California Real Estate Salesperson — 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.Mortgagor
• b.Beneficiary
• c.Trustee✓
• d.Trustor

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

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

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

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

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.$6,000✓
• b.$9,000
• c.$3,000
• 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.90%
• b.80%✓
• c.75%
• d.70%

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.Regulate real estate license exams
• c.Set maximum interest rates
• 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.Annual percentage rate and total finance charges✓
• b.Property's market value
• c.Appraiser's fee schedule
• d.Seller's net proceeds

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

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

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.Point
• c.Index✓
• d.Cap

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.Due-on-sale clause
• c.Subordination clause
• d.Balloon payment✓

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.Subordination clause
• b.Alienation clause
• c.Acceleration 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.3 points
• c.2 points
• d.2.5 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.$425,000
• c.$400,000
• d.$375,000✓

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

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.75%
• b.70%
• c.80%✓
• d.20%

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.Defeasance clause
• c.Acceleration 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.Acceleration clause✓
• b.Subordination clause
• c.Escalation clause
• d.Alienation 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.Forgive the remaining balance
• c.Extend the loan term automatically
• d.Demand full repayment when the property is sold or transferred✓

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

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

In a California home loan, the document that serves as the borrower's written promise to repay the debt is the:

• a.Deed of trust
• b.Promissory note✓
• c.Deed of reconveyance
• d.Grant deed

The promissory note is the borrower's personal promise to repay the money, while the deed of trust is the security instrument that pledges the property as collateral. The note is the evidence of the debt; the deed of trust makes the property answerable if the note is not paid. In California the two are used together.CA Civil Code

Pledging real property as security for a loan while keeping possession and use of it is called:

• a.Acceleration of the balance
• b.Hypothecation✓
• c.Subrogation of the lender's rights
• d.Novation of the underlying obligation

Hypothecation is pledging property as collateral without surrendering possession, which is exactly what a borrower does under a deed of trust. The borrower keeps living in the home while the lender holds a security interest. If the debt is unpaid, the lender may foreclose on the pledged property.

California is a lien-theory (title-in-borrower) state, which means that under a deed of trust the borrower:

• a.Keeps title while the trustee holds bare legal title as security✓
• b.Holds legal title jointly with the county recorder until payoff
• c.Loses all ownership to the lender until the debt is completely repaid
• d.Must surrender physical possession of the home to the beneficiary

In a lien or title-in-borrower framework the borrower keeps ownership and possession, and the trustee holds only bare or naked legal title as security under the power of sale. Full title is reconveyed to the borrower when the loan is paid. This differs from a strict title-theory approach where the lender holds title.

When a borrower fully repays a loan secured by a California deed of trust, the trustee executes a:

• a.Grant deed transferring title to the lender
• b.Deed of reconveyance releasing the lien✓
• c.Notice of default and election to sell
• d.Trustee's deed upon sale

Upon full repayment the beneficiary directs the trustee to record a deed of reconveyance, which clears the deed of trust from the title. This returns clear title to the borrower. Failure to reconvey can cloud the borrower's title.

In a California nonjudicial foreclosure, the trustee begins the process by recording a:

• a.Lis pendens with the court
• b.Notice of Default✓
• c.Writ of execution
• d.Notice of Sale

The nonjudicial process starts when the trustee records a Notice of Default after the borrower defaults, opening a reinstatement period. After roughly three months a Notice of Sale is recorded and published, and the sale occurs at least 21 days later. Lis pendens and writs of execution belong to judicial actions.

After a Notice of Default is recorded in California, the borrower generally has a reinstatement period of at least how long before a Notice of Sale may be recorded?

• a.Forty-five days
• b.One full year
• c.Three months✓
• d.Ten days

California law provides a three-month reinstatement period after the Notice of Default before the trustee may record a Notice of Sale. During reinstatement the borrower can cure the default by paying the missed amounts plus costs. The right to reinstate continues until five business days before the sale.

