Michigan Real Estate Broker Exam — All Questions

A borrower sells a home still subject to a mortgage that contains an alienation (due-on-sale) clause. What can the lender do?

• a.Nothing; the loan simply transfers to the buyer
• b.Increase the interest rate but not call the loan
• c.Demand the full remaining balance be paid upon the transfer✓
• d.Force the buyer to assume the loan on the original terms

An alienation clause, also called a due-on-sale clause, lets the lender accelerate the loan and demand the entire remaining balance if the property is transferred without the lender's consent. It prevents a buyer from simply taking over the seller's loan. The lender is not required to allow an assumption or merely raise the rate. Brokers structuring seller carry-backs, wraparounds, or 'subject to' deals must respect the senior lender's due-on-sale rights.

In a deed of trust, what is the role of the trustee?

• a.A neutral third party who holds bare legal title until the debt is repaid✓
• b.The lender who advances the loan funds
• c.The borrower who repays the note
• d.A county official appointed by the court who records the lien and releases it once the note is paid

A deed of trust involves three parties: the trustor (borrower), the beneficiary (lender), and the trustee, a neutral third party who holds bare legal title as security. When the loan is paid, the trustee issues a reconveyance releasing the lien; on default, the trustee may conduct a nonjudicial foreclosure where the state allows. This differs from a mortgage, which has only two parties. Knowing the roles helps a broker explain closing documents accurately.

A settlement service provider offers a broker a cash payment for each buyer the broker refers, with no service performed in return. Under RESPA this arrangement is:

• a.Permitted if disclosed in the listing agreement
• b.Permitted because referral fees are always legal
• c.Permitted only for commercial transactions
• d.Prohibited as an illegal kickback for a referral✓

RESPA prohibits kickbacks, fee-splitting, and unearned fees for referrals of settlement services on federally related mortgage loans. Paying or receiving anything of value merely for a referral, with no bona fide service rendered, is an illegal kickback, and mere disclosure does not cure it. A broker must police the office against such arrangements because a RESPA violation can expose the firm to serious penalties, making this a core risk-management duty.

A real estate advertisement states 'Only 5% down!' Under the Truth in Lending Act (Regulation Z), what does using this specific term require?

• a.Nothing further, because down-payment percentages are exempt from Regulation Z's trigger-term rules
• b.Disclosure of additional credit terms such as APR and repayment terms✓
• c.Approval from the lender before the ad may run
• d.That the property be a primary residence only

Under Regulation Z, certain specific credit figures are 'trigger terms.' Regulation Z lists four: the amount or percentage of any downpayment, the number of payments or period of repayment, the amount of any payment, and the amount of any finance charge (12 CFR 1026.24(d)(1)). Stating any one of them triggers a duty to disclose additional required terms, including the annual percentage rate (APR). General statements like 'low down payment' do not trigger the rule, but a specific figure like '5% down' does. Brokers must supervise office advertising for TILA compliance.

At a closing the buyer signs both a promissory note and a mortgage. A broker explaining the paperwork should describe the promissory note as:

• a.The instrument that creates the lien against the property
• b.The document recorded to give notice of the loan
• c.The borrower's personal promise to repay the debt✓
• d.The lender's authorization to foreclose on default

The note is the borrower's personal promise to repay a stated sum on stated terms, so it is the evidence of the debt itself. The mortgage or deed of trust is the separate security instrument that pledges the property and creates the lien, and it is that document, not the note, which is recorded to give notice. Power to foreclose also comes from the security instrument. Keeping the two straight lets a broker explain why a payoff produces a recorded release while the note is simply marked paid and returned to the borrower.

A lender explains that the borrower pledges the property as security for the loan yet keeps possession and full use of it. This arrangement is known as:

• a.Hypothecation, pledging property while retaining use✓
• b.Novation, which substitutes a new party for the original
• c.Defeasance, which cancels the lien once the debt is paid
• d.Subordination, which moves an existing lien behind another

Hypothecation is pledging property as collateral without surrendering possession, which is exactly what a borrower does in a mortgage or deed of trust: the lender gets security, the borrower keeps living in the house. Subordination is an agreement that changes the ranking of liens, not the pledge itself. Novation substitutes a new contract or party and releases the original one. Defeasance is the clause that wipes out the lien when the debt is satisfied. Only hypothecation names the underlying pledge-but-keep-possession relationship that makes real estate lending work.

In a title-theory state, what does the security instrument do at closing?

