Chapter 18 — Self-Check Quiz

Twenty-eight questions: twenty multiple choice in the style of the SAFE MLO test, and eight short answer. Work them without the chapter open. The answer key is collapsed at the bottom.

Multiple choice

1. A property is under contract at \$540,000 and appraises at \$505,000. Loan-to-value is computed on:

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

2. In the sales comparison approach, dollar adjustments are applied to:

A. the subject property B. the comparable properties C. both, in equal and opposite amounts D. whichever property has the higher gross living area

3. A comparable has a three-car garage; the subject has a two-car garage. The adjustment on the grid is:

A. positive, applied to the comparable B. negative, applied to the comparable C. positive, applied to the subject D. no adjustment; garages are captured in gross living area

4. Which of the following may a loan officer send directly to an appraiser?

A. An estimate of the value needed for the loan to close B. A range of values that would work for the transaction C. The fully executed purchase contract D. A note that future assignments depend on this report

5. A condition rating of C6 on a Uniform Residential Appraisal Report indicates:

A. new construction, never occupied B. well maintained with limited physical depreciation C. obvious deferred maintenance in need of some significant repairs, but still habitable D. substantial damage or deferred maintenance affecting safety, soundness, or structural integrity

6. The automated underwriting system offers value acceptance (an appraisal waiver) on a \$465,000 purchase. The value used for loan-to-value purposes is:

A. an automated valuation model estimate B. the contract price C. the county assessed value D. the lender's internal collateral score

7. Form 1004D is used to:

A. report an exterior-only inspection of a one-unit property B. state whether a property has declined in value since the original effective date, and/or to certify that required repairs or construction have been completed C. value an individual condominium unit D. record a comparable rent schedule for a single-family investment property

8. Which of the following is a proper basis for a reconsideration of value?

A. The contract price B. The borrower's opinion of the property's value C. A closed comparable sale the appraiser did not consider, with a stated reason it is more comparable than one that was used D. The county's assessed value

9. Cypress Court: \$540,000 contract, \$505,000 appraised value, 80% maximum loan-to-value. The additional cash the buyer must produce is:

A. \$35,000 B. \$28,000 C. \$7,000 D. \$108,000

10. The client of an appraisal ordered in connection with a residential purchase loan is:

A. the borrower, because the borrower pays for it B. the buyer's real estate agent C. the lender D. the appraisal management company

11. A \$385,000 purchase appraises at \$400,000. The effect on the loan amount is:

A. the loan increases to 95% of \$400,000 B. the loan increases by \$15,000 C. no change; the loan is computed on the lesser of price or value D. the loan decreases because the borrower now has more equity

12. Which of the following is not an appraisal?

A. A Form 1004 with an interior and exterior inspection B. A Form 2055 exterior-only report C. A desktop report signed by a licensed appraiser D. A broker price opinion

13. Regulation Z's appraisal requirements for a higher-priced mortgage loan generally include:

A. an automated valuation model estimate and a copy to the consumer B. a written appraisal by a certified or licensed appraiser including a physical interior inspection, with a copy to the consumer C. two appraisals on every transaction D. an exterior-only inspection performed within thirty days of consummation

14. A buyer restructures a low-appraisal file to an 85.54% loan-to-value rather than bringing additional cash. The statute most directly relevant to when the resulting mortgage insurance ends is:

A. the Real Estate Settlement Procedures Act B. the Fair Credit Reporting Act C. the Homeowners Protection Act D. the Servicemembers Civil Relief Act

15. Which approach to value is generally not developed on a one-unit owner-occupied purchase appraisal?

A. sales comparison B. cost C. income D. all three are always developed

16. Seller-paid financial assistance on the subject transaction is reported by the appraiser in:

A. the Neighborhood section B. the Contract section C. the Site section D. the sales comparison grid, as an adjustment to the subject

17. An applicant's right to receive a copy of the appraisal and other written valuations developed in connection with a first-lien application on a dwelling arises under:

A. the Truth in Lending Act and Regulation Z B. the Equal Credit Opportunity Act and Regulation B C. the Home Mortgage Disclosure Act and Regulation C D. the Gramm-Leach-Bliley Act

