Chapter 4 — Quiz

Twenty-eight questions. Several require computation. Answer key at the bottom.

1. In the payment formula $M = P \cdot i / (1-(1+i)^{-n})$, the variable $i$ represents:

A. The annual interest rate B. The monthly interest rate C. The APR D. The index plus margin

2. One month's interest on a \$300,000 balance at 6.000% is:

A. \$1,200 B. \$1,500 C. \$1,800 D. \$18,000

3. On a \$365,750 loan at 6.625%, the first month's interest is \$2,019.24 and the payment is \$2,341.94. The principal portion of the first payment is:

A. \$322.70 B. \$1,696.54 C. \$2,019.24 D. \$4,361.18

4. Over the life of a fully amortizing loan, the interest portion of each payment:

A. Stays constant B. Increases every month C. Decreases every month D. Decreases for 15 years, then increases

5. Extending a 30-year term to 40 years, holding rate and principal constant:

A. Reduces the payment substantially and reduces total interest B. Reduces the payment modestly and increases total interest substantially C. Has no effect on total interest D. Increases the payment

6. PITI stands for:

A. Principal, interest, taxes, insurance B. Principal, interest, term, index C. Payment, interest, taxes, insurance D. Principal, interest, tolerance, itemization

7. A borrower's proposed housing payment includes \$300/month in HOA dues. The HOA dues:

A. Are collected in the escrow account and counted in the ratio B. Are usually paid directly by the borrower but are counted in the ratio C. Are neither collected nor counted D. Are counted only on condominiums

8. On a purchase transaction, LTV is computed using:

A. The purchase price always B. The appraised value always C. The lesser of the purchase price or the appraised value D. The greater of the purchase price or the appraised value

9. A home is under contract at \$400,000 and appraises at \$380,000. At a maximum 90% LTV, the largest loan available is:

A. \$360,000 B. \$342,000 C. \$380,000 D. \$400,000

10. HCLTV differs from CLTV in that HCLTV uses:

A. The appraised value instead of the price B. The full credit line of a HELOC rather than its balance C. Only the first lien D. The original loan amount

11. Under the Homeowners Protection Act, a borrower may request cancellation of borrower-paid private mortgage insurance when the balance reaches:

A. 80% of the original value B. 78% of the original value C. 80% of the current value D. 75% of the original value

12. Under the same Act, mortgage insurance terminates automatically when the balance reaches:

A. 80% of the original value B. 78% of the original value C. 78% of the current value D. 70% of the original value

13. The housing (front-end) ratio is:

A. PITI ÷ net monthly income B. PITI ÷ gross monthly income C. All debts ÷ gross monthly income D. PITI ÷ purchase price

14. A borrower has \$9,000 gross monthly income, a proposed PITI of \$2,430, and \$900 in other monthly debts. The back-end ratio is:

A. 27.0% B. 30.0% C. 37.0% D. 43.0%

15. Which of the following is not counted in the back-end ratio?

A. An auto lease payment B. Alimony paid C. Childcare expenses D. Credit card minimum payments

16. An installment debt may generally be excluded from the debt-to-income ratio when it has approximately how many payments remaining or fewer?

A. 3 B. 6 C. 10 D. 24

17. One discount point equals 1% of:

A. The purchase price B. The loan amount C. The appraised value D. The down payment

18. One point on a \$412,000 loan is:

A. \$412 B. \$4,120 C. \$41,200 D. \$824

19. A borrower pays \$3,400 in points to save \$54 a month. The break-even period is approximately:

A. 32 months B. 48 months C. 63 months D. 91 months

20. The "par rate" is the rate at which:

A. The APR equals the note rate B. No discount points are paid and no lender credit is given C. The loan is exactly at 80% LTV D. The lender earns no compensation

21. A lender credit is generated when the borrower accepts:

A. A rate below par B. A rate above par C. A shorter lock period D. A larger down payment

22. Which of the following is generally excluded from the finance charge under Regulation Z?

A. Discount points B. The origination charge C. The appraisal fee D. Prepaid interest

23. Amount financed equals:

A. The loan amount plus closing costs B. The loan amount less prepaid finance charges C. The purchase price less the down payment D. The total of payments less interest