• a.Passes legal title to the lender until the debt is fully repaid✓
• b.Creates only a lien while the borrower keeps both legal and equitable title
• c.Transfers equitable title to the county recorder, who holds it until the lien is released
• d.Gives the borrower title free of any lender claim

In title-theory states the security instrument conveys legal title to the lender (or a trustee) while the borrower holds equitable title and possession, with full title returning when the debt is paid. In lien-theory states the borrower keeps legal title and the lender holds only a lien, which is why a lien-theory description is wrong for this question even though it is correct elsewhere. A recorder never takes title; it merely records documents. And no financed borrower holds title free of the lender's claim. Because this varies by state, brokers should describe the concept rather than assume one rule nationwide.

A parcel carries a first mortgage recorded years ago, a second mortgage recorded later, and a judgment docketed after both. Taxes are current, and foreclosure of the first yields less than the total owed. Which claim is paid last?

• a.The second mortgage, because judgment liens outrank private mortgages
• b.The judgment creditor, whose lien attached after both mortgages✓
• c.The first mortgage, since the foreclosing lender is paid after juniors
• d.The three claims share the proceeds in proportion to their balances

Among private liens the general rule is first in time, first in right: rank follows the order in which each claim was recorded or docketed. The first mortgage is satisfied first, the second mortgage next, and the judgment, having attached last, takes only what remains, which on a deficient sale is often nothing. A court judgment carries no automatic seniority over mortgages recorded before it. The foreclosing senior lender is not pushed behind juniors; its foreclosure wipes those junior claims off the title. Proceeds are distributed by rank, never pro rata. Private priorities can be reordered by agreement through a recorded subordination agreement, which is how a refinancing lender obtains first position.

A homeowner with an existing recorded home equity line wants to refinance the first mortgage, and the new lender insists on being in first position. Which document accomplishes that?

• a.A partial release recorded by the equity line lender
• b.An assumption agreement between the two lenders involved
• c.A subordination agreement from the equity lender✓
• d.A novation replacing the borrower on the equity line

A subordination agreement is the equity line lender's written consent to let its lien rank behind the new loan, which is the only way the refinancing lender gets first position without the line being paid off. A partial release frees specific collateral from a lien; it does not change ranking. An assumption transfers responsibility for an existing debt to a new borrower. A novation swaps in a new party and releases the old one. Brokers should warn clients early that a junior lender is not obligated to subordinate, and refusal can kill a refinance.

A borrower misses several monthly payments, and the lender notifies her that the entire unpaid balance is now immediately due. Which clause in the loan documents permits that demand?

• a.The defeasance clause, which cancels the lien on payoff
• b.The prepayment clause, which penalizes early payoff
• c.The alienation clause, triggered by a transfer of title
• d.The acceleration clause, which makes the whole balance due now✓

Acceleration is the lender's contractual right to call the entire remaining balance due upon a default such as nonpayment, and without it the lender could sue only for the missed installments. Acceleration is also the step that must occur before foreclosure of the whole debt. Defeasance works in the opposite direction, defeating the lien when the loan is satisfied. An alienation or due-on-sale clause is triggered by a transfer of the property, not by missed payments. A prepayment clause addresses paying early, which is the reverse of this borrower's problem.

A borrower makes the final payment on a loan secured by a deed of trust. Which document should the borrower expect to see recorded?

• a.A deed of reconveyance executed by the trustee✓
• b.An estoppel certificate showing a zero balance
• c.A quitclaim deed from beneficiary to trustee
• d.A satisfaction signed by the mortgagee

With a deed of trust, the trustee executes and records a deed of reconveyance that returns the bare legal title and clears the lien from the record. A satisfaction of mortgage does the same job but in a two-party mortgage, signed by the mortgagee, so it is the right idea attached to the wrong instrument here. An estoppel or beneficiary statement reports the balance and terms during a transaction; it releases nothing. A quitclaim running from the beneficiary to the trustee reverses the direction of the interest and clears nothing for the owner.

A seller pays off a five-year-old loan at closing and is charged an extra fee by the lender for doing so. Which loan feature most likely explains that charge?

• a.An acceleration clause triggered by the sale
• b.A prepayment penalty stated in the note✓
• c.A due-on-sale clause invoked by the lender
• d.A defeasance clause requiring a release fee

A prepayment penalty is a negotiated charge for retiring the debt ahead of schedule, compensating the lender for lost interest, and it is disclosed in the note. Acceleration lets a lender demand the balance after a default, but it does not add a fee for voluntary payoff. A due-on-sale clause makes the balance payable on transfer; the seller is paying that balance, and the clause itself imposes no penalty. Defeasance simply extinguishes the lien at payoff and carries no charge. Brokers should read payoff terms early so net sheets are accurate.