In a California trustee's sale, after the Notice of Sale is posted and published, the auction may be held no sooner than:

• a.7 days later
• b.21 days later✓
• c.3 business days later
• d.90 days later

After the three-month reinstatement period, the trustee records and publishes a Notice of Sale, and the auction may occur no sooner than 21 days after that notice. The notice must be posted on the property, published, and mailed to the borrower. This gives the borrower final time to reinstate or pay off.

A major consequence of choosing a nonjudicial trustee's sale rather than judicial foreclosure in California is that the lender:

• a.Waives the right to any deficiency judgment against the borrower✓
• b.Keeps legal title to the property held in escrow for a full year
• c.May still pursue the borrower for a full deficiency judgment afterward
• d.Must also grant the borrower a one-year statutory redemption period

By foreclosing nonjudicially under the power of sale, the lender gives up the right to pursue the borrower for any deficiency, meaning the shortfall between the debt and the sale proceeds. Judicial foreclosure can preserve a deficiency claim on non-purchase-money loans but is slower and allows redemption. The trade-off is speed versus a possible deficiency recovery.

Following a completed nonjudicial trustee's sale in California, the borrower's post-sale right of redemption is:

• a.Nonexistent, because there is no redemption after a trustee's sale✓
• b.A full one-year statutory redemption period that runs after the sale
• c.A ninety-day redemption window that opens once the sale is completed
• d.A three-month statutory redemption period following the trustee's sale

A nonjudicial trustee's sale is final; there is no statutory right of redemption after the gavel falls. The borrower's last chance is to reinstate up to five business days before the sale, or to pay the loan in full before the sale. Post-sale redemption rights exist only in judicial foreclosures.

Under California's purchase-money anti-deficiency rule, a lender generally cannot pursue a deficiency judgment on a loan used to buy:

• a.A large multi-tenant commercial office tower held for investment income
• b.Raw undeveloped land purchased purely for long-term speculation
• c.An owner-occupied dwelling of one to four units✓
• d.A cash-out refinanced single-family rental held by an investor

California Code of Civil Procedure section 580b bars deficiency judgments on purchase-money loans for owner-occupied dwellings of one to four units, and on seller carryback financing. The borrower's liability is effectively limited to the property itself. Refinances and many investment loans do not receive this protection.CA Code of Civil Procedure

California's 'one-action rule' generally requires a secured lender to:

• a.Exhaust the security in a single action before pursuing the borrower personally✓
• b.Bring any lawsuit on the outstanding debt within one calendar year of default
• c.Accept only one specified form of payment from the defaulting borrower
• d.Rely on the written opinion of only one state-licensed appraiser

The one-action rule requires a lender to look first to the secured property in a single action rather than suing the borrower personally while ignoring the collateral. It prevents multiple suits on the same debt. Violating it can cost the lender its security.CA Code of Civil Procedure

On a conventional loan, private mortgage insurance (PMI) is typically required when the loan-to-value ratio exceeds:

• a.50%
• b.60%
• c.95%
• d.80%✓

Conventional lenders generally require PMI when the LTV is above 80 percent, that is, when the borrower puts down less than 20 percent. PMI protects the lender against loss on the higher-risk portion of the loan. Under federal law PMI is generally cancellable as the balance amortizes toward 78 to 80 percent of original value.

Under the federal Homeowners Protection Act, PMI on a conventional loan must automatically terminate when the balance is scheduled to reach what share of the original value?

• a.95%
• b.78%✓
• c.50%
• d.90%

The Homeowners Protection Act requires automatic PMI termination once the loan balance is scheduled to reach 78 percent of the original value, assuming payments are current. Borrowers may also request cancellation at 80 percent. This prevents paying PMI longer than necessary.

A common minimum down payment on an FHA-insured purchase loan for a well-qualified borrower is about:

• a.3.5% of the purchase price✓
• b.A minimum of 10% of the purchase price for every borrower
• c.A full 20% of the purchase price is required for FHA financing
• d.No down payment at all is required on an FHA-insured loan

FHA loans allow down payments as low as 3.5 percent for borrowers meeting the credit threshold, making them popular with first-time buyers. In exchange, borrowers pay an upfront and an annual mortgage insurance premium. The FHA insures the loan while approved lenders fund it.

