CSLB General Building (B) — All Questions

In a typical mortgage, the borrower who pledges the property as security for the loan is the:

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

The mortgagor is the borrower who pledges the property as collateral, while the mortgagee is the lender. Remembering that the borrower 'gives' the mortgage helps: the party ending in '-or' gives it. This terminology is reversed from what many people initially assume.

A loan feature that requires a large final payment at the end of the term, larger than the regular payments, is called a:

• a.Fully amortized payment
• b.Negative amortization credit
• c.Prepayment penalty
• d.Balloon payment✓

A balloon payment is a large lump-sum payment due at the end of a loan whose regular payments do not fully pay off the balance. Balloon loans carry the risk that the borrower must refinance or pay the balance when due. They contrast with fully amortized loans that pay off completely.

In an amortized loan, each monthly payment is applied to:

• a.Both interest and principal, with interest typically higher early on✓
• b.Principal only for the entire term
• c.Interest only for the entire term
• d.Property taxes only

In a fully amortized loan, each payment covers accrued interest and reduces principal, gradually paying off the balance over the term. Early payments are mostly interest, and later payments are mostly principal. By the final payment, the balance reaches zero.

Which government-related program insures loans made by approved lenders to help borrowers with lower down payments?

• a.The Federal Reserve open market desk
• b.FHA (Federal Housing Administration) insurance✓
• c.The county property appraiser
• d.The MLS

The FHA insures mortgage loans made by approved lenders, which reduces lender risk and allows lower down payments for qualified borrowers. FHA does not make loans directly; it insures them. VA loans, by contrast, are guaranteed for eligible veterans.

A VA loan is designed primarily to benefit:

• a.First-time commercial developers
• b.Foreign investors
• c.Eligible veterans and certain service members✓
• d.Local governments

VA loans are guaranteed by the Department of Veterans Affairs for eligible veterans, active service members, and certain surviving spouses. The guarantee allows favorable terms, often including no down payment. The VA guarantees rather than directly makes most of these loans.

Private mortgage insurance (PMI) is typically required when a conventional borrower makes a down payment of:

• a.More than 50 percent
• b.Exactly 100 percent
• c.Any amount, regardless of down payment
• d.Less than 20 percent✓

Lenders typically require PMI on conventional loans when the down payment is less than 20 percent, protecting the lender against default. PMI can often be canceled once the borrower reaches sufficient equity. It differs from FHA mortgage insurance premiums, which have their own rules.

The clause in a mortgage that allows the lender to demand full repayment if the borrower defaults is the:

• a.Acceleration clause✓
• b.Defeasance clause
• c.Subordination clause
• d.Habendum clause

An acceleration clause lets the lender declare the entire remaining balance due upon default, such as missed payments. It is a necessary step before foreclosure. A defeasance clause, by contrast, requires the lender to release the lien once the loan is paid in full.

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

• a.Forgives the loan when the property is sold
• b.Requires the loan to be paid off when the property is sold or transferred✓
• c.Allows unlimited free assumption by any buyer
• d.Reduces the interest rate upon sale

A due-on-sale, or alienation, clause allows the lender to require full repayment if the property is sold or transferred, preventing an unauthorized loan assumption. This lets lenders adjust to current rates on transfer. Some government-backed loans may allow qualified assumptions.

When a buyer takes over the seller's existing mortgage and becomes personally responsible for it, the buyer has:

• a.Subordinated the loan
• b.Defeased the loan
• c.Assumed the loan✓
• d.Refinanced with a new lender

Assuming a loan means the buyer takes over the seller's existing mortgage and agrees to be personally liable for the debt. Lender approval is often required, especially with a due-on-sale clause. This differs from buying 'subject to' the mortgage, where the buyer does not assume personal liability.

The interest rate on an adjustable-rate mortgage (ARM) is typically calculated as:

• a.A fixed rate that never changes
• b.The seller's asking price divided by twelve
• c.The property tax rate
• d.An index plus a margin✓

An ARM's interest rate equals a benchmark index plus a fixed margin set by the lender. As the index moves, the rate adjusts at set intervals, often within caps. This contrasts with a fixed-rate mortgage, whose rate stays constant for the loan's life.

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 more loans✓
• b.Directly originate loans to individual borrowers at retail
• c.Set property tax rates
• d.License real estate agents

The secondary mortgage market buys existing loans from primary lenders, giving those lenders fresh capital to make new loans and improving liquidity. Fannie Mae and Freddie Mac are major participants. This market helps standardize lending and keep funds flowing.

A prepayment penalty in a loan is a charge for:

• a.Making a payment late
• b.Paying off the loan earlier than scheduled✓
• c.Requesting a payoff statement
• d.Insuring the property

A prepayment penalty is a fee some loans impose if the borrower pays off the balance early, compensating the lender for lost interest. Not all loans have them, and some loan types restrict or prohibit them. Borrowers should review loan terms for such clauses.

The federal Truth in Lending Act (TILA) primarily requires lenders to:

• a.Guarantee approval to all applicants
• b.Set a maximum home price
• c.Disclose credit terms and costs, including the annual percentage rate (APR)✓
• d.Provide free appraisals

TILA requires lenders to disclose key credit terms so borrowers can compare offers, including the finance charge and APR. The APR reflects the total yearly cost of credit as a percentage. TILA also governs certain advertising of credit terms.

A discount point paid on a mortgage loan generally equals what percentage of the loan amount, and serves to:

• a.Ten percent of the loan amount, paid to increase the rate
• b.One percent of the sale price, paid to the seller
• c.Five percent of the down payment, paid to the county
• d.One percent of the loan amount, paid to lower the interest rate✓

One discount point equals one percent of the loan amount and is prepaid interest a borrower pays to buy down (lower) the interest rate. Points can reduce long-term interest costs in exchange for higher upfront cost. Whether points are worthwhile depends on how long the borrower keeps the loan.

A mortgage is best described as which type of instrument in the financing process?

• a.A security instrument that pledges property as collateral for a debt✓
• b.The promise to repay the debt itself
• c.A deed transferring full ownership to the lender
• d.A lease of the property to the lender

A mortgage is the security instrument that pledges real property as collateral for a loan, creating a lien. The promissory note is the separate document that contains the borrower's promise to repay. Together, the note and mortgage document the loan obligation and its security.

Which document contains the borrower's actual promise to repay the loan and the repayment terms?

• a.The deed of reconveyance
• b.The promissory note✓
• c.The title commitment
• d.The estoppel certificate

The promissory note is the borrower's written promise to repay the loan and sets out the amount, interest rate, and payment terms. The mortgage or deed of trust secures that note with the property. The note is the primary evidence of the debt.

'Equity' in a property is best defined as:

• a.The total amount originally borrowed
• b.The annual property tax bill
• c.The market value of the property minus the debts secured against it✓
• d.The broker's commission

Equity is the owner's financial interest in a property, calculated as market value minus any outstanding liens or mortgage balances. Equity grows as the loan is paid down and as the property appreciates. It represents the portion of value the owner truly owns.

The Real Estate Settlement Procedures Act (RESPA) is primarily intended to:

• a.Set national property tax rates
• b.Guarantee mortgage approval
• c.License appraisers
• d.Provide consumers disclosures about settlement costs and prohibit kickbacks✓

RESPA is a federal law requiring disclosures about closing (settlement) costs and prohibiting kickbacks and referral fees that increase costs to consumers. It applies to most federally related mortgage loans on residential property. It works alongside TILA to protect borrowers.