Before closing a sale of property encumbered by an existing loan, the closing agent asks the lender for a signed statement of the exact unpaid balance and current terms. That statement is:

• a.An estoppel or beneficiary statement from the lender✓
• b.A reconveyance statement prepared by the county recorder
• c.A satisfaction piece releasing the lien of record
• d.An assumption certificate signed by the buyer

An estoppel certificate, called a beneficiary statement when a deed of trust is involved, is the lender's written confirmation of the balance, rate, and status, and the lender is then estopped from later claiming different figures. Recorders do not prepare substantive statements about loans. A satisfaction or release is recorded after payoff and reports nothing useful before closing. An assumption certificate would document a buyer taking over the debt, which is a different transaction entirely. Getting the estoppel figures early prevents the payoff shortfalls that derail closings.

A buyer formally assumes the seller's existing loan, and the lender never signs a release of the seller. If the buyer later defaults, whom may the lender pursue?

• a.Both the buyer and the seller, who remains secondarily liable✓
• b.Only the seller, who signed the original promissory note
• c.Only the buyer, because assumption transfers all liability
• d.Neither, because the lender's remedy is the property alone

In an assumption the buyer becomes primarily liable on the debt, but the seller who signed the note stays secondarily liable unless the lender grants a written release, usually through a novation that substitutes the buyer and discharges the seller. So the lender may look to both. Believing that assumption alone shifts every obligation is the classic error. The seller is not the only target either, since the buyer has promised to pay. And the lender is not limited to the collateral, because a personal promise to repay still exists on the note.

A buyer purchases under an all-inclusive (wraparound) note, paying the seller each month while the seller continues paying the underlying first loan. Which risk should the broker explain to the buyer?

• a.The buyer must repay the wrap balance twice over
• b.The buyer cannot record the wraparound instrument
• c.The seller may fail to pay the underlying loan✓
• d.The wrap rate must match the underlying loan rate

In a wraparound the senior loan stays in place and the seller pays it out of the buyer's larger payment, so a seller who pockets the money can let that loan default and the senior lender can foreclose even though the buyer paid faithfully. Sending payments through a collection escrow or servicing agent is the standard protection. The buyer should also record the wrap security instrument, which is perfectly recordable. Only one debt, the wrap, is owed, not two. And the wrap rate is normally higher than the underlying rate, which is where the seller's profit comes from. Brokers must also confirm the senior loan permits the transfer.

Instead of receiving all cash at closing, a seller accepts a note and security instrument from the buyer for part of the price. This financing is best described as:

• a.A blanket loan covering several parcels at once
• b.A purchase money mortgage carried by the seller✓
• c.A package loan that also includes the personal property
• d.An open-end loan the buyer may later draw against

A purchase money mortgage is financing given to acquire the property, and the term most often describes a seller carryback in which the seller takes back paper rather than cash. A blanket loan covers more than one parcel under a single lien, typically for a developer. An open-end loan lets the borrower re-borrow up to a set limit without a new loan. A package loan finances real property together with personal property such as appliances or furnishings. Brokers structuring carrybacks must still respect any due-on-sale clause in the seller's existing loan.

A developer finances twenty lots under a single loan and must deliver clear title to each lot as it is sold. Which loan feature makes that possible?

• a.An open-end clause letting the developer borrow more against the same twenty lots
• b.A package clause pledging the developer's equipment
• c.A partial release clause in a blanket mortgage covering the lots✓
• d.A defeasance clause ending the entire lien only at final payoff of the loan

A blanket mortgage encumbers multiple parcels, and its partial release clause lets the borrower obtain a release of individual parcels as an agreed amount is paid down, which is exactly how subdivision lots are sold one at a time. An open-end feature governs future borrowing, not releases. A package arrangement adds personal property to the collateral and does nothing about clearing lots. Defeasance releases the lien only when the entire debt is satisfied, which would force the developer to wait until the last lot sells. Brokers should confirm the release price per lot before listing.

A 68-year-old homeowner with substantial equity wants income without moving. What should a broker say about a federally insured home equity conversion mortgage?

• a.It transfers ownership of the home to the lender immediately
• b.It requires the owner to move out within one year
• c.It pays the owner while requiring no monthly loan payments✓
• d.It is available to any homeowner regardless of age

A HECM converts equity into cash through a lump sum, monthly advances, or a line of credit, and no monthly principal and interest payment is required while the borrower lives in the home; the balance grows and becomes due when the borrower sells, permanently moves out, or dies. The borrower keeps title and must still pay property taxes and insurance and maintain the home, so nothing transfers to the lender at origination and no forced move-out date applies. Age matters as well: the HECM program is limited to older borrowers, generally 62 and above.

