CSLB General Building (B) — All Questions

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

• a.Deed of trust
• b.Promissory note✓
• c.Warranty deed
• d.Title commitment

The promissory note is the borrower's personal promise to repay the loan under stated terms. The deed of trust (or mortgage) is the separate instrument that pledges the property as security for that note.

Texas commonly uses a 'deed of trust' rather than a traditional mortgage. In a deed of trust, the neutral third party who holds legal title until the loan is repaid is the:

• a.Trustee✓
• b.Trustor only
• c.Beneficiary
• d.Grantee

In a deed of trust, the borrower (trustor) conveys title to a trustee who holds it for the lender (beneficiary) until the debt is paid. This structure allows a non-judicial foreclosure process if the borrower defaults.

A loan feature that lets the lender declare the entire remaining balance due upon borrower default is a(n):

• a.Prepayment penalty
• b.Subordination clause
• c.Acceleration clause✓
• d.Defeasance clause

An acceleration clause allows the lender to demand the full unpaid balance immediately if the borrower defaults, which is a prerequisite to foreclosure. A defeasance clause, by contrast, cancels the lien once the debt is fully paid.

A 'due-on-sale' (alienation) clause in a mortgage generally:

• a.Requires the lender to lower the interest rate annually
• b.Forces the buyer to assume the loan
• c.Prohibits any prepayment
• d.Allows the lender to require full repayment if the property is sold or transferred✓

A due-on-sale clause lets the lender call the loan due when the borrower transfers the property, preventing an unapproved buyer from simply taking over the existing loan. It protects the lender's ability to re-price the loan at current rates.

In an amortized loan, the early payments are applied:

• a.Mostly to interest, with a small portion to principal✓
• b.Entirely to principal
• c.Entirely to property taxes
• d.Mostly to principal, with a small portion to interest

In a standard amortizing loan, early payments are weighted heavily toward interest because the outstanding balance is high. As the balance declines, more of each payment goes toward principal.

The four components commonly abbreviated as 'PITI' in a monthly housing payment are:

• a.Principal, insurance, taxes, and inspection
• b.Principal, interest, taxes, and insurance✓
• c.Points, interest, title, and insurance
• d.Principal, interest, transfer, and inspection

PITI stands for principal, interest, taxes, and insurance, the four parts of a typical escrowed mortgage payment. Lenders often collect taxes and insurance in an escrow account and pay them when due.

Private mortgage insurance (PMI) on a conventional loan is generally required when the borrower's down payment is:

• a.More than 50% of the price
• b.Exactly 20% of the price
• c.Less than 20% of the price (LTV above 80%)✓
• d.Any amount, regardless of down payment

PMI protects the lender against default and is typically required on conventional loans when the loan-to-value ratio exceeds 80%, meaning less than 20% down. It can usually be canceled once sufficient equity is reached.

A loan that is insured by the Federal Housing Administration is called a(n):

• a.VA loan
• b.Conventional loan
• c.Jumbo loan
• d.FHA loan✓

An FHA loan is insured by the Federal Housing Administration and typically allows lower down payments and more flexible qualifying. A VA loan is guaranteed by the Department of Veterans Affairs for eligible service members.

A key benefit of a VA-guaranteed loan for eligible veterans is that it:

• a.Often requires no down payment✓
• b.Requires a minimum 20% down payment
• c.Is available to all buyers regardless of service
• d.Charges the highest interest rates by law

VA loans, guaranteed by the Department of Veterans Affairs, often allow eligible veterans to purchase with no down payment. They are limited to qualified veterans, service members, and certain spouses.

In an adjustable-rate mortgage (ARM), the interest rate is periodically adjusted based on a specified:

• a.Appraised value of the home
• b.Financial index plus a margin✓
• c.Broker's commission rate
• d.Property tax rate

An ARM's rate is tied to a published index, and the lender adds a fixed margin to set the new rate at each adjustment. Caps typically limit how much the rate can change per period and over the loan's life.

