New York Real Estate Salesperson — All Questions

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

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

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.Fixed-rate mortgage✓
• c.Balloon mortgage
• d.Graduated payment 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.$1,800
• b.$1,500✓
• c.$2,000
• d.$1,200

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

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

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

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

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.$400
• c.$8,000
• d.$2,000

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.License real estate brokers
• d.Set property tax rates

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

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.10%
• c.12%
• d.6%

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

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

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

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

In a mortgage loan, the promissory note is the document that:

• a.Records the borrower's ownership interest in the public land records
• b.Evidences the debt and the borrower's promise to repay✓
• c.Transfers legal title of the property to the lending institution
• d.Pledges the real property as security and creates the lender's lien

The promissory note is the borrower's written promise to repay the loan on stated terms and is the evidence of the debt. The mortgage is the separate security instrument that pledges the property as collateral. A typical loan involves both documents.

The mortgage instrument, as opposed to the promissory note, functions to:

• a.State the interest rate, monthly payment, and total amount borrowed
• b.Convey marketable title from the seller to the buyer at closing
• c.Pledge the property as security, creating a lien the lender can foreclose✓
• d.Serve as the borrower's personal promise to repay the debt in full

The mortgage is the security instrument: it pledges the real property as collateral and gives the lender the right to foreclose if the borrower defaults. The note contains the promise to pay and the loan terms. The two documents work together in a mortgage loan.

New York is considered a 'lien theory' state, which means that in a mortgage the:

• a.Borrower forfeits all ownership rights upon signing the mortgage
• b.Borrower keeps title, and the lender holds only a lien on the property✓
• c.Lender takes legal title until the loan is completely paid off
• d.Property is held by a neutral third-party trustee during the loan

In a lien-theory state like New York, the borrower retains title and the lender holds a lien as security. In title-theory states, the lender (or a trustee) holds legal title until the debt is paid. This distinction affects the foreclosure process used.

A deed of trust, used in some states instead of a mortgage, involves three parties: the borrower (trustor), the lender (beneficiary), and the:

• a.Trustee, who holds title as security until the loan is repaid✓
• b.Assessor, who determines the property's value for annual taxation
• c.Guarantor, who insures the lender against the borrower's default
• d.Grantor, who conveys ownership of the property to the borrower

A deed of trust adds a neutral trustee who holds title (or a power of sale) as security for the lender-beneficiary until the trustor-borrower repays. This structure enables non-judicial foreclosure in many states. New York, however, uses mortgages and judicial foreclosure rather than deeds of trust.

Hypothecation in real estate finance refers to:

• a.Pledging property as loan collateral while keeping possession of it✓
• b.Physically surrendering the property to the lender during the loan term
• c.Insuring the lender against loss through private mortgage insurance
• d.Selling the property to repay an outstanding debt before it matures

Hypothecation is pledging property as security for a debt without giving up possession, which is exactly what a mortgage does. The borrower continues to live in and use the home while the lender holds a lien. Losing the collateral occurs only upon default and foreclosure.

When a mortgage loan is fully repaid, the lender records a document that releases the lien, known in New York as a:

• a.Subordination agreement lowering the mortgage's lien priority
• b.Certificate of occupancy issued by the local building department
• c.Notice of default beginning the foreclosure process against the owner
• d.Satisfaction of mortgage✓

A satisfaction of mortgage (satisfaction piece) is recorded when the debt is paid in full, releasing the lender's lien and clearing the title. Failing to record it can leave a cloud on title. The defeasance clause in the mortgage is what requires this release upon full payment.

The defeasance clause in a mortgage requires the lender to:

• a.Release the lien once the borrower has fully repaid the debt✓
• b.Take possession of the property immediately after the loan closes
• c.Accelerate the entire balance the moment a single payment is late
• d.Increase the interest rate if market rates rise during the loan term

The defeasance clause obligates the lender to discharge the mortgage lien and return clear title when the loan is paid in full, typically evidenced by recording a satisfaction. It is distinct from the acceleration clause, which lets the lender demand the full balance upon default.

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

• a.Offered only to first-time buyers purchasing newly built homes
• b.Made directly to the borrower by the federal government itself
• c.Insured by the Federal Housing Administration✓
• d.Guaranteed by the Department of Veterans Affairs for eligible veterans

The FHA does not lend money; it insures loans made by approved lenders, protecting them against borrower default. This insurance lets lenders offer lower down payments and more flexible qualifying. Borrowers pay mortgage insurance premiums for this protection.

A distinctive benefit of a VA-guaranteed loan for an eligible veteran is that it:

• a.Carries no closing costs or lender fees of any kind at settlement
• b.Is available to any borrower regardless of military service history
• c.Can allow purchase with no down payment✓
• d.Requires a minimum down payment of twenty percent of the price

VA loans, guaranteed by the Department of Veterans Affairs for eligible veterans and service members, often allow qualified borrowers to buy with no down payment. The VA guarantee reduces lender risk. A funding fee usually applies, and eligibility depends on service.

In an adjustable-rate mortgage, the interest rate at each adjustment is set by combining the:

• a.Original purchase price and the current appraised property value
• b.Discount points paid at closing and the loan's origination fee
• c.Loan-to-value ratio and the borrower's personal credit score
• d.Index and the margin✓

An ARM's rate equals a published index (which moves with the market) plus a fixed margin the lender adds. For example, an index of 4% plus a 2.5% margin yields a 6.5% rate. Caps limit how much the rate can change per period and over the life of the loan.

An ARM with a 2/6 cap structure means the interest rate cannot increase more than:

• a.6% at each adjustment and 2% over the entire loan term combined
• b.2% at each adjustment and 6% over the life of the loan✓
• c.6% total, applied only during the first year after loan closing
• d.2% per year, with absolutely no limit over the life of the loan

In a 2/6 cap, the first number (2%) is the periodic cap limiting each adjustment, and the second (6%) is the lifetime cap limiting the total increase above the start rate. Caps protect borrowers from sharp payment shocks. A start rate of 4% could rise no higher than 10%.

A balloon mortgage is characterized by:

• a.Smaller periodic payments with a large final lump-sum payment due at maturity✓
• b.Payments that rise on a fixed schedule during the early years of the loan
• c.Level payments that fully pay off the loan by the end of its term
• d.An interest rate that adjusts up or down every year until payoff

A balloon loan has payments that do not fully amortize the debt, leaving a large 'balloon' balance due in one payment at the end of the term. Borrowers often plan to refinance or sell before the balloon comes due. It carries refinancing risk if values or credit decline.

A purchase-money mortgage most commonly refers to financing in which:

• a.A government agency directly funds the entire purchase for the buyer
• b.The buyer pays the full price in cash without any financing at all
• c.The buyer's employer lends the down payment as a workplace benefit
• d.The seller extends credit to the buyer for part of the purchase price✓

A purchase-money mortgage is credit the seller extends to the buyer to help finance the purchase, with the seller taking back a note and mortgage. It is a form of seller financing. It can help buyers who need supplemental financing beyond a primary loan.

A blanket mortgage is one that:

• a.Covers more than one parcel of real estate under a single loan✓
• b.Insures the lender against the borrower's default on the payments
• c.Includes personal property such as appliances along with the real estate
• d.Allows the borrower to draw funds repeatedly up to a set credit limit

A blanket mortgage finances several parcels under one loan, common with subdivisions and developers. It usually contains a partial release clause allowing individual lots to be freed from the lien as they are sold. This lets a developer convey clear title lot by lot.

A package mortgage differs from a standard home loan because it also finances:

• a.Several separate parcels of land under one blanket obligation
• b.Personal property, such as appliances, along with the real estate✓
• c.The construction of improvements in periodic advances during building
• d.The borrower's other consumer debts by consolidating them into one loan

A package mortgage includes certain items of personal property, like kitchen appliances or furnishings, in the financing along with the real estate. It is common in some condominium and new-home sales. A blanket mortgage, by contrast, covers multiple parcels of real property.

A reverse mortgage is designed primarily for:

• a.First-time buyers seeking the smallest possible monthly payment
• b.Investors financing the purchase of multiple rental properties at once
• c.Builders funding new construction through periodic loan advances
• d.Older homeowners who convert home equity into payments to themselves✓

A reverse mortgage lets qualifying senior homeowners borrow against their equity and receive funds, with repayment deferred until they sell, move out, or die. The loan balance grows over time rather than shrinking. It is a way to tap equity without monthly principal-and-interest payments.

A home is purchased for $300,000 with a $255,000 loan. What is the loan-to-value ratio?

• a.85%✓
• b.90%, meaning the borrower financed the great majority of the price
• c.80%, the threshold at which private mortgage insurance is avoided
• d.75%, indicating the borrower made an unusually large down payment

LTV equals the loan amount divided by the price or value: $255,000 / $300,000 = 0.85, or 85%. The remaining 15% ($45,000) is the borrower's down payment and equity. Because the LTV exceeds 80%, the borrower would typically owe private mortgage insurance.

A buyer purchases a $360,000 home with a 10% down payment. What is the loan amount?

• a.$396,000, which incorrectly adds the down payment to the price
• b.$324,000✓
• c.$300,000, an even figure that ignores the stated purchase price
• d.$36,000, which is actually the amount of the buyer's down payment

A 10% down payment on $360,000 is $36,000. The loan is the price minus the down payment: $360,000 - $36,000 = $324,000. This corresponds to a 90% loan-to-value ratio.

A borrower pays 3 discount points on a $250,000 loan. What is the cost of the points?

• a.$25,000, which wrongly assumes each point equals ten percent of the loan
• b.$750, which mistakenly treats the three points as a single tenth of a point
• c.$7,500✓
• d.$3,000, an amount that does not correspond to any correct point calculation

One discount point equals 1% of the loan amount, so 3 points is 3% of $250,000 = $7,500. Points are paid at closing to buy down the interest rate. They are essentially prepaid interest.

A lender uses a 28% front-end (housing) ratio. If a buyer's gross monthly income is $7,000, the maximum monthly PITI payment is:

• a.$700, which mistakenly uses a 10% ratio rather than 28%
• b.$1,750, a figure that does not result from the stated 28% ratio
• c.$2,520, which incorrectly applies a 36% ratio instead of 28%
• d.$1,960✓

The front-end ratio caps housing costs at a percentage of gross income: $7,000 x 0.28 = $1,960 for principal, interest, taxes, and insurance (PITI). Lenders use this ratio to judge affordability. A separate back-end ratio limits total debt payments.

A borrower has total monthly debt payments (including PITI) of $2,450 and gross monthly income of $7,000. The back-end (debt-to-income) ratio is:

• a.45%, an amount higher than the correct calculation actually produces
• b.40%, which does not match the numbers given in the problem
• c.28%, which is the typical front-end housing ratio rather than this figure
• d.35%✓

The back-end ratio divides total monthly debt by gross monthly income: $2,450 / $7,000 = 0.35, or 35%. It includes housing plus car loans, credit cards, and other obligations. Lenders use it alongside the front-end ratio to assess borrower capacity.

A borrower obtains a $180,000 loan at 5% annual interest. What is the interest portion of the first monthly payment?

• a.$9,000, which is the full year's interest rather than one month's
• b.$750✓
• c.$900, which incorrectly divides the annual interest by only ten months
• d.$600, a figure that does not follow from the stated rate and balance

Annual interest is $180,000 x 0.05 = $9,000. Dividing by 12 gives $750 of interest in the first month. In an amortized loan, interest is charged on the outstanding balance, which is highest at the beginning.

A fully amortized loan has a monthly principal-and-interest payment of $1,000, and this month's interest portion is $750. How much reduces the principal?

• a.$1,750, which incorrectly adds the interest and payment together
• b.$250✓
• c.$1,000, the full payment, ignoring the interest that must be paid first
• d.$750, which is actually the interest portion, not the principal portion

In each payment, interest is paid first and the remainder reduces principal: $1,000 - $750 = $250 to principal. As the balance falls, later payments apply more to principal and less to interest. The total payment stays level in a fixed-rate loan.

Using a loan factor of $6.00 per $1,000 borrowed, the monthly principal-and-interest payment on a $200,000 loan is:

• a.$12,000, which mistakenly multiplies by the wrong power of ten
• b.$1,200✓
• c.$600, which uses only half of the correct loan amount
• d.$1,020, which does not correspond to the factor and loan amount given

A per-thousand factor is multiplied by the number of thousands borrowed: $200,000 / $1,000 = 200 units, and 200 x $6.00 = $1,200 per month. These factors, drawn from amortization tables, provide a quick payment estimate for a given rate and term.

A home is worth $400,000 and the mortgage balance is $250,000. The owner's equity is:

• a.$400,000, the full value, ignoring the outstanding mortgage debt
• b.$250,000, which is the loan balance rather than the owner's equity
• c.$150,000✓
• d.$650,000, which incorrectly adds the loan balance to the value

Equity is the property's value minus what is owed against it: $400,000 - $250,000 = $150,000. Equity grows as the loan is paid down and as the property appreciates. It represents the owner's actual financial stake in the property.

Private mortgage insurance on a conventional loan must automatically terminate, under the Homeowners Protection Act, once the loan balance reaches:

• a.50% of the current appraised value at the borrower's request
• b.The full original loan amount at the scheduled maturity date
• c.78% of the original property value, if payments are current✓
• d.90% of the original loan amount after five years of payments

Under the federal Homeowners Protection Act, the lender must automatically cancel borrower-paid PMI when the balance is scheduled to reach 78% of the original value and the borrower is current. A borrower may also request cancellation at 80%. PMI protects the lender, not the borrower.

New York uses judicial foreclosure, which means that to foreclose a lender must:

• a.Simply post a public notice and sell the property without any court
• b.File a lawsuit and obtain a court order authorizing a sale✓
• c.Wait for the borrower to voluntarily surrender the property peacefully
• d.Obtain approval from the New York Department of State before selling

In judicial foreclosure, used in New York, the lender must sue the defaulting borrower, prove the default in court, and obtain a judgment authorizing a referee's sale. This court supervision protects borrowers but makes the process slower. Non-judicial 'power of sale' foreclosure is not the norm in New York.

A lis pendens filed at the start of a foreclosure serves to:

• a.Set the minimum bid price for the eventual foreclosure auction sale
• b.Give public notice that a lawsuit affecting the property's title is pending✓
• c.Immediately transfer title of the property to the foreclosing lender
• d.Release the borrower from all further liability for the mortgage debt

A lis pendens ('suit pending') is a recorded notice warning that litigation affecting the property's title has begun, so anyone dealing with the property takes subject to the outcome. It protects the lender's claim and clouds the title. It does not itself transfer ownership.

The borrower's equity of redemption in a foreclosure allows the borrower to:

• a.Force the lender to accept a lower payoff than the amount actually owed
• b.Continue living in the property rent-free indefinitely after the sale
• c.Pay the full debt and costs to reclaim the property before the sale✓
• d.Sell the property to a relative for one dollar to defeat the lender's lien

The equity of redemption lets a defaulting borrower stop the foreclosure by paying the entire debt plus costs before the foreclosure sale is completed. It is a borrower protection rooted in equity. Once the sale occurs, this pre-sale right generally ends.

A deficiency judgment in a foreclosure allows the lender to:

• a.Increase the interest rate retroactively on the original loan balance
• b.Pursue the borrower for the shortfall when the sale does not cover the debt✓
• c.Keep any surplus proceeds remaining after the debt is fully satisfied
• d.Automatically seize the borrower's other real estate without a court order

If a foreclosure sale brings less than the outstanding debt plus costs, the lender may seek a deficiency judgment against the borrower for the remaining balance, subject to statutory limits. Any surplus above the debt, by contrast, belongs to the borrower. Deficiency rules vary and are regulated.

A deed in lieu of foreclosure is an arrangement in which the borrower:

• a.Refinances the existing loan into a lower fixed interest rate
• b.Receives a court order canceling the mortgage debt entirely
• c.Voluntarily conveys the property to the lender to avoid foreclosure✓
• d.Sells the property to a third party for more than the loan balance

In a deed in lieu of foreclosure, the borrower voluntarily deeds the property to the lender to satisfy the debt and avoid a formal foreclosure. It can be faster and less damaging than foreclosure for both parties. The lender must agree, and junior liens can complicate it.

A short sale occurs when a lender agrees to let the owner sell the property for:

• a.Exactly the appraised value regardless of the loan balance owed
• b.Less than the balance owed on the mortgage✓
• c.A price set at auction by a court-appointed referee after judgment
• d.More than the loan balance to generate a profit for the lender

In a short sale, the lender agrees to accept sale proceeds that are less than the mortgage balance, releasing its lien to allow the sale. It is an alternative to foreclosure when the owner owes more than the home is worth. The lender must approve the terms and may or may not waive the deficiency.

The main purpose of the Real Estate Settlement Procedures Act (RESPA) is to:

• a.Set the maximum interest rate lenders may charge on home loans
• b.Require disclosure of settlement costs and prohibit kickbacks✓
• c.Establish the property tax rates charged by local municipalities
• d.Guarantee every applicant approval for a federally related mortgage

RESPA requires clear disclosure of closing (settlement) costs so borrowers can shop and understand their charges, and it prohibits kickbacks and unearned referral fees. It applies to most federally related mortgage loans. It does not cap interest rates or set taxes.

Section 8 of RESPA specifically prohibits:

• a.Lenders from requiring an escrow account for taxes and insurance
• b.Charging any origination fee on a residential mortgage loan
• c.Kickbacks and unearned fees for referrals of settlement business✓
• d.Sellers from paying any portion of the buyer's closing costs

RESPA Section 8 bars kickbacks, referral fees, and unearned fee-splitting among settlement service providers, such as paying a broker for steering business to a title company. Legitimate payments for actual services performed are allowed. Violations carry significant penalties.

Under the TRID rule, the lender must provide the borrower a Loan Estimate within:

• a.One business day after the property appraisal is completed
• b.Thirty calendar days before the scheduled closing date arrives
• c.Three business days of receiving a loan application✓
• d.Ten business days following the borrower's first mortgage payment

The TILA-RESPA Integrated Disclosure (TRID) rule requires the lender to deliver a Loan Estimate within three business days after receiving a completed application. It shows estimated rates, payments, and closing costs so borrowers can compare offers. A Closing Disclosure follows later.

The TRID rule requires the borrower to receive the Closing Disclosure at least:

• a.Three business days before consummation of the loan✓
• b.Ten business days after the borrower moves into the property
• c.Thirty days before the borrower submits the loan application
• d.One full year after the closing has already been completed

Borrowers must receive the Closing Disclosure at least three business days before consummation (closing), giving them time to review final terms against the Loan Estimate. Certain significant changes restart the three-day period. This waiting rule protects borrowers from last-minute surprises.

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

• a.The sale contract itself before the deed has been delivered
• b.The purchase-money mortgage used to buy their new primary home
• c.A refinance or home equity loan on their principal residence✓
• d.Any commercial real estate loan on an investment property

Under the Truth in Lending Act, borrowers have a three-business-day right to rescind certain loans secured by their principal residence, such as refinances and home equity loans. This right does not apply to a purchase-money mortgage used to buy the home. It protects homeowners from hasty equity borrowing.

The annual percentage rate (APR) differs from the note's interest rate because the APR:

• a.Measures only the monthly payment amount without any interest
• b.Reflects the total yearly cost of credit, including certain fees and points✓
• c.Is always lower than the stated note rate on every mortgage loan
• d.Represents the return the lender earns after paying its own expenses

The APR expresses the true annual cost of credit by including the interest rate plus certain finance charges, such as points and some fees, spread over the loan term. It is usually slightly higher than the note rate. Regulation Z requires its disclosure so borrowers can compare loans.

Under Regulation Z, if a real estate ad states a specific 'trigger term' such as the down payment amount, the advertiser must also disclose:

• a.Additional credit terms like the APR and repayment terms✓
• b.The seller's original purchase price and current mortgage balance
• c.The property's assessed value and the annual property tax bill
• d.The listing broker's commission and the salesperson's split

Regulation Z's advertising rules provide that using a trigger term, such as a specific down payment, monthly payment, or number of payments, requires disclosing additional terms including the APR and repayment schedule. This prevents misleading partial credit advertising. General statements without trigger terms are exempt.

At closing on the 10th day of a month, the buyer owes 10 days of prepaid interest on a $200,000 loan at 6% (using a 360-day year). What is the per-diem interest?

• a.$33.33 per day✓
• b.$100.00 per day, a figure far larger than the calculation supports
• c.$16.67 per day, which mistakenly halves the correct daily amount
• d.$54.79 per day, which incorrectly uses a 365-day accrual method here

Annual interest is $200,000 x 0.06 = $12,000. Using a 360-day banker's year, the per-diem is $12,000 / 360 = $33.33 per day. For 10 days the prepaid interest would be about $333.33. Lenders collect interim interest from closing to the first payment.

Annual property taxes of $3,600 are unpaid at a closing that occurs exactly four months into the tax year. Using monthly proration, the seller's share owed to the buyer is:

• a.$300
• b.$2,400
• c.$3,600, the full annual amount, ignoring the proration entirely
• d.$1,200✓

The seller owes taxes for the portion of the year they owned the property: $3,600 x 4/12 = $1,200. Because the taxes are unpaid, the seller credits this amount to the buyer, who will pay the full bill. Proration allocates ongoing costs fairly at closing.

A tenant's monthly rent is $1,500, and the closing occurs on the 16th using a 30-day month. The seller has collected the full month, so the buyer is credited for:

• a.$1,500, the entire month's rent, ignoring the mid-month proration
• b.$50, which reflects only a single day of the monthly rent
• c.$750✓
• d.$500, which does not correspond to a 15-day share of the rent

The buyer owns the property for the last 15 days of a 30-day month, so the buyer's share of rent already collected by the seller is $1,500 x 15/30 = $750, credited to the buyer at closing. Collected rent for the buyer's period of ownership belongs to the buyer.

New York's state transfer tax is $2 for each $500 of consideration. On a $400,000 sale, the transfer tax is:

• a.$1,600✓
• b.$4,000, which mistakenly applies a full 1% rate to the price
• c.$2,000, a figure that does not match the statutory rate
• d.$800, which incorrectly uses a rate of $1 per $500 of value

Divide the price by $500: $400,000 / $500 = 800 units. Multiply by $2: 800 x $2 = $1,600 (equivalent to 0.4%). The seller customarily pays this New York State transfer tax, reported on form TP-584 at closing.

New York's 'mansion tax' adds 1% on residential sales of $1 million or more, paid by the buyer. On a $1,200,000 home, the base mansion tax is:

• a.$1,200, which incorrectly applies a rate of one-tenth of one percent
• b.$12,000✓
• c.$6,000, a figure that does not follow from the 1% statewide rate
• d.$120,000, which mistakenly multiplies the price by ten percent

The statewide mansion tax is 1% of the full price for residential sales of $1 million or more: $1,200,000 x 0.01 = $12,000, paid by the buyer. New York City imposes an additional graduated mansion tax on top of the state rate. The threshold is a hard cliff at $1 million.

A property sells for $450,000 with a 5% commission split equally between the listing and selling brokerages. Each brokerage receives:

• a.$4,500, a figure that does not result from the stated 5% rate
• b.$11,250✓
• c.$5,625, which incorrectly splits only a single side's half again
• d.$22,500, which is the entire commission before it is split in two

Total commission is $450,000 x 0.05 = $22,500. Split evenly, each brokerage receives $22,500 / 2 = $11,250. The brokerage then divides its share with its salesperson per their agreement. Commission rates are negotiable and not set by law.

A seller's home sells for $300,000. After a 6% commission and a $180,000 loan payoff, and $2,000 in other costs, the seller's net proceeds are:

• a.$118,000, which fails to subtract the outstanding loan payoff
• b.$120,000, which omits the commission from the seller's deductions
• c.$100,000✓
• d.$82,000, which double-counts one of the seller's closing costs

Commission is $300,000 x 0.06 = $18,000. Net proceeds equal price minus all costs: $300,000 - $18,000 - $180,000 - $2,000 = $100,000. A seller's net sheet subtracts commission, loan payoffs, and other closing costs from the sale price.

A borrower has a $10,000 second mortgage at 8% simple interest for 6 months. The total interest owed is:

• a.$4,800, which incorrectly treats the rate as a monthly figure
• b.$200, which mistakenly uses a 4% rate instead of 8%
• c.$400✓
• d.$800, which is a full year's interest rather than six months' worth

Simple interest is principal x rate x time: $10,000 x 0.08 x 0.5 year = $400. A six-month term is half of the annual interest of $800. Simple interest is charged only on the principal, not on accumulated interest.

A borrower pays 2.5 discount points on a $300,000 loan. The dollar cost of these points is:

• a.$750, which mistakenly treats 2.5 points as a quarter of one point
• b.$7,500✓
• c.$3,000, an amount that does not follow from the point calculation
• d.$75,000, which incorrectly assumes each point equals ten percent

Each point is 1% of the loan, so 2.5 points is 2.5% of $300,000 = $7,500. Points are prepaid interest paid at closing to lower the note rate. Buyers weigh the upfront cost against the monthly savings.

A mortgage balance is $150,000 at 6% annual interest. Using a 360-day year, the per-diem interest for a mid-month payoff is:

• a.$41.10 per day, which incorrectly applies a 365-day accrual basis
• b.$25 per day✓
• c.$250 per day, a figure ten times larger than the correct amount
• d.$12.50 per day, which mistakenly uses a 3% interest rate

Annual interest is $150,000 x 0.06 = $9,000. Dividing by 360 gives $25 per day. At payoff, the borrower owes the remaining principal plus interest accrued to the payoff date. Lenders often provide a payoff figure good through a specific date.

Predatory lending refers to:

• a.A lender's routine practice of requiring an escrow account for taxes
• b.Any mortgage loan that carries a fixed rather than an adjustable rate
• c.Unfair or abusive loan terms imposed on vulnerable borrowers✓
• d.Lending only to borrowers with the highest possible credit scores

Predatory lending involves deceptive, unfair, or abusive practices, such as excessive fees, hidden terms, or loans the borrower cannot repay, often targeting the elderly or financially vulnerable. Laws like HOEPA and state statutes combat it. Not every high-cost loan is predatory, but abusive terms are the hallmark.

The Home Ownership and Equity Protection Act (HOEPA) provides extra protections for borrowers taking out:

• a.Commercial loans secured by office and retail buildings
• b.Standard conforming loans sold to Fannie Mae and Freddie Mac
• c.VA and FHA government-backed loans of any interest rate
• d.High-cost mortgages that exceed certain rate or fee thresholds✓

HOEPA, part of the Truth in Lending Act, imposes additional disclosures and restrictions on 'high-cost' home loans that exceed set rate or points-and-fees thresholds. It targets abusive terms in the subprime market. Lenders must give special warnings and avoid certain features on covered loans.

The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating based on all of the following EXCEPT:

• a.Sex, marital status, and age of the person applying for credit
• b.The borrower's credit history and ability to repay✓
• c.The applicant's receipt of income from a public assistance program
• d.Race, color, religion, and national origin of the applicant

ECOA bars credit discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. Lenders may, however, consider legitimate creditworthiness factors like credit history, income, and ability to repay. Those factors are the proper basis for a lending decision.

New York's civil usury law generally caps the interest rate on most ordinary loans at:

• a.There is no interest rate limit of any kind under New York law
• b.6% per year, the same as the legal default judgment interest rate
• c.25% per year for all consumer and commercial loans without exception
• d.16% per year✓

New York's general civil usury limit is 16% per year for most ordinary loans, above which the loan may be unenforceable; criminal usury is set higher, at 25%. Certain loans and lenders are exempt, and the figures can change, so licensees should verify current limits. Charging above the cap is illegal usury.

'Equity stripping' as a predatory practice involves:

• a.Splitting the commission fairly between two cooperating brokers
• b.Reducing the borrower's interest rate to build equity more quickly
• c.Making a loan based on home equity that the borrower cannot repay, aiming at foreclosure✓
• d.Requiring a large down payment so the borrower has more equity

Equity stripping is a predatory tactic where a lender extends a loan the borrower cannot afford, secured by substantial home equity, expecting default and foreclosure to capture that equity. It targets asset-rich but cash-poor owners. Consumer protection laws and disclosures aim to curb it.

'Loan flipping,' an abusive lending practice, refers to:

• a.Converting an adjustable-rate loan to a fixed rate to reduce risk
• b.Transferring a mortgage from one lender to another at the same terms
• c.Quickly reselling a purchased property for a legitimate market profit
• d.Repeatedly refinancing a borrower's loan to generate fees with little benefit✓

Loan flipping is the predatory practice of repeatedly refinancing a borrower's mortgage, each time charging points and fees that strip equity while providing little or no real benefit to the borrower. It is distinct from legitimate property 'flipping' or beneficial refinancing. Regulators treat it as abusive.

A lender collects reserves in an escrow (impound) account primarily to ensure that:

• a.The borrower's monthly principal-and-interest payment keeps decreasing
• b.The real estate broker's commission is fully funded before closing
• c.Property taxes and hazard insurance are paid when they come due✓
• d.The lender earns extra profit on the borrower's mortgage over time

An escrow or impound account collects a portion of taxes and insurance with each monthly payment so the lender can pay those bills when due, protecting the collateral. The account is reviewed periodically and adjusted for changes in taxes or premiums. It is separate from principal and interest.

Prepaid items collected from the buyer at closing typically include:

• a.Prorated interest, homeowner's insurance, and property tax reserves✓
• b.The full purchase price of the property paid entirely in cash
• c.The listing broker's total commission for marketing the home
• d.The seller's outstanding mortgage payoff and unpaid liens

Prepaid items are amounts the buyer pays up front at closing to fund future obligations, such as interim mortgage interest, the first year of hazard insurance, and initial escrow reserves for taxes and insurance. They differ from recurring monthly payments. Lenders require them to start the escrow account.

A loan origination fee charged by a lender is:

• a.A government tax imposed on every recorded mortgage instrument
• b.A refundable deposit returned to the borrower after the first payment
• c.A fee for processing and originating the loan, often about 1% of the amount✓
• d.The interest the borrower prepays to permanently lower the note rate

The origination fee compensates the lender for evaluating, preparing, and funding the loan, and it is commonly around 1% of the loan amount. It differs from discount points, which specifically buy down the interest rate. Both appear among a borrower's closing costs.

New York imposes a mortgage recording tax that is:

• a.A flat fee identical for every mortgage regardless of its size
• b.Charged solely on cash purchases where no mortgage exists
• c.Paid only by the seller as part of the state transfer tax
• d.A tax based on the amount of the mortgage being recorded✓

New York's mortgage recording tax is levied on the principal amount of a mortgage when it is recorded, with rates that vary by locality (higher in New York City). It is separate from the real estate transfer tax on the sale itself. Buyers financing a purchase typically bear this cost.

A subordination agreement changes the priority of liens so that:

• a.The mortgage is converted from adjustable to fixed-rate terms
• b.One lienholder agrees to move to a lower priority behind another✓
• c.The borrower's interest rate is automatically reduced by the lender
• d.All existing liens are permanently and completely removed from title

A subordination agreement is a recorded agreement in which a lienholder consents to have its lien take a lower priority than a lien that would otherwise rank behind it. It is common when refinancing a first mortgage while keeping a second. Priority normally follows recording order unless altered this way.

When a buyer 'assumes' an existing mortgage, the buyer:

• a.Takes title free of the existing loan, which is automatically paid off
• b.Obtains an entirely new loan at current market interest rates
• c.Takes over personal liability for the existing loan's payments✓
• d.Avoids all responsibility for the debt secured by the property

In an assumption, the buyer takes on personal liability for the seller's existing mortgage and continues its terms, usually with lender approval. This differs from taking title 'subject to' the mortgage, where the buyer makes payments but is not personally liable. A due-on-sale clause may block assumption.

A due-on-sale (alienation) clause in a mortgage gives the lender the right to:

• a.Raise the interest rate whenever market rates happen to increase
• b.Demand full repayment when the property is sold or transferred✓
• c.Forbid the borrower from ever making extra principal payments
• d.Extend the loan term automatically at the borrower's request

A due-on-sale (alienation) clause lets the lender call the entire balance due if the borrower sells or transfers the property, which prevents a new buyer from simply assuming the old loan without approval. It protects the lender's ability to reprice risk. Some transfers are exempt by law.

The purpose of a subordination clause is most clearly seen when a landowner:

• a.Lets a construction lender's new loan take priority over the seller's earlier lien✓
• b.Sells the property for cash with no financing involved at all
• c.Assigns the purchase contract to a completely different buyer
• d.Pays off the mortgage and records a satisfaction of the lien

A subordination clause is valuable when, for example, a seller who financed the land agrees that a later construction lender's mortgage will have first priority, enabling the borrower to obtain building financing. The earlier lien voluntarily steps back. This makes the development loan feasible.

Fannie Mae and Freddie Mac set 'conforming' loan limits, which are the maximum loan amounts they will:

• a.Purchase from primary lenders in the secondary market✓
• b.Lend directly to individual homebuyers at their local branches
• c.Allow a borrower to withdraw from a home equity credit line
• d.Charge as an interest rate on any residential mortgage loan

Conforming loans meet the size and underwriting standards that let Fannie Mae and Freddie Mac buy them in the secondary market, providing lenders liquidity. Loans above the conforming limit are 'jumbo' loans. These entities purchase loans rather than lending directly to consumers.

A borrower takes title 'subject to' an existing mortgage rather than assuming it. This means the borrower:

• a.Becomes fully and personally liable for the entire mortgage balance
• b.Extinguishes the existing mortgage lien on the property immediately
• c.Obtains a brand-new loan replacing the seller's original financing
• d.Makes the payments but is not personally liable for the debt✓

Taking title 'subject to' a mortgage means the buyer agrees to make the payments but does not become personally liable on the note; if there is a default, the buyer risks losing the property but is not personally sued for a deficiency. In an assumption, by contrast, the buyer accepts personal liability.

An open-end mortgage benefits a borrower by allowing them to:

• a.Transfer the loan to another borrower free of lender approval
• b.Repay the loan only when the property is eventually sold
• c.Borrow additional funds up to a limit without a new mortgage✓
• d.Avoid paying any interest during the first years of the loan

An open-end mortgage lets the borrower re-borrow funds already repaid, up to a set limit, without executing a new mortgage, similar to a line of credit secured by the property. It is convenient for ongoing needs like home improvements. Each advance is secured by the same mortgage.

The Federal Reserve influences mortgage interest rates primarily by:

• a.Adjusting monetary policy that affects the cost and supply of money✓
• b.Directly approving or denying individual borrowers' loan applications
• c.Setting the exact interest rate every lender must charge on loans
• d.Buying homes at foreclosure auctions to support property values

The Federal Reserve affects interest rates indirectly through monetary policy tools that change the cost and availability of money in the economy, which ripples into mortgage rates. It does not set mortgage rates directly or approve individual loans. Rates ultimately respond to market conditions.

A graduated payment mortgage (GPM) is structured so that the borrower's payments:

• a.Remain exactly level for the entire fixed term of the loan
• b.Start low and rise on a set schedule in the loan's early years✓
• c.Adjust up or down each year based on a published market index
• d.Are interest-only until a single balloon payment comes due

A GPM begins with low payments that increase step-by-step over the first years before leveling off, easing early affordability for borrowers who expect rising income. Early payments may not cover all interest, causing temporary negative amortization. It differs from an ARM, whose changes track an index.

A wraparound mortgage is a financing technique in which the new, larger loan:

• a.Covers several separate parcels of land under one blanket lien
• b.Adds personal property such as appliances to the real estate loan
• c.Includes and 'wraps around' the existing first mortgage, which stays in place✓
• d.Immediately pays off and discharges the seller's original mortgage

In a wraparound, the seller extends a new loan that encompasses the balance of the existing first mortgage, which remains in place. The buyer pays the seller, who continues paying the underlying loan. It works only if the first mortgage lacks an enforceable due-on-sale clause.

A construction loan is typically disbursed to the borrower:

• a.In periodic advances (draws) as building progresses✓
• b.As a permanent 30-year loan requiring no further refinancing
• c.Only after the completed home has been sold to a final buyer
• d.In a single lump sum paid entirely before construction begins

A construction loan is paid out in stages ('draws') tied to completed phases of the work, and it is usually short-term with interest on the amount advanced. On completion, it is often replaced by permanent 'take-out' financing. Lenders inspect progress before releasing each draw.

A conventional 'conforming' loan is one that:

• a.Meets Fannie Mae and Freddie Mac standards and size limits✓
• b.Is guaranteed by the Department of Veterans Affairs for veterans
• c.Exceeds the maximum size limit and is therefore a jumbo loan
• d.Is insured by the FHA against the risk of borrower default

A conforming loan meets the underwriting standards and loan-size limits set by Fannie Mae and Freddie Mac, allowing it to be sold to them in the secondary market. Loans above the limit are 'jumbo.' Conforming status generally means more favorable, standardized terms.

A borrower's gross annual income is $84,000. Using a 28% front-end ratio, the maximum monthly housing (PITI) payment is:

• a.$2,352, which incorrectly applies a 33.6% ratio to the income
• b.$1,960✓
• c.$23,520, which is an annual figure rather than a monthly one
• d.$840, which mistakenly uses a 12% ratio instead of 28%

First convert income to monthly: $84,000 / 12 = $7,000. Then apply the 28% housing ratio: $7,000 x 0.28 = $1,960 maximum PITI. Lenders use this front-end ratio to gauge how much house payment a borrower can afford.

A property's net operating income is $36,000 and an investor requires a 9% capitalization rate. The indicated value is:

• a.$3,240,000, which misplaces the decimal in the division
• b.$400,000✓
• c.$324,000, which incorrectly multiplies the income by the cap rate
• d.$450,000, a figure that does not follow from a 9% cap rate

Value equals net operating income divided by the cap rate: $36,000 / 0.09 = $400,000. A lower required cap rate would produce a higher value, and a higher rate a lower value. Investors use this income-approach formula to price income property.

A satisfaction of mortgage that a lender fails to record after payoff can result in:

• a.A cloud on the title, because the released lien still appears of record✓
• b.The borrower losing all ownership rights in the property immediately
• c.The lender being able to foreclose again on the same paid-off loan
• d.An automatic increase in the property's assessed value for taxes

If the lender does not record a satisfaction after the loan is paid, the old mortgage still appears in the public record, creating a cloud on title that can delay a future sale or refinance. The defeasance clause obligates the lender to release the lien. Owners should confirm the satisfaction is recorded.

The primary function of the secondary mortgage market is to:

• a.Set the property tax rates that fund local school districts
• b.Buy existing loans from lenders, giving them funds to make new loans✓
• c.License and regulate the conduct of mortgage loan originators
• d.Originate first mortgages directly to consumers at retail branches

The secondary market, including Fannie Mae and Freddie Mac, purchases loans from primary lenders, replenishing their capital so they can lend again and keeping mortgage credit flowing. The primary market is where borrowers obtain their original loans. This buying activity increases liquidity.