A buyer asks whether the Federal Housing Administration will lend her the money to buy a home. The most accurate response is that the FHA:

• a.Lends directly to buyers who meet its income limits
• b.Insures loans made by approved lenders✓
• c.Guarantees a portion of the loan for veterans only
• d.Buys loans after closing

The FHA does not lend; it insures loans originated by approved lenders, which is why the borrower pays an upfront mortgage insurance premium plus an annual premium collected monthly. Confusing insuring with lending is the most common error on this point. Guaranteeing a portion of the loan describes the VA program for eligible veterans, not the FHA. Purchasing closed loans describes secondary market investors such as Fannie Mae. A separate agency program serves eligible rural borrowers. Brokers should tell buyers to shop approved lenders, since rates and fees still vary among them.

A veteran buyer with full entitlement asks a broker how VA financing works. Which statement is accurate?

• a.The VA guarantees a portion, so no down payment is typical✓
• b.A down payment of at least five percent is required
• c.Only veterans still on active duty are eligible to apply
• d.The VA insures the entire loan amount against any lender loss

The VA guarantees only a portion of the loan, and that guaranty, measured by the veteran's entitlement, is what lets approved lenders offer financing with no down payment in typical cases. Most borrowers also pay a funding fee, though certain disabled veterans are exempt. Saying the VA insures the whole loan overstates the coverage and confuses the program with FHA insurance. A mandatory down payment is exactly what the guaranty is designed to avoid. Eligibility reaches veterans, qualifying service members, and certain surviving spouses, not just those currently serving.

A buyer puts ten percent down on a conventional loan and pays private mortgage insurance. Under the federal Homeowners Protection Act, when may that borrower request cancellation?

• a.Once the loan has been outstanding for two full years
• b.Only when the lender chooses to cancel the coverage
• c.Never, since the coverage lasts the whole loan term
• d.When the balance reaches 80 percent of the original value✓

The Homeowners Protection Act lets a borrower request cancellation of private mortgage insurance when the balance reaches 80 percent of the original value, provided the payment history is good and the lender's conditions are met, and it requires automatic termination at 78 percent. So cancellation is a statutory right, not a matter of lender preference, and it is not tied to a two-year seasoning rule. Coverage lasting the entire term describes how some government mortgage insurance can work, which is a different program. PMI protects the lender, not the borrower, so canceling it saves the buyer real money.

A local bank originates a home loan at closing and two months later sells that loan to Fannie Mae. Which statement best describes what happened?

• a.The loan became a government-insured mortgage
• b.The borrower's loan terms changed at the sale
• c.The bank acted only as a mortgage broker here
• d.The loan moved into the secondary market✓

Originating a loan to a borrower happens in the primary market; buying and selling loans already made happens in the secondary market, and that sale is what replenishes the bank's funds so it can lend again. The borrower's note rate and terms do not change when a loan is sold, although the servicer collecting payments may change. The bank funded the loan, so it acted as a lender rather than as a broker placing the loan elsewhere. And a purchase by Fannie Mae does not convert a conventional loan into a government-insured one.

Which secondary market entity guarantees securities backed by pools of federally insured or guaranteed loans, such as FHA and VA loans?

• a.Fannie Mae, which buys conventional conforming loans
• b.Ginnie Mae, a government corporation housed within HUD✓
• c.Freddie Mac, a buyer of loans from savings institutions
• d.The Federal Reserve, which sets the discount rate

Ginnie Mae is a wholly government-owned corporation within HUD, and its role is to guarantee mortgage-backed securities made up of government loans; it does not buy loans itself. Fannie Mae and Freddie Mac are the conventional-side purchasers whose uniform standards define conforming loans, and amounts above their limits are jumbo or nonconforming. Those standardized underwriting rules exist so loans can be pooled and sold to investors. The Federal Reserve conducts monetary policy and influences rates generally but does not guarantee mortgage securities or purchase individual home loans from lenders.

A firm takes residential loan applications and places them with wholesale lenders for a fee, but it never funds a loan with its own money. That firm is acting as:

• a.A portfolio lender that keeps its loans in house
• b.A mortgage banker that funds loans with its own money
• c.A mortgage broker who places loans with wholesale lenders✓
• d.A secondary market investor purchasing closed loans

A mortgage broker is an intermediary who takes the application and shops it to funding lenders for compensation, without ever putting up the money. A mortgage banker funds loans in its own name, then typically sells them and may retain servicing. A portfolio lender funds loans and keeps them on its own books, which frees it from conforming guidelines and lets it set its own standards. A secondary market investor buys loans that have already closed. Knowing which type of shop a client is using tells a broker how flexible the underwriting is likely to be.