24. The Linden Street loan has a note rate of 6.625% and an APR of 7.253%. The largest single contributor to that gap is:

A. The appraisal fee B. Recording fees C. The mortgage insurance D. The escrow deposit

25. APR systematically understates the true cost of a loan when:

A. The loan is held to maturity B. The borrower sells or refinances well before maturity C. The loan has no closing costs D. The rate is fixed

26. Per-diem interest is computed as:

A. Loan amount × rate ÷ 12 B. Loan amount × rate ÷ 365 C. Payment ÷ 30 D. Loan amount ÷ 365

Short answer

27. A borrower closing on October 3 asks whether moving the closing to October 30 will "save them a payment." Answer accurately in three sentences, including what they do gain.

28. State three things debt-to-income cannot measure, and for each name the kind of borrower it misjudges.

Answer key **1.** B — the **monthly** rate. This unit error is the most common source of wrong payments. **2.** B — \$300,000 × 0.06 ÷ 12 = \$1,500. **3.** A — \$2,341.94 − \$2,019.24 = **\$322.70**. Only 13.8% of the first payment reduces the balance. **4.** C — decreases every month, because it is computed on a falling balance. **5.** B. On the Linden Street loan the 40-year payment is \$2,173.96 — \$167.98 less — and total interest rises by \$200,402.40. **6.** A. **7.** B — HOA dues are generally paid directly by the borrower rather than escrowed, **but they are counted in the qualifying ratio.** This asymmetry catches borrowers comparing two properties. **8.** C — the **lesser**. This is the rule that makes a low appraisal a cash problem. **9.** B — \$380,000 (the lesser) × 90% = **\$342,000**. **10.** B — the full credit line, because the borrower can draw the rest tomorrow. **11.** A — 80% of the **original** value: the borrower may *request*. **12.** B — 78% of the **original** value: *automatic*. Note that both are measured against original value and both apply to conventional borrower-paid PMI, not FHA MIP. **13.** B — PITI ÷ **gross** monthly income. **14.** C — (\$2,430 + \$900) ÷ \$9,000 = \$3,330 ÷ \$9,000 = **37.0%**. **15.** C — childcare. It is frequently a household's second or third largest expense and does not appear in the ratio at all. **16.** C — approximately ten or fewer, subject to program specifics. **17.** B — the **loan amount**, not the purchase price. Getting this wrong is always in the borrower's disfavor. **18.** B — \$412,000 × 0.01 = **\$4,120**. **19.** C — \$3,400 ÷ \$54 = **63.0 months**, about 5.2 years. **20.** B. **21.** B — a rate **above** par. The lender is paying the borrower for the higher yield. **22.** C — the appraisal fee, excluded under Regulation Z §1026.4(c)(7) when bona fide and reasonable. A, B, and D are all finance charges. **23.** B — the loan amount less prepaid finance charges. On the Linden Street file: \$365,750.00 − \$6,095.34 = \$359,654.66. **24.** C — the mortgage insurance. Excluding MI would give an APR of 6.789% rather than 7.253%. **25.** B — APR amortizes the upfront costs across the full term. A borrower who exits early paid all the costs and got a fraction of the term. **26.** B — loan amount × annual rate ÷ 365. **27.** They will not save a payment — they will defer collecting some interest. The loan accrues interest from the day it funds either way; closing later simply means fewer days of prepaid interest are collected at the table. What they actually gain is **cash at closing**: on the Linden Street loan, moving from October 3 to October 30 reduces prepaid interest from \$1,925.20 to \$132.77, a saving of \$1,792.43 in cash needed that day. **28.** Any three of: it uses **gross** income and so ignores taxes (misjudges a borrower in a high-tax state, or one with many dependents); it ignores **household size and childcare** (misjudges a young family with two children in full-time care); it ignores **non-debt expenses** like medical costs, tuition, or a long commute; it treats **all debts as equivalent** (a \$500 student loan and a \$500 boat payment); it is a **snapshot** and ignores direction (misjudges a borrower about to be laid off, or one about to receive a large raise); and it **declines borrowers who have already demonstrated the behavior** — someone paying \$2,800 rent on time for six years, failing on a \$2,400 PITI because of student loans.