Financing Practice Questions

Explanation: LTV = Loan Amount / Property Value = $320,000 / $400,000 = 0.80 or 80%. Lenders use LTV to assess risk; loans above 80% LTV typically require private mortgage insurance (PMI).

Explanation: The Truth in Lending Act (TILA), implemented by Regulation Z, requires lenders to disclose the APR, total finance charge, total amount financed, and total of all payments. The APR includes the interest rate plus fees, giving borrowers a standardized basis for comparing loan costs. RESPA governs settlement costs and prohibits kickbacks.

Explanation: A conventional mortgage is one that is not insured or guaranteed by any government agency. It is originated and funded by private lenders such as banks and mortgage companies. Conventional loans may be conforming (meeting Fannie Mae/Freddie Mac guidelines) or non-conforming (jumbo loans). FHA and VA loans are government-backed, not conventional.

Explanation: FHA loans (insured by the Federal Housing Administration) allow down payments as low as 3.5% for borrowers with credit scores of 580 or higher, and more flexible debt-to-income ratios than conventional loans. However, FHA loans require both an upfront mortgage insurance premium (MIP) and annual MIP regardless of down payment amount — a key distinction from conventional PMI.

Explanation: A 5/1 ARM has a fixed interest rate for the first 5 years, then adjusts annually (every 1 year) based on a specified index plus margin. ARMs also have periodic caps (limiting how much the rate can change per adjustment period) and lifetime caps (limiting total rate change over the life of the loan).

Explanation: PMI protects the lender (not the borrower) against loss in the event of borrower default on a conventional loan with less than 20% equity (LTV above 80%). Under the Homeowners Protection Act, PMI must be automatically canceled when the loan balance reaches 78% of the original purchase price, and the borrower has the right to request cancellation at 80% LTV.

Explanation: A due-on-sale (or acceleration) clause allows the lender to demand full repayment of the remaining mortgage balance when the property is sold or transferred without the lender's consent. This prevents buyers from assuming older, lower-rate mortgages without lender approval and protects the lender's interest rate position.

Explanation: A purchase money mortgage (PMM) is a form of seller financing in which the property seller acts as the lender. Instead of receiving full cash at closing, the seller accepts a promissory note from the buyer, secured by a mortgage on the property. PMMs can help buyers who cannot qualify for traditional financing and allow sellers to generate interest income.

Explanation: RESPA prohibits kickbacks and unearned fee-splitting among settlement service providers (lenders, title companies, real estate brokers, etc.) in federally related mortgage transactions. It also requires disclosure of settlement costs and prohibits sellers from requiring buyers to use a specific title company. RESPA does not prohibit legitimate fees for services actually rendered.

Explanation: VA loans, guaranteed by the Department of Veterans Affairs, allow eligible veterans, active duty service members, and surviving spouses to purchase a home with zero down payment and no private mortgage insurance. Instead of PMI, VA loans charge a one-time funding fee (which can be financed into the loan). Loan limits were eliminated in 2020 for most eligible veterans.