A property appraises at $320,000 and is under contract at $335,000. The buyer applies for a loan of $256,000. What loan-to-value ratio will the lender use?

• a.80 percent, based on the appraised value✓
• b.76.4 percent, based on the sale price
• c.125 percent, dividing the value by the loan
• d.78.2 percent, averaging the price and the value

Lenders compute loan-to-value against the lesser of sale price or appraised value, so the divisor here is $320,000: $256,000 / $320,000 = 0.80, or 80 percent. Check the other routes to see why they fail. Using the $335,000 contract price gives $256,000 / $335,000 = 0.764, or 76.4 percent, which is the trap for candidates who ignore the low appraisal. Averaging the two figures to $327,500 yields 78.2 percent, a method no lender uses. Inverting the fraction gives 125 percent. The buyer's equity here is the $79,000 gap between price and loan, and a second lien would raise the combined loan-to-value.

A buyer purchases a home for $300,000 with a $240,000 loan and agrees to pay two discount points at closing. What do those points cost?

• a.$6,000, two percent of the purchase price
• b.$480, treating a point as a tenth of a percent
• c.$2,400, treating each point as half a percent
• d.$4,800, two percent of the loan amount✓

One discount point is one percent of the loan amount, not of the price, so two points equal 0.02 x $240,000 = $4,800. Check: one point is $2,400, and two of them total $4,800. Applying two percent to the $300,000 price produces $6,000, the most common error. Treating a point as half a percent gives $2,400, and treating it as a tenth of a percent gives $480. Points are paid to raise the lender's yield in exchange for a lower note rate, and either party may pay them if the lender agrees.

A seller who plans to carry back financing asks the listing broker how much interest he is allowed to charge. The broker should explain that usury laws:

• a.Apply only to loans made by federally chartered banks, never to seller carrybacks
• b.Set a minimum rate that private lenders must charge
• c.Have been repealed everywhere by federal statute
• d.Cap the interest a lender may charge, at limits set by state law✓

Usury laws set a ceiling on the interest that may be charged, and both the ceiling and the exemptions are creatures of state law, so the honest answer is that a limit exists and the seller needs local legal advice on the number. The rules are not confined to federally chartered banks; private lenders and seller carrybacks are often the parties most exposed. They have not been repealed nationwide, though certain federally related loans are preempted. And usury never imposes a floor. Charging above the limit can cost the lender interest, or more, depending on the state.

An adjustable-rate loan adjusts to a published index plus a fixed amount the lender adds. That fixed amount is:

• a.The lifetime cap, limiting total rate movement
• b.The teaser rate offered for the first period
• c.The annual percentage rate disclosed at closing
• d.The margin, which the lender adds to the index✓

The margin is the lender's fixed markup, and index plus margin equals the fully indexed rate the borrower actually pays after adjustment. The margin normally stays constant for the life of the loan while the index moves with the market. A lifetime cap limits how far the rate can travel over the whole term but is not part of the rate computation. A teaser is a discounted starting rate that lasts only until the first adjustment. The annual percentage rate is a disclosure of total borrowing cost, not an input to the adjustment formula.

A broker reviews an adjustable-rate disclosure showing a two percent periodic cap and a six percent lifetime cap. What do those caps limit?

• a.The maximum loan amount available under this program
• b.The number of times the lender may change the index
• c.The total interest the borrower can ever be charged
• d.The rise per adjustment and over the loan's life✓

A periodic cap limits how much the rate may move at any single adjustment, and a lifetime cap limits the total movement above the starting rate over the whole term, so together they bound the borrower's worst case. They say nothing about how often an index itself may move, which is set by the market, nor do they cap total interest paid, which depends on the balance and the term. They also have no relationship to loan size. Buyers coming off a low teaser rate should be shown the fully indexed payment, since the first adjustment can bring real payment shock.

A borrower's adjustable-rate loan has a payment cap, and in a rising-rate month the required payment does not cover all the interest owed. What happens to the loan balance?

• a.It stays the same until the rate is adjusted
• b.It grows as unpaid interest is added to principal✓
• c.It falls because the payment cap protects equity
• d.The unpaid interest is forgiven by the lender each month

When a payment cap holds the payment below the interest actually accruing, the shortfall is added to the principal, so the balance rises. That is negative amortization, and it can leave a borrower owing more than the original loan and with less equity than expected. The balance does not simply freeze, because interest keeps accruing daily on the outstanding debt. It certainly does not fall, since no principal is being retired. And lenders do not forgive the shortfall; they capitalize it. Brokers should flag payment-capped loans so buyers understand what a low payment can hide.

A five-year note calls for interest-only monthly payments with the entire principal due at maturity. The lump sum owed at the end is called:

• a.An acceleration payment demanded by the lender
• b.A negative amortization charge added at payoff
• c.A prepayment penalty owed at the final payment
• d.A balloon payment, since the loan is not fully amortized✓

A loan that is not fully amortized over its term ends with a balloon: a final payment much larger than the others, here the whole principal because only interest was being paid. Acceleration is a lender's demand for the balance after a default, not a scheduled event. Negative amortization is unpaid interest added to principal, which cannot happen while interest is being paid in full each month. A prepayment penalty applies to paying early, the opposite of paying at maturity. Brokers should confirm the borrower's exit plan, since balloons depend on a refinance or a sale.

A builder pays the lender to cut the buyer's rate by two percent in the first year and one percent in the second, after which the note rate applies. This is:

• a.A temporary 2-1 buydown of the interest rate✓
• b.A lender credit that raises the note rate instead
• c.A permanent buydown lasting the entire loan term
• d.An adjustable rate loan with two annual caps

A temporary 2-1 buydown funds a subsidy account that lowers the payment for the first two years only, after which the borrower pays the full note rate for the remaining term. A permanent buydown is different: discount points paid at closing reduce the rate for the life of the loan. A lender credit works the other way, trading a higher rate for cash toward closing costs. And nothing here adjusts with an index, so this is not an adjustable-rate loan with caps. Lenders generally qualify the borrower at the note rate, so brokers should not promise the discounted payment lasts.

A $200,000 loan is fully amortized at six percent annual interest with a monthly payment of $1,199.10. How much of the very first payment is applied to principal?

• a.$1,000.00, since interest is always paid first
• b.$1,199.10, the whole payment for the month
• c.$199.10, the payment minus the interest due✓
• d.About $600, since payments split evenly at first

Compute the first month's interest as balance times the annual rate divided by twelve: $200,000 x 0.06 / 12 = $1,000. Subtract that from the payment: $1,199.10 - $1,000 = $199.10 toward principal. Check: the balance drops to $199,800.90, so next month's interest is slightly smaller and slightly more goes to principal, which is how amortization works. The $1,000 figure is the interest portion, not the principal, and the full $1,199.10 ignores interest entirely. Payments do not split evenly early on; early payments are mostly interest and late payments mostly principal.

A borrower is confused because her note shows a rate of 6.5 percent while the lender's disclosure shows an annual percentage rate of 6.8 percent. A broker should explain that the APR:

• a.Is the rate used to calculate the monthly payment
• b.Reflects the rate plus loan costs, stated as a yearly rate✓
• c.Includes the property taxes escrowed each month
• d.Changes each year as market interest rates move

The annual percentage rate expresses the note rate together with prepaid finance charges such as points, origination fees, and mortgage insurance as a single yearly cost figure, which is why it usually exceeds the note rate. The payment itself is computed from the note rate and the term, not from the APR. Escrowed taxes and hazard insurance are not finance charges and stay out of the calculation. And the APR on a fixed-rate loan is a one-time disclosure, not a number that floats with the market. Comparing APRs helps a buyer weigh competing offers.

A homeowner refinances the loan on her principal residence with a different lender. Under Regulation Z, what right does she have after signing the documents?

• a.Three business days in which to rescind the loan✓
• b.No right to rescind, because refinances are exempt
• c.Thirty days to cancel for any reason at all
• d.A right to rescind that also covers home purchases

Regulation Z gives a three-business-day right of rescission on a refinance with a new lender or a home equity loan secured by the borrower's principal residence, and the lender may not disburse funds until that period runs. Refinances are the classic covered transaction, not an exempt one. There is no thirty-day cancellation right. Most importantly, the right does not attach to a purchase-money loan on the home being bought, which is why buyers cannot unwind their financing after closing. Brokers should schedule funding around the rescission period on refinances so clients are not surprised.

A lender receives a completed residential loan application on Monday. Under TRID, the Loan Estimate must be delivered or placed in the mail:

• a.Only after the appraisal report is received
• b.Within three business days of application✓
• c.At least three business days before consummation
• d.At the same time as the Closing Disclosure

TRID requires the Loan Estimate within three business days after the lender receives a completed application, which is defined by a short list of items rather than by the lender's own checklist. The three-business-day period running before consummation belongs to the Closing Disclosure, which the consumer must receive at least that far ahead of closing. The two forms therefore arrive at opposite ends of the transaction, not together, and the estimate is not held for the appraisal. Three changes reset the closing waiting period: an APR outside tolerance, a change of loan product, or adding a prepayment penalty.

A brokerage routinely refers its buyers to a title agency in which the brokerage holds an ownership interest. Under RESPA this affiliated business arrangement is allowed only if:

• a.The affiliate charges the same fee as its competitors do
• b.It is disclosed, use is optional, and no referral fee is paid✓
• c.The buyer signs the disclosure after the closing occurs
• d.The brokerage owns at least half of the title agency

RESPA permits an affiliated business arrangement only when the relationship is disclosed to the consumer at or before referral, the consumer is not required to use the affiliate, and the only thing of value received is a return on the ownership interest rather than a payment per referral. Matching competitors' prices is irrelevant to the exemption. A disclosure delivered after closing comes too late to inform the consumer's choice. And no minimum ownership percentage creates or defeats the exemption. A broker should audit these referral relationships, since the firm carries the exposure.

A seller insists, as a condition of selling, that the buyer purchase the title insurance policy from a company the seller selects. Under RESPA this condition is:

• a.Permitted if the seller discloses the choice in writing
• b.Required by federal law in every home sale
• c.Prohibited where the buyer pays for the policy✓
• d.Permitted only in commercial transactions instead

RESPA bars a seller from requiring, directly or indirectly, that a buyer who pays for title insurance buy it from any particular company as a condition of the sale, and violations can expose the seller to damages measured against the charges. Disclosing the demand does not cure it, because the problem is the coercion, not the secrecy. Nothing in federal law requires such a condition. And the protection runs to residential federally related mortgage loans rather than being limited to commercial deals. A buyer may of course choose the seller's suggested company voluntarily.

A buyer asks why the lender is collecting extra months of taxes and insurance at closing. Under RESPA, the reserve a lender may keep is limited to roughly:

• a.A two-month cushion of escrow payments✓
• b.One full year of taxes and insurance charges
• c.Any amount the lender's underwriter requires
• d.Six months of escrow payments held in reserve

RESPA caps the escrow cushion at one sixth of the estimated annual disbursements, which works out to about two months of payments, and it requires an annual escrow analysis with refunds of surpluses above the allowed limit. A six-month or full-year reserve exceeds the statutory ceiling. Nor is the amount left to the underwriter's discretion, since the cap is federal. Related duties travel with servicing: when the right to collect payments is sold, the borrower must receive advance notice of the transfer, and payments sent to the old servicer are protected briefly after the change.

A lender refuses to count a wife's steady part-time earnings because she is of childbearing age, and the application is denied. Under the Equal Credit Opportunity Act, this is:

• a.Lawful, since the income might not continue later
• b.Lawful if the lender documents the reason in the file
• c.Unlawful only if the loan was federally related in nature
• d.Unlawful discrimination based on sex and marital status✓

ECOA forbids discrimination in any credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, or the receipt of public assistance, and discounting a woman's verified income because of assumptions about childbearing is textbook sex discrimination. Speculation about future earnings does not make it lawful, and papering the file with a rationale does not cure a prohibited basis. ECOA also reaches all credit, not only federally related mortgage loans. A denied applicant is entitled to an adverse action notice giving the reasons or explaining how to request them.

A real estate licensee who holds no loan originator license takes a buyer's financial information, then negotiates the rate and terms of a seller carryback note for extra compensation. This conduct:

• a.Is exempt because an active real estate license already covers loan negotiation
• b.Is governed only by the RESPA kickback provisions
• c.Is prohibited outright by federal law in every state
• d.May require mortgage loan originator licensing under the SAFE Act✓

The SAFE Act requires licensing or registration, through the national system, of anyone who takes a residential mortgage loan application and offers or negotiates loan terms for compensation or gain. Doing both for a fee moves a licensee toward origination, and a real estate license is not a substitute credential. The activity is not flatly banned; it is regulated, and narrow exemptions for property owners financing their own sales vary in scope. RESPA governs kickbacks and settlement charges and does not address origination licensing. Simply referring a buyer to a lender is not origination.

Under the Dodd-Frank ability-to-repay rule, before making a residential mortgage loan a lender must:

• a.Verify the borrower can repay the loan✓
• b.Rely on stated income
• c.Qualify at the teaser rate
• d.Approve any borrower who makes a large down payment

The ability-to-repay rule requires a reasonable, good-faith determination that the borrower can repay, based on verified income or assets, employment, debts, the resulting debt ratios, and credit history. Stated-income lending and qualifying at a discounted starting rate are precisely the practices the rule ended, since both let borrowers into payments they could not sustain. A large down payment reduces the lender's loss but does not excuse the analysis. Loans meeting the qualified mortgage standards, which bar features such as negative amortization and excessive points, receive greater legal protection for the lender.

