Real Estate Finance & Mortgages 2 — Questions and Answers
Question 1: A conventional loan is characterized by:
- Government insurance or guarantee
- No government backing, conforming to Fannie Mae/Freddie Mac guidelines (Correct answer)
- Fixed 30-year term only
- Exclusive use by veterans
Correct answer: No government backing, conforming to Fannie Mae/Freddie Mac guidelines
Conventional loans are not insured by a government agency and must typically meet conforming limits and standards set by Fannie Mae and Freddie Mac.
Question 2: VA home loans are exclusively available to:
- All US citizens
- Low-income first-time buyers
- Eligible veterans, active-duty service members, and qualifying surviving spouses (Correct answer)
- Federal government employees
Correct answer: Eligible veterans, active-duty service members, and qualifying surviving spouses
VA loans are guaranteed by the Department of Veterans Affairs and available only to eligible military borrowers, offering no down payment and no PMI.
Question 3: Paying 'points' at loan closing means the borrower is:
- Paying realtor commissions early
- Paying upfront fees to permanently reduce the mortgage interest rate (Correct answer)
- Making a larger down payment
- Paying property taxes in advance
Correct answer: Paying upfront fees to permanently reduce the mortgage interest rate
Each discount point equals 1% of the loan amount and reduces the interest rate, lowering monthly payments in exchange for a higher upfront cost.
Question 4: The debt-to-income (DTI) ratio most commonly used by lenders for conventional loans should not exceed:
- 50%
- 43% (Correct answer)
- 30%
- 60%
Correct answer: 43%
Most conventional lenders require a back-end DTI of 43% or less, meaning total monthly debt payments should not exceed 43% of gross monthly income.
Question 5: In a deed of trust, who holds legal title to the property during the loan term?
- The borrower (trustor)
- The lender (beneficiary)
- A neutral third-party trustee (Correct answer)
- The title insurance company
Correct answer: A neutral third-party trustee
In a deed of trust, legal title is conveyed to a trustee who holds it on behalf of the lender until the loan is repaid, then reconveyed to the borrower.
Question 6: A balloon payment mortgage requires the borrower to:
- Make increasing payments each year
- Pay a large lump-sum balance at the end of the loan term (Correct answer)
- Refinance after 5 years mandatorily
- Make bi-weekly payments
Correct answer: Pay a large lump-sum balance at the end of the loan term
A balloon loan has smaller regular payments but requires the remaining principal balance to be paid in full at the end of a short term.
Real Estate Finance & Mortgages 2
A conventional loan is characterized by: