California Real Estate Salesperson — All Questions

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.

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