A broker whose transaction is short on value telephones the appraiser and asks her to hit the contract number so the loan can close. That request:

• a.Is acceptable if the broker supplies recent comparables
• b.Is allowed because the borrower paid the appraisal fee
• c.Improperly pressures the appraiser and is prohibited✓
• d.Is proper, since the broker is not the lender

Federal appraiser independence rules bar anyone with an interest in the transaction from coercing, bribing, or otherwise attempting to influence an appraiser to reach a particular value. Handing over factual comparable sales through proper channels is permissible, but attaching it to a demand for a number is not, so supplying data does not rescue this call. Who paid the fee is irrelevant to independence. And the prohibition covers agents, brokers, and sellers, not merely lender employees. Note too that the borrower is entitled to a copy of the appraisal report promptly, without having to ask.

A buyer's agent presents an offer backed by a lender letter based only on figures the buyer recited over the telephone. The listing broker should describe that letter as:

• a.A loan commitment that binds the lender to fund once the offer is accepted
• b.An underwriting decision made after full review
• c.A prequalification, since no income or assets were verified✓
• d.A preapproval, because the lender reviewed the buyer's stated income and credit

A prequalification is an informal opinion drawn from unverified statements, so it tells a seller very little. A preapproval follows an actual application with verified income, assets, and a pulled credit report, which is why it carries far more weight in a multiple-offer situation. An underwriting decision comes later still, after the full file and the appraisal are reviewed. A commitment is the lender's conditional promise to fund once stated conditions are met. Underwriters weigh the four Cs of capacity, credit, capital, and collateral, and a broker should train agents to ask which letter they actually hold.

A defaulting borrower wants to halt the foreclosure by paying the full debt plus costs before the foreclosure sale takes place. That opportunity is:

• a.A statutory redemption right exercised after the sale
• b.A deficiency judgment entered against the borrower
• c.The equitable right of redemption before sale✓
• d.A deed given to the lender in lieu of foreclosure

The equitable right of redemption is the borrower's chance to cure by paying the accelerated debt and costs at any time before the foreclosure sale, and it exists as a general principle. A statutory right to redeem after the sale is different: it exists only where state law creates it, and its terms vary, so a broker should never assume one is available. A deficiency judgment is the lender's separate claim for a shortfall remaining after the sale, where permitted. A deed in lieu is a voluntary conveyance that avoids foreclosure rather than redeeming from it.

An underwriter compares the proposed housing payment to gross monthly income, then compares all monthly debt payments to that same income. These two measures are:

• a.The capitalization rate and the cash-on-cash return
• b.The loan-to-value and combined loan-to-value ratios
• c.The front-end and back-end debt-to-income ratios✓
• d.The borrower's credit utilization and score

The housing-only comparison is the front-end ratio and the all-debts comparison is the back-end ratio, and together they measure capacity, one of the four Cs of underwriting. Loan-to-value measures the loan against the property's value rather than against income, and a combined figure adds junior liens. Capitalization rate and cash-on-cash return are investment yardsticks applied to income property, not to a borrower's paycheck. Credit utilization and score describe the credit report, which underwriters review separately. A broker who understands the ratios can tell early which buyers will need to retire debt to qualify.

A lender forecloses by having a trustee conduct a sale under a power-of-sale clause, without ever filing a lawsuit. This process is:

• a.Strict foreclosure, which passes title to the lender
• b.A judicial foreclosure supervised by the court
• c.A deed in lieu given voluntarily by the owner
• d.A nonjudicial foreclosure, used where state law allows it✓

A nonjudicial foreclosure relies on a power-of-sale clause in the security instrument, so the trustee sells after giving the required notices and no court action is filed. It is available only where state law authorizes it. A judicial foreclosure requires filing suit and obtaining a court-ordered sale, which is the route used where power-of-sale authority is unavailable. Strict foreclosure, recognized in only a few states, vests title in the lender without any sale of the property. A deed in lieu is a voluntary transfer negotiated with the lender, not a foreclosure proceeding at all.

An owner owes more on the loan than the property is worth and asks the listing broker to market it for less than the payoff. For that sale to close, what must occur?

• a.The buyer must agree to assume the unpaid balance
• b.The county must approve
• c.The broker must waive the entire commission earned
• d.The lender must approve the short payoff✓

A short sale closes only if every lienholder agrees to release its lien for less than the amount owed, so lender approval is the whole transaction. The buyer takes title free of the released liens and assumes nothing. Counties record documents and collect taxes but do not approve prices. Commissions remain negotiable, though a lender's approval letter may limit what it will fund from proceeds. Brokers should set realistic timing expectations, get the approval terms in writing, and remind sellers that whether any remaining deficiency is pursued depends on state law and the lender's terms.