan balance through periodic payments that cover both interest and principal.
Question 6: A lender quotes an interest rate of 6.5% but the annual percentage rate (APR) is 6.9%. What accounts for this difference?
- The APR reflects only the principal balance owed
- The APR includes the interest rate plus fees and costs associated with the loan (Correct answer)
- The APR is always lower than the stated interest rate
- The APR represents the lender's profit margin on the loan
Correct answer: The APR includes the interest rate plus fees and costs associated with the loan
APR expresses the true annual cost of borrowing by incorporating the interest rate plus loan fees (origination fees, discount points, etc.) into a single percentage.
Question 7: Which government-sponsored enterprise (GSE) purchases conforming conventional mortgages from lenders to provide liquidity to the secondary mortgage market?
- FHA
- VA
- Fannie Mae (Correct answer)
- HUD
Correct answer: Fannie Mae
Fannie Mae (FNMA) and Freddie Mac (FHLMC) are GSEs that buy conforming loans from lenders, replenishing lender funds and supporting the secondary market.
PSI Real Estate Financing MCQ 3
What is the primary purpose of private mortgage insurance (PMI) on a conventional loan?