Arizona Real Estate Broker Exam — All Questions

What two components determine the interest rate on an adjustable-rate mortgage at each adjustment?

• a.A cap plus a floor rate
• b.A discount point plus an origination fee
• c.An index plus a margin✓
• d.A prime rate plus a prepayment penalty

An adjustable-rate mortgage sets the rate at each adjustment as a published index, which moves with the market, plus a fixed margin the lender adds. Caps limit how far the rate can move at any one adjustment and over the life of the loan, but they do not set the rate. Points and origination fees are up-front charges, and a prepayment penalty is a payoff cost.

What is the essential difference between a conventional loan and an FHA or VA loan?

• a.A conventional loan may be made only by a national bank
• b.A conventional loan may not be sold on the secondary market
• c.A conventional loan always requires a twenty percent deposit
• d.It carries no government insurance or guarantee at all✓

A conventional loan is not insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs; the lender relies on the borrower's credit and the property. Conventional loans are freely sold into the secondary market, may be made by many lender types, and are commonly written above eighty percent loan-to-value with private mortgage insurance instead of a large deposit.

When is private mortgage insurance typically required on a conventional loan?

• a.When the borrower's credit score is below seven hundred
• b.When the property is held as an investment rather than a home
• c.When the loan-to-value ratio exceeds eighty percent✓
• d.When the loan term extends beyond twenty years

Private mortgage insurance protects the lender against loss on a higher-leverage conventional loan and is customarily required above an eighty percent loan-to-value ratio. It insures the lender, not the borrower, even though the borrower pays the premium. Credit score, occupancy and term all affect pricing and eligibility, but they are not the trigger for the insurance requirement.

What does the debt service coverage ratio measure in commercial lending?

• a.The loan balance divided by the property's value
• b.Operating expenses divided by gross scheduled income
• c.Gross rental income divided by the purchase price
• d.Net operating income divided by annual debt service✓

The debt service coverage ratio is net operating income divided by annual debt service, and it tells the lender how much cushion the property's cash flow gives over the loan payments. A ratio of 1.25 means income covers the payments 1.25 times. Loan balance over value is loan-to-value, and operating expenses over income is the operating expense ratio.