Chapter 13 — Quiz

Twenty-four questions. Multiple choice and short answer, written in the style of the SAFE MLO test where the material is exam-relevant. Answer key in the collapsed block at the bottom — do the whole quiz before you open it.

1. A rate sheet quotes a price of 99.500 on a \$365,750 loan. This means the borrower is:

  • A. receiving a lender credit of \$1,828.75
  • B. paying 0.500 discount points, or \$1,828.75
  • C. paying 0.500 discount points, or \$1,828.75, plus an origination fee
  • D. paying 99.5% of the loan amount at closing

2. On a rate sheet, as the interest rate rises, the price generally:

  • A. rises, because the investor is buying a larger income stream
  • B. falls, because higher rates are riskier
  • C. stays constant; only the lock period changes price
  • D. rises only on adjustable-rate products

3. Under the Ability-to-Repay rule, a standard adjustable-rate mortgage is generally qualified using a fully amortizing payment at:

  • A. the introductory rate
  • B. the fully indexed rate
  • C. the greater of the introductory rate or the fully indexed rate
  • D. the maximum rate permitted by the lifetime cap

4. A 5/6 ARM has an initial rate of 5.875%, an index of 4.25%, a margin of 2.75%, and caps of 2/1/5. The highest rate permitted over the life of the loan is:

  • A. 7.000% · B. 7.875% · C. 10.875% · D. 12.000%

5. Using the ARM in question 4, the rate that could apply immediately after the first adjustment, at worst, is:

  • A. 6.875% · B. 7.000% · C. 7.875% · D. 10.875%

6. In a 2-1 buydown, the borrower is qualified using a payment based on:

  • A. the year-one rate · B. the year-two rate · C. the note rate · D. the fully indexed rate

7. A temporary buydown is best described as:

  • A. a reduced note rate for the first two years
  • B. an escrow account funded at closing that subsidizes part of the payment for a stated period
  • C. a lender credit applied monthly
  • D. an adjustable-rate feature

8. One discount point equals:

  • A. 1% of the purchase price
  • B. 1% of the loan amount
  • C. 1% of the down payment
  • D. 0.125% of the interest rate

9. A borrower pays \$3,657.50 in discount points and saves \$60.46 a month. The break-even is approximately:

  • A. 45 months · B. 55 months · C. 60 months · D. 72 months

10. A borrower receives a \$1,371.56 lender credit and accepts a payment \$30.47 a month higher. This arrangement favors a borrower who:

  • A. will hold the loan more than sixty months
  • B. will hold the loan fewer than about forty-five months
  • C. has a high credit score
  • D. is buying an investment property

11. Which is generally TRUE of FHA mortgage insurance compared with conventional borrower-paid mortgage insurance?

  • A. FHA's annual premium varies with the representative credit score
  • B. FHA charges an upfront premium that may be financed into the loan amount
  • C. FHA's annual premium always terminates at 78% of original value
  • D. FHA requires no mortgage insurance when the loan-to-value ratio exceeds 90%

12. A borrower's total verified funds are \$38,000. A 10%-down structure requires \$38,500 before closing costs. The correct way to present this structure to the borrower is:

  • A. as an option they declined for cost reasons
  • B. as an option, with a note that it is expensive
  • C. not as an option at all, with a stated explanation that it cannot be funded
  • D. as the recommended structure, since it has the lowest payment

13. Conventional mortgage insurance on a 95% loan-to-value purchase generally terminates automatically when the loan balance reaches:

  • A. 80% of the original value
  • B. 78% of the original value
  • C. 80% of the current appraised value
  • D. it does not terminate automatically

14. Regulation Z's anti-steering safe harbor generally requires an originator to present options including the loan with the lowest interest rate, the loan with the lowest interest rate without certain risky features, and:

  • A. the loan with the shortest term
  • B. the loan with the lowest total dollar amount of origination points or fees and discount points
  • C. the loan with the largest lender credit
  • D. the loan with the lowest monthly payment

15. Which of the following is NOT one of the "risky features" the anti-steering safe harbor's second option must be free of?

  • A. negative amortization
  • B. a prepayment penalty
  • C. an escrow account for taxes and insurance
  • D. a balloon payment in the first seven years

16. A borrower is deciding between a conventional 95% structure and an FHA 96.5% structure on the same house. Which single borrower fact most strongly determines the answer?

  • A. the property type
  • B. the buyer's agent's preference
  • C. how long they will keep the loan
  • D. the closing date

17. The upfront mortgage insurance premium on an FHA loan, when financed:

  • A. reduces the base loan amount
  • B. increases the total loan amount and therefore the monthly principal and interest
  • C. is refunded in full on any refinance
  • D. is paid monthly rather than at closing

18. On a purchase transaction, a lender credit:

  • A. may be taken as cash back to the borrower at closing
  • B. offsets closing costs and prepaids and generally cannot be paid to the borrower as cash
  • C. must be applied to the down payment
  • D. reduces the loan amount

Short answer

19. In two sentences, distinguish "feasibility" from "convenience" in a down-payment analysis, and state why the distinction decides program selection.

20. A file's total cash to close at 5% down is \$25,376.34 against \$38,000.00 of verified funds, and the total housing payment is \$3,033.72. Compute the reserves remaining and express them in months. Show the arithmetic.

21. Explain in three sentences why an ARM's low introductory payment does not help a borrower qualify for a larger loan under the Ability-to-Repay rule.

