CSLB General Building (B) — All Questions

In a California deed of trust, the party who holds bare legal title as security until the loan is repaid is the:

• a.Trustor
• b.Beneficiary
• c.Trustee✓
• d.Mortgagor

A deed of trust involves three parties: the trustor (borrower), the beneficiary (lender), and the trustee, who holds bare legal title as security. If the borrower defaults, the trustee can conduct a nonjudicial foreclosure sale. California primarily uses deeds of trust rather than mortgages.CA Civil Code

An FHA loan is best described as a loan that is:

• a.Insured by the Federal Housing Administration and made by approved lenders✓
• b.Made directly by the federal government
• c.Guaranteed only for veterans
• d.Exempt from all mortgage insurance

FHA loans are originated by approved private lenders and insured by the Federal Housing Administration, which protects the lender against loss. They allow low down payments but require mortgage insurance premiums. The FHA insures rather than directly makes the loans.

A key benefit of a VA-guaranteed loan for an eligible veteran is:

• a.No credit check
• b.The possibility of no down payment✓
• c.A guaranteed low fixed rate set by law
• d.Exemption from property taxes

VA loans are guaranteed by the Department of Veterans Affairs and often allow eligible veterans to purchase with no down payment. The guarantee protects the lender against loss. Veterans still must qualify based on income and credit and pay a funding fee.

The California Cal-Vet home loan program is unusual because the state:

• a.Only insures the loan
• b.Guarantees the loan through the VA
• c.Purchases the property and sells it to the veteran under a land contract✓
• d.Waives all interest

Under the Cal-Vet program, the California Department of Veterans Affairs buys the property and resells it to the eligible veteran, typically using a contract of sale. This gives the state a security interest in the property. Cal-Vet loans are funded through state bonds.

A conventional loan is one that is:

• a.Insured by the FHA
• b.Guaranteed by the VA
• c.Funded by the Cal-Vet program
• d.Not insured or guaranteed by a government agency✓

A conventional loan is not backed by a government insurance or guarantee program such as FHA or VA. Lenders may require private mortgage insurance if the down payment is less than 20 percent. Conventional financing is the most common type of mortgage.

A borrower obtains a $300,000 loan and pays 2 discount points. The dollar amount paid in points is:

• a.$3,000
• b.$6,000✓
• c.$9,000
• d.$12,000

One discount point equals one percent of the loan amount, so two points on $300,000 is 0.02 times $300,000, which equals $6,000. Points are prepaid interest a borrower pays to lower the interest rate. They are calculated on the loan amount, not the purchase price.

A buyer purchases a home for $400,000 with a $320,000 loan. The loan-to-value (LTV) ratio is:

• a.70%
• b.75%
• c.80%✓
• d.90%

The LTV ratio equals the loan amount divided by the value or price, so $320,000 / $400,000 equals 0.80, or 80 percent. Lenders use LTV to gauge risk, with higher ratios generally requiring mortgage insurance. A lower LTV means more borrower equity.

The Real Estate Settlement Procedures Act (RESPA) primarily aims to:

• a.Disclose settlement costs and prohibit kickbacks in federally related mortgage loans✓
• b.Set maximum interest rates
• c.Regulate real estate license exams
• d.Require flood insurance

RESPA requires disclosure of settlement costs to borrowers and prohibits kickbacks and unearned referral fees among settlement service providers. It applies to most federally related residential mortgage loans. Its goal is transparency and fairness in the closing process.RESPA

The federal Truth in Lending Act (TILA), implemented through Regulation Z, requires lenders to disclose the:

• a.Property's market value
• b.Annual percentage rate and total finance charges✓
• c.Seller's net proceeds
• d.Appraiser's fee schedule

TILA requires lenders to disclose the annual percentage rate, finance charges, and other credit terms so consumers can compare loans. The APR reflects the true cost of credit including certain fees. Regulation Z implements TILA's disclosure requirements.Truth in Lending Act

California usury law generally limits the interest a private lender may charge, but a major exception exists for:

• a.All cash loans
• b.Loans over $1 million only
• c.Loans to corporations only
• d.Loans arranged or made by licensed real estate brokers✓

California's usury restrictions cap interest on certain private loans, but numerous exemptions apply, including loans made or arranged by licensed real estate brokers. Institutional lenders such as banks are also exempt. These exemptions cover most real estate financing.CA Constitution

A fully amortized loan is one in which:

• a.Regular payments retire the entire principal and interest by the end of the term✓
• b.Only interest is paid until maturity
• c.A large balloon payment ends the loan
• d.The balance grows over time

A fully amortized loan is repaid through regular equal payments that cover both interest and principal, leaving a zero balance at the end of the term. Early payments are mostly interest, with principal reduction increasing over time. This contrasts with interest-only or balloon loans.