The mortgage insurance that protects the lender on an FHA loan is called the:

• a.Title insurance premium
• b.Mortgage insurance premium (MIP)✓
• c.VA funding fee
• d.Private mortgage insurance (PMI)

FHA borrowers pay a mortgage insurance premium, including an upfront premium and an annual premium, whereas conventional borrowers pay private mortgage insurance. Both protect the lender, not the borrower. The FHA uses MIP revenue to cover losses on defaulted insured loans.

A VA-guaranteed loan differs from a low-down-payment conventional loan in that the VA loan:

• a.Is funded and disbursed directly by the federal Veterans Affairs
• b.Carries no one-time funding fee under any circumstance at all
• c.Requires a full 20 percent down payment from the eligible veteran
• d.Requires no monthly private mortgage insurance✓

VA loans carry no monthly mortgage insurance, unlike low-down conventional loans that require PMI, though most borrowers pay a one-time VA funding fee. The Department of Veterans Affairs guarantees a portion of the loan, reducing lender risk. Eligible veterans can often buy with no down payment.

Before a veteran can obtain a VA-guaranteed loan, the lender generally requires a:

• a.Notice of Default
• b.Recorded homestead declaration
• c.Cal-Vet purchase contract
• d.Certificate of Eligibility✓

The Certificate of Eligibility confirms the veteran's entitlement to the VA loan guaranty based on qualifying service. The lender uses it to determine the guaranty amount available. Without a valid certificate, the loan cannot be processed as a VA loan.

The Cal-Vet home loan program is funded primarily through:

• a.Private mortgage insurers
• b.County property tax revenue
• c.Federal FHA insurance funds
• d.State general obligation bonds✓

Cal-Vet financing is funded by the sale of state general obligation bonds approved by California voters, not federal money. The Department of Veterans Affairs buys the home and resells it to the veteran, usually by a contract of sale. This structure lets the state offer competitive terms to eligible veterans.

The Cal-Vet loan program is administered by the:

• a.California Department of Veterans Affairs✓
• b.Federal Housing Administration
• c.California Department of Real Estate
• d.United States Department of Veterans Affairs

The California Department of Veterans Affairs administers the Cal-Vet program, distinct from the federal VA that guarantees VA loans. It purchases the property and sells it to the veteran under a land contract, keeping legal title as security. Eligibility is based on qualifying military service.

Fannie Mae and Freddie Mac operate primarily in the:

• a.The title insurance market, underwriting owner and lender policies
• b.Secondary mortgage market, buying loans from lenders✓
• c.The primary market, lending mortgage funds directly to home buyers
• d.The property tax collection and county assessment system

Fannie Mae and Freddie Mac buy existing loans from primary lenders in the secondary market, replenishing lenders' funds so they can make more loans. They do not lend directly to consumers. By purchasing and securitizing loans they add liquidity to the mortgage system.

The primary mortgage market is where:

• a.Lenders originate loans directly with borrowers✓
• b.The federal government directly sets consumer interest rates
• c.Existing loans are bundled together and resold as securities
• d.Real estate appraisers obtain and renew their state licenses

The primary market is where borrowers obtain loans directly from originating lenders such as banks, credit unions, and mortgage companies. Those lenders may then sell the loans into the secondary market. The two markets together keep mortgage credit flowing.

Ginnie Mae (GNMA) differs from Fannie Mae and Freddie Mac in that Ginnie Mae:

• a.Is a government corporation that guarantees securities backed by FHA and VA loans✓
• b.Sets the maximum usury interest limits applied across California
• c.Licenses and disciplines mortgage loan officers statewide
• d.Lends mortgage funds directly to qualifying first-time home buyers

Ginnie Mae is a wholly government-owned corporation within HUD that guarantees mortgage-backed securities backed by government loans such as FHA and VA. It does not buy loans or lend directly. Its guarantee carries the full faith and credit of the United States government.

