CSLB General Building (B) — All Questions

In a mortgage transaction, the borrower who pledges the property as security is called the:

• a.Mortgagee
• b.Trustee
• c.Mortgagor✓
• d.Grantee

The mortgagor is the borrower who pledges the property as collateral for the loan. The mortgagee is the lender that holds the security interest. Remember that the party whose title ends in '-or' gives the security to the '-ee'.

A loan in which the interest rate remains constant for the entire term is a:

• a.Adjustable-rate mortgage
• b.Graduated payment mortgage
• c.Balloon mortgage
• d.Fixed-rate mortgage✓

A fixed-rate mortgage keeps the same interest rate and, for a fully amortized loan, the same principal-and-interest payment for the life of the loan. An adjustable-rate mortgage changes with an index. Fixed rates give borrowers predictable payments.

A borrower obtains a $300,000 loan at a 6% annual interest rate. What is the interest portion of the first monthly payment?

• a.$1,200
• b.$2,000
• c.$1,800
• d.$1,500✓

Annual interest is $300,000 x 0.06 = $18,000. Dividing by 12 months gives $1,500 of interest in the first month. In an amortized loan, interest is calculated on the outstanding balance, which is highest at the start.

A property sells for $250,000 and the buyer makes a 20% down payment. What is the loan amount?

• a.$50,000
• b.$230,000
• c.$220,000
• d.$200,000✓

A 20% down payment on $250,000 is $250,000 x 0.20 = $50,000. The loan amount is the price minus the down payment: $250,000 - $50,000 = $200,000. The 80% financed corresponds to an 80% loan-to-value ratio.

The loan-to-value (LTV) ratio is calculated as:

• a.Down payment divided by the loan amount
• b.Property value divided by the loan amount
• c.Loan amount divided by the appraised value or price✓
• d.Interest divided by principal

LTV is the loan amount divided by the lesser of the appraised value or sale price, expressed as a percentage. A $200,000 loan on a $250,000 property is an 80% LTV. Higher LTVs mean less borrower equity and generally more lender risk.

Private mortgage insurance (PMI) is typically required on a conventional loan when the:

• a.LTV is 80% or lower
• b.Down payment is at least 20%
• c.Interest rate is fixed
• d.LTV is greater than 80%✓

PMI protects the lender when the borrower makes a down payment of less than 20%, meaning the LTV exceeds 80%. It can often be removed once sufficient equity is built. A 20% or larger down payment usually avoids PMI on conventional loans.

An acceleration clause in a mortgage allows the lender to:

• a.Lower the interest rate automatically
• b.Extend the loan term indefinitely
• c.Demand the entire remaining balance if the borrower defaults✓
• d.Forgive the debt after ten years

An acceleration clause lets the lender declare the full unpaid balance immediately due upon a borrower default, such as missed payments. It is a necessary step before foreclosure. This protects the lender from having to sue for each missed installment.

In a fully amortized loan, over the life of the loan the portion of each payment going to interest:

• a.Increases while principal decreases
• b.Decreases while principal increases✓
• c.Stays exactly the same
• d.Is always zero

In a fully amortized loan, early payments are mostly interest because the balance is high, and over time the interest portion shrinks while the principal portion grows. The total payment stays level in a fixed-rate loan. By the end, nearly all of each payment reduces principal.

A buyer pays 2 discount points on a $200,000 loan. How much do the points cost?

• a.$4,000✓
• b.$2,000
• c.$400
• d.$8,000

One discount point equals 1% of the loan amount, so 2 points is 2% of $200,000 = $4,000. Points are paid at closing to lower the loan's interest rate. They effectively prepay interest to buy down the rate.

A key purpose of the secondary mortgage market, including entities like Fannie Mae and Freddie Mac, is to:

• a.Originate loans directly to consumers at branches
• b.Provide liquidity by buying loans from primary lenders✓
• c.Set property tax rates
• d.License real estate brokers

The secondary mortgage market buys existing loans from primary lenders, giving those lenders fresh funds to make more loans and thus increasing liquidity. Fannie Mae and Freddie Mac are major participants. The primary market is where borrowers get their original loans.

The Truth in Lending Act (Regulation Z) requires lenders to disclose the:

• a.Annual percentage rate (APR) and finance charges✓
• b.Seller's net proceeds
• c.Buyer's credit score to the public
• d.Broker's commission split

Regulation Z, implementing the Truth in Lending Act, requires lenders to disclose the APR, finance charges, and other credit terms so consumers can compare loans. The APR reflects the true cost of credit including certain fees. It also governs certain advertising of credit terms.

A property has a net operating income of $24,000 and sold for $300,000. What is the capitalization rate?

• a.8%✓
• b.6%
• c.10%
• d.12%

The capitalization rate equals net operating income divided by value: $24,000 / $300,000 = 0.08, or 8%. Cap rate is used to estimate value and compare income properties. A higher cap rate generally indicates higher risk or a lower price relative to income.

A conventional loan is best described as one that is:

• a.Not insured or guaranteed by a government agency✓
• b.Guaranteed by the VA
• c.Insured by the FHA
• d.Always interest-only

A conventional loan is not backed by a government program such as FHA insurance or a VA guarantee. It relies on the borrower's creditworthiness and the property as collateral. Government-backed loans have their own qualifying rules and benefits.

A prepayment penalty in a mortgage is a charge for:

• a.Refinancing with a new appraisal
• b.Making a late payment
• c.Requesting an escrow analysis
• d.Paying the loan off early✓

A prepayment penalty is a fee some loans impose when a borrower pays off all or part of the loan ahead of schedule, compensating the lender for lost interest. Not all loans have them, and some are restricted by law. Borrowers should check whether their loan includes one.

Using an annual property tax rate of $2.50 per $100 of assessed value, the annual tax on a home assessed at $180,000 is:

• a.$450
• b.$5,400
• c.$4,500✓
• d.$45,000

Divide the assessed value by 100: $180,000 / 100 = 1,800 units. Multiply by the rate: 1,800 x $2.50 = $4,500. Property taxes are calculated from the assessed value, which may differ from market value.

The account in which a lender holds a portion of a borrower's monthly payment to pay property taxes and insurance is the:

• a.Escrow (impound) account✓
• b.Acceleration account
• c.Amortization account
• d.Discount account

An escrow or impound account is where the lender collects a portion of taxes and insurance with each monthly payment and pays those bills when due. This ensures property taxes and hazard insurance stay current. The account is analyzed periodically and adjusted.