PSI Real Estate Financing MCQ 4 â Questions and Answers
Question 1: What is a 'conforming loan' in the context of conventional mortgage financing?
- A loan that conforms to FHA underwriting guidelines
- A loan that meets Fannie Mae or Freddie Mac's purchase criteria including loan limits (Correct answer)
- A loan with a fixed interest rate for the entire term
- A loan insured by a private mortgage insurer
Correct answer: A loan that meets Fannie Mae or Freddie Mac's purchase criteria including loan limits
A conforming loan meets the underwriting standards and loan limits set by Fannie Mae and Freddie Mac, making it eligible for purchase on the secondary market.
Question 2: Which of the following BEST describes a 'bridge loan' in real estate?
- A long-term loan used to finance commercial construction projects
- A short-term loan used to bridge the gap between buying a new home and selling the existing one (Correct answer)
- A government-subsidized loan for first-time homebuyers
- A loan that bridges the difference between appraised value and purchase price
Correct answer: A short-term loan used to bridge the gap between buying a new home and selling the existing one
A bridge loan is short-term financing that allows a borrower to purchase a new property before their current property is sold.
Question 3: A borrower has a gross monthly income of $5,000 and total monthly debt obligations of $1,900 including a proposed PITI of $1,200. What is the back-end debt-to-income ratio?
- 24%
- 38% (Correct answer)
- 40%
- 42%
Correct answer: 38%
The back-end DTI divides total monthly debts ($1,900) by gross monthly income ($5,000) = 38%.
Question 4: Under a VA loan, what is the purpose of the VA 'funding fee'?
- It pays the lender's origination costs
- It funds the VA loan guaranty program and allows veterans to obtain loans with no down payment (Correct answer)
- It replaces the need for a title insurance policy
- It covers the cost of the VA property appraisal
Correct answer: It funds the VA loan guaranty program and allows veterans to obtain loans with no down payment
The VA funding fee is a one-time charge that helps sustain the VA loan program, allowing eligible veterans to obtain no-down-payment mortgages without ongoing mortgage insurance.
Question 5: Which clause in a mortgage document gives the lender the right to declare the entire loan balance immediately due and payable if the borrower defaults?
- Subordination clause
- Defeasance clause
- Acceleration clause (Correct answer)
- Alienation clause
Correct answer: Acceleration clause
The acceleration clause allows the lender to demand immediate full repayment of the remaining loan balance upon the borrower's default or other triggering event.
Question 6: What is the maximum seller concession allowed on a conventional loan with less than 10% down payment?
- 2% of the purchase price
- 3% of the purchase price (Correct answer)
- 4% of the purchase price
- 6% of the purchase price
Correct answer: 3% of the purchase price
Fannie Mae and Freddie Mac limit seller concessions to 3% of the purchase price when LTV exceeds 90% (less than 10% down).
Question 7: What distinguishes a 'deed of trust' from a traditional mortgage as a security instrument?
- A deed of trust requires judicial foreclosure, while a mortgage allows non-judicial foreclosure
- A deed of trust involves three partiesâborrower, lender, and trusteeâwhile a mortgage involves only two (Correct answer)
- A deed of trust is only used for commercial properties
- A deed of trust does not create a lien on the property
Correct answer: A deed of trust involves three partiesâborrower, lender, and trusteeâwhile a mortgage involves only two
A deed of trust uses three parties: the trustor (borrower), beneficiary (lender), and a neutral trustee who holds title as security, allowing non-judicial foreclosure in most states.
PSI Real Estate Financing MCQ 4
What is a 'conforming loan' in the context of conventional mortgage financing?