Discount points paid to a lender at closing are typically used to:

• a.Increase the loan amount
• b.Pay the real estate commission
• c.Buy down (lower) the loan's interest rate✓
• d.Cover the appraisal fee only

Discount points are prepaid interest paid to reduce the loan's interest rate, with one point equal to 1% of the loan amount. Paying points can lower monthly payments over the life of the loan.

The federal law that requires lenders to disclose the annual percentage rate (APR) and total finance charges to consumers is the:

• a.Fair Housing Act
• b.RESPA
• c.Sherman Antitrust Act
• d.Truth in Lending Act (TILA)✓

The Truth in Lending Act requires lenders to disclose credit costs, including the APR and finance charges, so consumers can compare loans. RESPA, by contrast, focuses on settlement (closing) cost disclosures and prohibits kickbacks.

The Real Estate Settlement Procedures Act (RESPA) primarily regulates:

• a.Closing (settlement) cost disclosures and prohibits kickbacks✓
• b.Zoning of residential neighborhoods
• c.The design of TREC contract forms
• d.Property tax assessment methods

RESPA governs the disclosure of settlement costs on federally related mortgage loans and prohibits kickbacks and unearned referral fees. It works alongside TILA, which addresses the cost of credit.

Foreclosure under a Texas deed of trust with a power-of-sale clause is often carried out through:

• a.A lengthy jury trial
• b.A non-judicial trustee's sale✓
• c.Automatic transfer to the county
• d.An IRS auction

The power-of-sale clause in a Texas deed of trust allows a non-judicial foreclosure conducted by the trustee, which is faster than a court process. Statutory notice requirements must still be met, and the rules can change.

A borrower's ability to reclaim the property by paying the full debt before a foreclosure sale is known as the:

• a.Right of rescission
• b.Right of subrogation
• c.Equitable right of redemption✓
• d.Statutory acceleration

The equitable right of redemption lets a defaulting borrower pay the entire debt plus costs to stop the foreclosure and keep the property before the sale. Some states also provide a statutory redemption period after the sale for certain loans.

In a mortgage assumption, the buyer:

• a.Automatically receives a new lower interest rate
• b.Pays cash for the full purchase price
• c.Is never personally liable for the debt
• d.Takes over the seller's existing loan and its terms✓

In an assumption, the buyer takes over the seller's existing loan, including its balance, rate, and terms, subject to lender approval where required. Whether the seller is released from liability depends on the lender and loan documents.

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

• a.Loan amount divided by the property's value or price✓
• b.Property value divided by the loan amount
• c.Interest rate multiplied by the term
• d.Down payment divided by the interest rate

LTV equals the loan amount divided by the lesser of the appraised value or sales price, expressed as a percentage. A lower LTV means more borrower equity and generally lower lender risk.

A buyer purchases a home for $300,000 and makes a $60,000 down payment. What is the loan-to-value ratio?

• a.70%
• b.80%✓
• c.20%
• d.120%

The loan amount is $300,000 minus $60,000, or $240,000, and LTV equals $240,000 divided by $300,000, which is 0.80 or 80%. The $60,000 down payment represents 20% equity.

'Usury' laws are designed to:

• a.Guarantee loan approval for all buyers
• b.Set minimum home prices
• c.Limit the maximum interest rate a lender may lawfully charge✓
• d.Require all loans to be assumable

Usury laws cap the interest rate that lenders may legally charge to protect borrowers from excessive rates. Charging above the legal limit can subject a lender to penalties.

The secondary mortgage market, including entities like Fannie Mae and Freddie Mac, primarily functions to:

• a.Buy loans from lenders, providing liquidity so lenders can make new loans✓
• b.Directly lend money to homebuyers at closing
• c.Set property tax rates nationwide
• d.License real estate agents

The secondary market buys existing mortgages from primary lenders, giving those lenders fresh capital to originate more loans. This improves the flow of mortgage money and helps standardize lending.