In an adjustable-rate mortgage, the published economic indicator to which the interest rate is tied is called the:

• a.Margin
• b.Index✓
• c.Cap
• d.Point

An adjustable-rate mortgage's interest rate is calculated by adding a fixed margin to a fluctuating index such as a Treasury or SOFR-based rate. The index moves with market conditions, while the margin stays constant. Rate caps limit how much the rate can change.

A loan with small periodic payments and one large final payment due at maturity contains a:

• a.Prepayment penalty
• b.Subordination clause
• c.Balloon payment✓
• d.Due-on-sale clause

A balloon payment is a large lump-sum payment due at the end of a partially amortized loan. The periodic payments do not fully retire the principal, leaving a substantial balance owed at maturity. Borrowers often refinance to satisfy the balloon.

A loan clause that charges the borrower a fee for paying off the loan early is a:

• a.Acceleration clause
• b.Alienation clause
• c.Subordination clause
• d.Prepayment penalty✓

A prepayment penalty compensates the lender for interest lost when a borrower pays off a loan ahead of schedule. California law limits prepayment penalties on many owner-occupied residential loans. Borrowers should confirm whether their loan permits penalty-free prepayment.CA Civil Code

A borrower pays $5,250 in discount points on a $350,000 loan. How many points did the borrower pay?

• a.1.5 points✓
• b.2 points
• c.2.5 points
• d.3 points

Points paid equal the dollar amount divided by the loan amount, so $5,250 / $350,000 equals 0.015, or 1.5 points. Each point equals one percent of the loan. Points are used to buy down the interest rate.

A lender will make a loan at a maximum 75% LTV on a property appraised at $500,000. The largest loan available is:

• a.$300,000
• b.$375,000✓
• c.$400,000
• d.$425,000

The maximum loan equals the LTV ratio times the appraised value, so 0.75 times $500,000 equals $375,000. The borrower must supply the remaining $125,000 as a down payment. Lenders cap LTV to limit their risk exposure.

A borrower has a $240,000 interest-only loan at 6% annual interest. The monthly interest payment is:

• a.$1,000
• b.$1,100
• c.$1,200✓
• d.$1,440

Annual interest equals $240,000 times 0.06, which is $14,400, and dividing by 12 gives a monthly interest payment of $1,200. On an interest-only loan the principal balance does not change with these payments. Interest is calculated on the outstanding balance.

A buyer makes a $90,000 down payment on a $450,000 home and finances the rest. The loan-to-value ratio is:

• a.20%
• b.70%
• c.75%
• d.80%✓

The loan amount is $450,000 minus $90,000, which equals $360,000, and $360,000 / $450,000 equals 0.80, or 80 percent LTV. The down payment represents 20 percent equity. A 20 percent down payment often avoids private mortgage insurance on conventional loans.

A clause in a loan that allows an existing lien to move to a lower priority position behind a new loan is a:

• a.Subordination clause✓
• b.Acceleration clause
• c.Defeasance clause
• d.Alienation clause

A subordination clause allows an existing lender to voluntarily agree that its lien will take a lower priority than a later loan. It is common in land development financing where a construction loan must take first position. Without subordination, lien priority normally follows recording order.CA Civil Code

A clause that allows a lender to declare the entire loan balance due immediately upon the borrower's default is an:

• a.Alienation clause
• b.Acceleration clause✓
• c.Subordination clause
• d.Escalation clause

An acceleration clause lets the lender demand the full outstanding balance at once when the borrower defaults, for example by missing payments. It is a prerequisite to foreclosure for the whole debt. Without it, the lender could only pursue overdue installments.CA Civil Code

A due-on-sale clause, also called an alienation clause, allows the lender to:

• a.Lower the interest rate on sale
• b.Extend the loan term automatically
• c.Demand full repayment when the property is sold or transferred✓
• d.Forgive the remaining balance

A due-on-sale or alienation clause permits the lender to call the entire loan balance due when the secured property is sold or transferred. It prevents buyers from freely assuming the existing loan. This protects the lender's ability to reprice the loan at current rates.CA Civil Code

In California, the most common method of foreclosing a deed of trust after default is a:

• a.Judicial foreclosure through the courts
• b.Strict foreclosure
• c.Deed in lieu required by law
• d.Nonjudicial trustee's sale under the power of sale✓

Because California deeds of trust contain a power of sale, lenders typically use a nonjudicial trustee's sale, which is faster and does not require a lawsuit. The trustee follows statutory notice and timing requirements. Judicial foreclosure is available but less common and preserves the right to a deficiency judgment.CA Civil Code