18. A comparable sold for \$400,000 four months before the effective date. The appraiser's supported market conditions adjustment is +0.25% per month. The time adjustment is approximately:

A. +\$1,000 B. +\$4,000 C. +\$10,000 D. +\$40,000

19. The subject has 1,780 square feet of gross living area; a comparable has 1,905. The appraiser's supported gross living area adjustment is \$50 per square foot. The grid adjustment is:

A. +\$6,250 to the comparable B. −\$6,250 to the comparable C. +\$6,250 to the subject D. −\$27,000 to the comparable

20. Which of the following best describes a hybrid (bifurcated) appraisal?

A. Two appraisers each inspect the property and reconcile their opinions B. A trained third-party data collector performs the on-site work and a licensed appraiser develops and signs the opinion of value C. An automated model produces the value and an appraiser reviews it D. The lender's underwriter develops the value from the appraiser's photographs

Short answer

21. Explain, in two sentences, why the lesser-of rule can only ever cut against the borrower and never in their favor.

22. The comparables in a report sold for roughly \$216 per square foot, and the appraiser's gross living area adjustment is \$50 per square foot. Explain why these two figures are not the same quantity, and state the correct use of price per square foot.

23. Name the three legitimate bases for a reconsideration of value, and name four things that are not.

24. A file has a maximum loan-to-value of 95%. The contract price is \$410,000 and the appraised value is \$398,000. Compute the cash gap two ways.

25. A borrower says they believe the appraisal was low because of their race. Your reading of the report is that it is well supported. State your first three actions, in order, and the one thing you must not do.

26. A borrower asks whether replacing the roof required by a subject-to appraisal will raise the appraised value. Answer them, and explain what the 1004D completion report actually certifies.

27. A file has a maximum loan-to-value of 90%, a contract price of \$475,000, and an appraised value of \$462,000. Compute the maximum loan, the required down payment, and the cash gap.

28. In one sentence each, state what a low appraisal does to the lender's position and to the contract. Then say which of the two you are actually being asked to solve.