Under the TILA-RESPA Integrated Disclosure (TRID) rule, a lender must deliver the Loan Estimate within how many business days of receiving a loan application?

• a.10 business days
• b.30 calendar days
• c.3 business days✓
• d.1 business day

TRID requires the lender to provide the Loan Estimate within three business days of application. The Loan Estimate discloses the estimated interest rate, payments, and closing costs so the borrower can shop lenders. It replaced the older Good Faith Estimate for most loans.Truth in Lending Act

TRID requires the borrower to receive the Closing Disclosure at least how long before loan consummation?

• a.30 days before consummation
• b.3 business days before consummation✓
• c.At the closing table itself
• d.7 calendar days after closing

The Closing Disclosure must reach the borrower at least three business days before consummation, giving time to compare final terms with the Loan Estimate. Certain significant changes restart the three-day waiting period. It replaced the HUD-1 settlement statement for most consumer mortgages.Truth in Lending Act

The TRID rule combined and replaced which earlier disclosure forms?

• a.The Transfer Disclosure Statement and Natural Hazard Disclosure
• b.The recorded grant deed and the quitclaim deed used at transfer
• c.The signed promissory note and the recorded deed of trust
• d.The Good Faith Estimate and the HUD-1 Settlement Statement✓

TRID merged the Good Faith Estimate and early TILA disclosure into the Loan Estimate, and the HUD-1 and final TILA into the Closing Disclosure. The goal was clearer, more comparable disclosures for consumers. It applies to most closed-end consumer mortgage loans.Truth in Lending Act

RESPA Section 8 specifically prohibits:

• a.Charging the borrower any loan origination fee at settlement
• b.Requiring the borrower to purchase a lender's title policy
• c.Paying or receiving kickbacks or unearned fees for referring settlement business✓
• d.Maintaining an escrow impound account for taxes and insurance

RESPA Section 8 bars kickbacks, referral fees, and unearned fee-splitting among settlement service providers. Fees must be for services actually performed. Violations carry significant civil and criminal penalties.RESPA

RESPA generally applies to:

• a.Purely business-purpose loans made to a commercial enterprise
• b.Federally related mortgage loans on one-to-four residential properties✓
• c.All-cash commercial purchases with no institutional financing
• d.Private seller carryback promissory notes used exclusively

RESPA covers federally related mortgage loans secured by one-to-four family residential property, which includes most home purchase and refinance loans. It requires settlement cost disclosures and regulates escrow accounts and servicing. Purely commercial or business-purpose loans are generally exempt.RESPA

The TILA right of rescission gives a borrower three business days to cancel a:

• a.A purchase-money loan used to buy or build a brand-new home
• b.A short-term commercial construction loan on a large project
• c.An automobile purchase loan secured only by the vehicle
• d.Refinance or home equity loan on a principal residence✓

Under TILA the three-day right of rescission applies to certain non-purchase loans secured by the borrower's principal residence, such as refinances and home equity lines. It does not apply to loans used to purchase or build the borrower's home. The borrower may cancel until midnight of the third business day.Truth in Lending Act

The annual percentage rate (APR) disclosed under TILA reflects:

• a.The local county and city combined property tax rate applied
• b.Only the note's stated interest rate, excluding any added fees
• c.The effective yearly cost of credit including certain finance charges and fees✓
• d.The listing and selling brokers' negotiated commission rate

The APR expresses the total yearly cost of credit, folding in the note rate plus certain finance charges such as points and some fees. It usually exceeds the stated note rate, letting consumers compare loans on a common basis. TILA requires its disclosure.Truth in Lending Act

Under Regulation Z, stating a specific monthly payment or down payment amount in a credit advertisement is a 'trigger term' that requires the ad to also disclose:

• a.The listing agent's real estate license identification number
• b.The property's exact measured interior square footage figure
• c.The seller's full legal name and current mailing address
• d.Other key credit terms such as the APR and repayment terms✓

Regulation Z provides that if an ad states a trigger term, such as a specific down payment, payment amount, or number of payments, it must also disclose additional terms including the APR and repayment schedule. This prevents misleading partial disclosures. General statements without specific numbers do not trigger the rule.Truth in Lending Act

For a non-exempt private consumer loan, California's usury law generally caps interest at:

• a.25% per year
• b.18% per year
• c.10% per year✓
• d.5% per year

California's constitution generally limits interest on non-exempt personal, family, or household loans to 10 percent per year. For other non-exempt loans the cap is 5 percent over the Federal Reserve Bank of San Francisco discount rate. Most institutional and broker-arranged real estate loans are exempt.CA Constitution

Which lender is generally EXEMPT from California's usury limits?

• a.A private individual quietly lending money to a personal friend
• b.A bank, or a loan arranged by a licensed real estate broker✓
• c.A neighbor informally financing the sale of a used automobile
• d.An unlicensed private party lending against a home for profit

California exempts many lenders from usury caps, including banks, savings institutions, and loans made or arranged by licensed real estate brokers. These exemptions cover the great majority of real estate financing. Loans between private, unlicensed parties are the ones most likely still subject to the cap.CA Constitution

The federal Equal Credit Opportunity Act (ECOA) prohibits a lender from discriminating in credit decisions based on:

• a.The applicant's overall credit score and past payment history
• b.The applicant's calculated monthly debt-to-income ratio figure
• c.The dollar size of the mortgage loan the applicant requested
• d.Race, religion, sex, marital status, age, or receipt of public assistance✓

ECOA prohibits credit discrimination based on race, color, religion, national origin, sex, marital status, age, or because income comes from public assistance. Lenders may still evaluate legitimate factors such as income, debts, and credit history. The law ensures fair access to credit.

A straight (term) note requires the borrower to pay:

• a.Only the principal each period, with no interest ever charged
• b.Interest only during the term, with the full principal due at maturity✓
• c.Nothing at all until the secured property is eventually sold
• d.Equal monthly payments of both principal and accruing interest

A straight or term note calls for periodic interest-only payments, with the entire principal repaid in a lump sum at the end of the term. Because principal is not reduced along the way, the balance stays constant. This contrasts with a fully amortized loan that retires principal gradually.

Negative amortization occurs when:

• a.The payment is less than the interest due, so unpaid interest is added to principal✓
• b.The borrower pays the entire loan off well ahead of schedule
• c.The interest rate stays fixed for the entire loan repayment term
• d.Principal is repaid faster than the amortization schedule requires

Negative amortization happens when a scheduled payment does not cover the interest owed and the shortfall is added to the loan balance, so the debt grows. Some adjustable and payment-option loans allow this. The borrower can end up owing more than the original amount.

In an adjustable-rate mortgage, the fixed percentage the lender adds to the index to set the rate is the:

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

The margin is the lender's fixed markup added to the moving index to determine the ARM's interest rate. Unlike the index, the margin usually stays constant for the life of the loan. Index plus margin equals the fully indexed rate.

The feature of an adjustable-rate mortgage that limits how much the rate can rise at each adjustment or over the loan's life is the:

• a.Index
• b.Teaser rate
• c.Rate cap✓
• d.Margin

Rate caps limit interest rate movement, with periodic caps restricting each adjustment and a lifetime cap limiting the total increase over the term. Caps protect the borrower from steep payment shocks. They do not, however, guarantee the rate will never rise.

An impound (escrow) account collected with a monthly mortgage payment is used to pay the borrower's:

• a.The listing broker's earned real estate sales commission
• b.Property taxes and hazard insurance✓
• c.The loan origination points charged by the mortgage lender
• d.The homeowners association's one-time transfer or setup fee

An impound or escrow account collects a portion of property taxes and hazard insurance premiums each month so the lender can pay those bills when due. This assures the lender that taxes and insurance stay current, protecting its collateral. FHA loans and many high-LTV loans require impounds.

A borrower's total monthly housing payment is often abbreviated PITI, which stands for:

• a.Points, interest, title charges, and the home inspection fee
• b.Principal, interest, loan term, and the adjustable rate index
• c.Principal, interest, taxes, and insurance✓
• d.Payment, interest, property taxes, and the borrower's income

PITI stands for principal, interest, taxes, and insurance, the four core components of a typical monthly payment on an impounded loan. Lenders use PITI in qualifying ratios to measure affordability. It represents the borrower's real monthly housing cost.

A lender uses a 28% housing (front-end) ratio. A buyer earns $6,000 gross per month. The maximum monthly PITI payment the buyer qualifies for is:

• a.$2,000
• b.$1,200
• c.$1,680✓
• d.$2,160

Multiply gross monthly income by the ratio: $6,000 times 0.28 equals $1,680 maximum housing payment. The front-end ratio caps housing costs as a share of income. Lenders also apply a back-end ratio covering total debt.

A lender applies a 36% total debt (back-end) ratio. A borrower's gross monthly income is $8,000 and existing monthly debts total $500. The amount available for housing (PITI) is:

• a.$2,380✓
• b.$2,500
• c.$1,740
• d.$2,880

The back-end ratio allows total debt of $8,000 times 0.36, which is $2,880; subtracting the $500 of other debts leaves $2,380 available for housing. The back-end ratio counts all recurring debt, not just housing. The lender uses the lower of the front-end and back-end results.

A borrower takes a $200,000 interest-only loan at 5.5% annual interest. The monthly interest payment is:

• a.$1,100.00
• b.$1,000.00
• c.$916.67✓
• d.$833.33

Annual interest is $200,000 times 0.055, which equals $11,000; dividing by 12 gives about $916.67 per month. On an interest-only loan the principal does not change. Interest is always charged on the outstanding balance.

A lender charges 1.75 points on a $400,000 loan. The dollar cost of the points is:

• a.$8,000
• b.$5,250
• c.$7,000✓
• d.$4,000

One point equals one percent of the loan, so 1.75 points on $400,000 is 0.0175 times $400,000, which equals $7,000. Points are prepaid interest paid at closing to reduce the rate. They are calculated on the loan amount, not the sale price.

A property appraises at $600,000 and the buyer wants an 80% LTV loan. The required down payment is:

• a.$120,000✓
• b.$150,000
• c.$480,000
• d.$60,000

An 80 percent LTV loan is 0.80 times $600,000, which is $480,000, so the down payment is the remaining $120,000, or 20 percent. LTV measures the loan against value or price, whichever is lower. A larger down payment lowers the LTV and the lender's risk.

A home is under contract at $500,000 but appraises for only $480,000. For an 80% LTV loan, the lender bases the loan amount on:

• a.The higher $500,000 contract price agreed by the two parties
• b.A $490,000 figure representing the average of the two amounts
• c.A $520,000 amount reflecting the price plus a safety cushion
• d.$480,000, the lower appraised value✓

Lenders compute LTV on the lesser of the sale price or the appraised value, so the loan is 0.80 times $480,000, which equals $384,000. The buyer must cover the $20,000 appraisal gap plus the down payment. This protects the lender from over-lending on an inflated price.

Discount points are best described as:

• a.A government tax imposed on the transfer of recorded title
• b.Prepaid interest paid upfront to lower the loan's interest rate✓
• c.A penalty amount the lender charges for making late payments
• d.The lender's recurring monthly loan-servicing administrative fee

Discount points are prepaid interest a borrower pays at closing to buy down the interest rate, lowering monthly payments over the life of the loan. Each point equals one percent of the loan amount. Whether points are worthwhile depends on how long the borrower keeps the loan.

A loan origination fee differs from discount points in that the origination fee:

• a.Is collected at closing and paid directly to the appraiser
• b.Always lowers the loan's interest rate the same way points do
• c.Is fully refundable to the borrower when the loan is paid off
• d.Compensates the lender for processing and making the loan✓

The origination fee pays the lender for the work of processing and funding the loan, while discount points are prepaid interest that reduce the rate. Both are often quoted as a percentage of the loan. Only discount points buy down the interest rate.

