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 remaining debt after ten years of payments
• b.Lower the interest rate automatically whenever market rates fall
• c.Extend the loan term indefinitely whenever the borrower asks for it
• 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 structured as an interest-only loan for its full term
• c.Guaranteed by the U.S. Department of Veterans Affairs
• 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
• b.Certificate of occupancy from the town
• c.Notice of default starting foreclosure
• 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
• b.Made directly by the federal government
• c.Insured by the Federal Housing Administration✓
• d.Guaranteed by 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 at all
• b.Is available to any borrower, veteran or not
• c.Can allow purchase with no down payment✓
• d.Requires a minimum twenty percent down payment

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.The purchase price
• b.Discount points and origination fee
• c.Loan-to-value ratio and 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%
• c.80%
• d.75%

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
• b.$324,000✓
• c.$300,000
• d.$36,000

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
• b.$750
• c.$7,500✓
• d.$3,000

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
• b.$1,750
• c.$2,520
• 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%
• b.40%
• c.28%
• 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
• b.$750✓
• c.$900
• d.$600

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
• b.$250✓
• c.$1,000
• d.$750

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
• b.$1,200✓
• c.$600
• d.$1,020

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
• b.$250,000
• c.$150,000✓
• d.$650,000

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
• b.Less than the balance owed on the mortgage✓
• c.A price set at a court-ordered referee's auction
• d.More than the loan balance, for the lender's profit

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.