Answer key — work the questions first **1. C.** Loan-to-value uses the lesser of purchase price or appraised value (Ch. 4; applied throughout §18.1 and §18.7). **2. B.** You adjust the comparables. The subject has no price yet — that is what you are solving for. **3. B.** The comparable is superior, so you subtract from the comparable. *Comp Better, Subtract.* **4. C.** Factual material — the contract, permits, plans, HOA documents — is exactly what you should send. A, B, and D are attempts to influence value and are prohibited. (§18.2) **5. D.** C6 describes damage or deferred maintenance affecting safety, soundness, or structural integrity. C is the C5 description; B is C3; A is C1. A C6 property is generally not financeable as-is regardless of the value opinion. (§18.5) **6. B.** On a purchase, value acceptance means the contract price is used as the value. Nobody independently checks whether the price is supportable — which is a risk the *buyer* absorbs. (§18.6) **7. B.** The 1004D is the Appraisal Update and/or Completion Report and does both jobs. A is Form 2055; C is Form 1073; D is Form 1007. (§18.9) **8. C.** A closed comparable sale with a stated reason it is more comparable than one the appraiser used. A, B, and D are not facts about the property and do not belong in an ROV. (§18.8) **9. B. \$28,000.** Maximum loan 80% of \$505,000 = \$404,000; down payment \$540,000 − \$404,000 = \$136,000; gap \$136,000 − \$108,000 = \$28,000. Equivalently, 80% × \$35,000 = \$28,000. The \$35,000 answer is the trap — that is the value shortfall, not the cash gap. (§18.7) **10. C.** The lender is the client. The borrower pays for it and is entitled to a copy, but the report is prepared for the lender's use in a lending decision. (§18.1, §18.3) **11. C.** No change. The lesser-of rule cuts one way only; the borrower simply bought well. (§18.1) **12. D.** A broker price opinion is a real estate licensee's estimate of price, not an appraisal. A desktop report *is* an appraisal — a licensed appraiser develops and signs it; they just did not inspect the property. (§18.6) **13. B.** Written appraisal, certified or licensed appraiser, physical interior inspection, copy to the consumer — plus a second appraisal in certain flip situations where the seller acquired the property recently and is reselling at a significantly higher price. Verify current thresholds and exemptions. (§18.6) **14. C.** The Homeowners Protection Act governs borrower-requested cancellation and automatic termination of borrower-paid private mortgage insurance. (§18.7; Ch. 5) **15. C.** The income approach. It becomes relevant on two-to-four-unit and investment property. (§18.1) **16. B.** The Contract section, where the appraiser reports whether the contract was analyzed and whether there was financial assistance, how much, and for what. (§18.3) **17. B.** The ECOA valuations rule, implemented in Regulation B. (§18.1) **18. B. +\$4,000.** Four months × 0.25% = 1.00% of \$400,000. **19. B. −\$6,250.** The subject is 125 square feet smaller, so the comparable is superior: 125 × \$50 = \$6,250, subtracted from the comparable. D is the trap — it applies the property's *average* price per square foot instead of the supported marginal adjustment. (§18.4) **20. B.** A third-party property data collector does the on-site work; a licensed appraiser develops and signs the value and remains responsible for it. (§18.6) --- **21.** The lender's exposure is capped by whichever number is smaller, because that is the figure that is defensible in a forced sale — so a value below the price reduces the loan, while a value above the price adds nothing the lender is willing to lend against. The excess is the buyer's opinion, and the buyer is welcome to pay for it with their own money. **22.** The \$216 figure is the average value of a square foot *including* everything that came with the house — the lot, the location, the garage, the kitchen, the utilities — almost all of which is already present in both properties. The \$50 figure is what the market pays for a marginal square foot of floor area in a house that already has all of that, which paired-sales analysis supports at a fraction of the average. Price per square foot is a sanity check on whether a value looks strange; it is never a method for arguing one. **23.** Legitimate: (1) a factual error in the report — gross living area, room count, lot size, year built, an uncounted permitted addition, a misreported comparable; (2) additional **closed** comparable sales the appraiser may not have considered, each with a stated reason it is more comparable than a comparable actually used; (3) an error in the analysis — an adjustment applied in the wrong direction, an unsupported market conditions adjustment, a non-competing comparable, an unexplained reconciliation. Not legitimate: the contract price, the borrower's opinion, the agent's comparative market analysis, the tax assessed value, a consumer website's estimate, the fact that the deal will die. **24.** Rule: 95% × (\$410,000 − \$398,000) = 95% × \$12,000 = **\$11,400.** Long way: maximum loan 95% × \$398,000 = \$378,100; required down payment \$410,000 − \$378,100 = \$31,900; planned down payment 5% × \$410,000 = \$20,500; gap \$31,900 − \$20,500 = **\$11,400.** **25.** (1) Stop and listen; document what they said, in their words, with the date and time. (2) Escalate to your compliance or fair-lending function the same day, through your lender's defined process. (3) Tell them the reconsideration of value process exists, how to use it, and that they may also complain to the appropriate regulator and to the state appraiser board. What you must not do is argue with them, defend the appraiser, investigate it yourself, or discourage a complaint. Your own reading of the report is not the question; the borrower has raised a fair-lending matter and it goes where fair-lending matters go. (§18.5) **26.** No. The appraised value already assumes the repair was made — the report says, in effect, *this property is worth that number once the roof is replaced.* The 1004D completion report certifies that the required work was completed, generally with photographs. It does not re-value the property and it does not add anything to the number. (§18.9) **27.** Maximum loan 90% × \$462,000 = **\$415,800.** Required down payment \$475,000 − \$415,800 = **\$59,200.** Planned down payment 10% × \$475,000 = \$47,500, so the cash gap is \$59,200 − \$47,500 = **\$11,700** — which is 90% × \$13,000, as the rule predicts. **28.** To the lender: nothing. It will lend the same percentage of a smaller number to the same borrower today; its position is if anything safer than it was. To the contract: it creates a cash gap that somebody — buyer or seller — has to absorb, or the transaction ends. You are being asked to solve the second one, which is a price negotiation, not a financing problem — and saying so on the first call is the most useful thing you can do all week.