22. A 2-1 buydown on a 6.625% note produces a year-one payment of \$1,880.47 and a year-two payment of \$2,105.46 against a note-rate payment of \$2,341.94. Compute the total amount that must be escrowed at closing. Show both years.

23. Name the five steps of the presentation discipline in §13.9, in order.

24. A borrower asks: "Why is your rate higher than the one I saw advertised online?" Answer in under forty words without disparaging the competitor and without quoting a number you have not priced.

Answer key — open only after completing the quiz **1. B.** Price is quoted per hundred. 99.500 means the loan is worth 99.5% of face, so the borrower makes up the missing 0.500% — 0.500 points, or 0.005 × \$365,750 = **\$1,828.75**. Note that discount points and an origination fee are separate charges; the price does not include the latter, so C is wrong. **2. A.** Higher rate, higher price. The investor is buying an income stream and a bigger one is worth more. This is the convention new originators most often reverse out loud in front of a customer. **3. C.** The **greater** of the introductory rate or the fully indexed rate, on a fully amortizing schedule. "Fully indexed rate" alone (B) is the trap answer, and it is correct only when the fully indexed rate happens to be the greater of the two. **4. C.** Caps of 2/1/5 mean the lifetime cap is 5.000 percentage points over the *initial* rate: 5.875% + 5.000% = **10.875%**. **5. C.** The first-adjustment cap is 2.000 percentage points: 5.875% + 2.000% = **7.875%**. Note that this exceeds the fully indexed rate of 7.000% — the cap permits more than the index and margin would currently produce. **6. C.** The note rate. The subsidy is temporary; the obligation is not. A 2-1 buydown does not qualify anyone for anything they could not otherwise qualify for. **7. B.** An escrow account funded at closing, drawn down monthly. The note rate never changes, which is the single fact most borrowers and many agents have backwards. **8. B.** 1% of the **loan amount** — not the price, and not the down payment. **9. C.** \$3,657.50 ÷ \$60.46 = **60.5 months**. **10. B.** The credit repays in \$1,371.56 ÷ \$30.47 = **45.0 months**. A borrower whose horizon is shorter than that comes out ahead. Credits break even faster than points on the same grid, because it costs more to buy an eighth of a point of rate than it pays to sell one. **11. B.** FHA charges an upfront premium that may be financed into the loan. A is false — FHA's premium does not vary with score, which is exactly why FHA competes better at lower scores. C is false — above 90% LTV on a 30-year term the annual premium currently runs the life of the loan; verify the current rule in HUD Handbook 4000.1. D is false. **12. C.** A structure the borrower cannot fund is not a structure. Presenting it as an option they "decided against" is a small dishonesty that will cost you the next conversation. Say why you deleted it. **13. B.** 78% of **original** value, on the amortization schedule, under the Homeowners Protection Act. Note the distinction the exam likes: automatic termination at 78% of original value versus borrower-requested cancellation at 80%, which has its own conditions. **14. B.** The lowest total dollar amount of origination points or fees and discount points. **15. C.** An escrow account for taxes and insurance is not a risky feature; it is ordinary. The listed features include negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first seven years, a demand feature, shared equity, and shared appreciation. Verify the current text of the rule with your compliance department. **16. C.** The horizon. Every other input can be documented; this one has to be asked for, and it flips the answer on points, on program, on ARM versus fixed, and on how a concession should be spent. **17. B.** It increases the total loan amount, so it increases principal and interest for thirty years. On the Linden Street file the FHA structure hands the borrower \$5,775.00 of down-payment relief and charges \$12,276.69 more of debt — the relief plus the \$6,501.69 premium that paid for it. **18. B.** It offsets closing costs and prepaids. If the available credit exceeds the costs there is nothing to absorb it, and the file must generally be repriced to a lower rate rather than paying the excess to the borrower. **19.** *Feasibility* means the borrower cannot close without the relief — there is no version of the transaction that works, so the program that lowers the requirement **is** the transaction. *Convenience* means they can close either way and the relief only changes their bank balance afterward, which demotes it from a gate to one number in a comparison. The distinction decides program selection because it determines whether the down-payment difference ends the analysis or merely enters it. **20.** \$38,000.00 − \$25,376.34 = **\$12,623.66**. \$12,623.66 ÷ \$3,033.72 = **4.16 months** of the full housing payment. **21.** The qualifying payment is computed at the greater of the introductory rate or the fully indexed rate, not at the payment the borrower will actually make. Because the fully indexed rate on a typical ARM exceeds the available fixed rate, the ARM is frequently qualified at a *higher* payment than the fixed loan. The introductory rate therefore buys cash flow, not qualifying power — on the Linden Street illustration it raised the back-end ratio from 42.66% to 43.53%. **22.** Year one: \$2,341.94 − \$1,880.47 = \$461.47/month × 12 = **\$5,537.64**. Year two: \$2,341.94 − \$2,105.46 = \$236.48/month × 12 = **\$2,837.76**. Total escrowed: **\$8,375.40** — about 2.29% of a \$365,750 loan. **23.** (1) Present every structure they can actually fund, and say which you deleted and why. (2) Hold every assumption identical across the columns. (3) Quantify in the same four units — payment, cash to close, reserves, total cost over a stated horizon. (4) State the assumption that decides it and ask them to correct it. (5) Recommend, give the reason, name what would reverse it, and stop talking. **24.** A model answer: *"That number is real for somebody — probably a higher score, more down, and a shorter lock. Yours is priced on your file: 706, five percent down, sixty days. Send me their written quote and I'll show you line by line where the difference is."* Note what it does not do: it does not call the competitor dishonest, and it does not guess at a number.