A financing arrangement in which a new, larger loan is made that includes and stays subordinate to an existing loan is a:

• a.Package loan on real and personal property
• b.Open-end future-advance loan
• c.Wraparound (all-inclusive) deed of trust✓
• d.Blanket loan over several parcels

A wraparound or all-inclusive deed of trust wraps a new junior loan around an existing senior loan, which stays in place. The buyer pays the seller on the larger wrap, and the seller keeps paying the underlying loan. It is a form of seller financing.CA Civil Code

A blanket loan covering several parcels typically contains a release clause, which allows the borrower to:

• a.Obtain a partial reconveyance of individual parcels as they are sold or paid down✓
• b.Skip several scheduled monthly payments without any penalty
• c.Increase the total blanket loan amount whenever they choose
• d.Avoid recording the blanket deed of trust with the county

A blanket loan secures more than one parcel, and its release clause lets the borrower free individual lots from the lien as they are sold and the loan is partially paid. Subdividers and developers use blanket loans to finance multiple lots. Each release requires paying the agreed release price.CA Civil Code

A package loan finances:

• a.A phased construction project paid out in staged loan draws
• b.Several entirely separate parcels of land under one lien
• c.Only the underlying land, expressly excluding the improvements
• d.Real property together with personal property such as appliances or furnishings✓

A package loan covers both the real estate and specified personal property, such as built-in appliances or furnishings, under one loan. It is common in furnished condominium or resort sales. This differs from a blanket loan, which covers multiple parcels of real estate.

A construction loan is usually disbursed:

• a.In installments (draws) as stages of construction are completed✓
• b.In one lump sum disbursed to the borrower at the initial closing
• c.Only after the finished home is sold to an end buyer
• d.By the county assessor's office after final inspection

Construction loans are paid out in a series of draws tied to completed phases of work, with inspections before each release. Interest accrues only on funds actually disbursed. The short-term construction loan is typically replaced by permanent take-out financing when the project is done.

A federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage is generally available to homeowners who are at least:

• a.55 years old
• b.70 years old
• c.65 years old
• d.62 years old✓

HECM reverse mortgages, insured by the FHA, are available to homeowners age 62 or older who have substantial equity. The loan converts equity into cash with no monthly payments, and the balance is repaid when the owner sells, moves, or dies. Interest and fees accrue and increase the balance over time.

When an arranger negotiates seller (purchase-money) financing on a one-to-four unit residential sale in California, the law generally requires a:

• a.A recorded Notice of Default starting the foreclosure clock
• b.A brand-new appraisal ordered and paid for by the county
• c.A trustee's deed of reconveyance releasing the existing lien
• d.Seller Financing Disclosure Statement describing the loan terms and risks✓

California requires a Seller Financing Disclosure Statement when an arranger negotiates purchase-money seller financing on one-to-four residential units. It spells out the loan terms, the risks of default, and the priority of liens. This protects both buyer and seller in carryback transactions.CA Civil Code

A buyer who takes title 'subject to' an existing loan, rather than assuming it, is:

• a.Made fully and personally liable for repaying the entire debt
• b.Required to pay the existing loan off in full immediately
• c.Not personally liable on the note, though the property remains security for it✓
• d.Automatically released from the seller's underlying loan lien

Buying 'subject to' a loan means the buyer makes payments but does not take on personal liability; on default the lender can foreclose on the property but cannot pursue the buyer personally. In an assumption, by contrast, the buyer becomes personally liable. Both may trigger a due-on-sale clause.CA Civil Code

A defeasance clause in a security instrument requires the lender to:

• a.Accelerate the entire balance immediately upon any default
• b.Add a prepayment penalty to the borrower's promissory note
• c.Raise the note's interest rate at any time after closing
• d.Release the lien and restore clear title once the debt is fully paid✓

A defeasance clause obligates the lender or trustee to defeat, or cancel, the security interest and return clear title when the borrower satisfies the debt. In California this is carried out through a deed of reconveyance. It assures the borrower that repayment clears the lien.CA Civil Code