Chapter 35 — Self-Check Quiz

Construction, Renovation, and Reverse

Twenty-five 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 — work the whole quiz before you open it.

Program values in these questions are illustrative. On the job, every one of them must be verified at the source.

1. A construction-to-permanent loan is sized against:

  (A) the appraised value of the lot   (B) the construction contract price alone   (C) an appraiser's opinion of value subject to completion per plans and specifications   (D) the borrower's total liquid assets

2. The single most important risk a two-close structure creates for the borrower is:

  (A) two sets of closing costs   (B) having to re-qualify for the permanent loan a year later, at whatever rates and guidelines then exist   (C) a longer time to close the interim loan   (D) the requirement to use a HUD-approved consultant

3. During construction, the borrower pays interest on:

  (A) the full loan commitment from closing forward   (B) the drawn balance only   (C) the after-improved value   (D) nothing; interest is waived until conversion

4. Short answer. A construction budget is \$300,000. Over a twelve-month build the average drawn balance is \$165,000, and the construction rate is 8.000%. What is the total construction-period interest, and what percentage is it of a full year's interest on the whole commitment?

5. An unconditional lien waiver states that the subcontractor:

  (A) will release its claim once it is paid   (B) has been paid and releases its claim   (C) waives its right to be paid   (D) has completed its scope of work

6. Retainage exists primarily to:

  (A) reduce the lender's interest exposure during the build   (B) give the borrower a cash reserve at completion   (C) preserve leverage over the final and least-attractive portion of the work   (D) fund the contingency reserve

7. Which of the following requires a standard 203(k) rather than a limited one?

  (A) replacing kitchen cabinets and countertops   (B) new roof and new windows   (C) adding a bedroom over an attached garage   (D) interior paint and flooring

8. A HUD-approved 203(k) Consultant is required on:

  (A) every 203(k)   (B) the standard 203(k)   (C) the limited 203(k)   (D) HomeStyle only

9. HomeStyle Renovation is a product of:

  (A) the Federal Housing Administration   (B) Fannie Mae   (C) Ginnie Mae   (D) the Department of Veterans Affairs

10. Short answer. A 203(k) purchase has a cost basis of \$240,000 and an after-improved value of \$252,000. Applying the lesser of 96.5% of cost basis or 110% of after-improved value, which test controls and what is the base loan?

11. The maximum mortgage on a renovation loan is generally the lesser of a cost-based figure and a value-based figure. The value-based test exists primarily to protect against:

  (A) a borrower financing more than the project costs   (B) the improvements adding less value than they cost   (C) a contractor abandoning the job   (D) mortgage insurance being unavailable

12. A Home Equity Conversion Mortgage is:

  (A) a conventional product guaranteed by Fannie Mae   (B) insured by the FHA and administered by HUD   (C) guaranteed by the VA for borrowers over 62   (D) a proprietary product with no federal involvement

13. A HECM principal limit factor rises when:

  (A) the youngest borrower is older and the expected rate is lower   (B) the youngest borrower is younger and the expected rate is higher   (C) the property is worth more   (D) the borrower has a higher credit score

14. The maximum claim amount on a HECM is the lesser of:

  (A) appraised value or the borrower's equity   (B) appraised value, the HECM national lending limit, or the sales price on a purchase   (C) the principal limit or the appraised value   (D) 80% of appraised value or the county loan limit

15. Short answer. A home appraises at \$400,000, below the national lending limit. The principal limit factor is 0.412. Compute the principal limit. Then, with mandatory obligations of \$122,000, compute the net principal limit.

16. "Non-recourse" on a HECM means:

  (A) the borrower may never be sued for any reason   (B) neither borrower nor estate will owe more than the home is worth at repayment   (C) the lender takes title to the home at closing   (D) the loan may not be prepaid

17. If a home securing a HECM sells for more than the loan balance, the surplus belongs to:

  (A) the lender   (B) HUD, as the insurer   (C) the borrower or the borrower's estate   (D) the servicer, as a disposition fee

18. Which of the following is not a HECM maturity event?

  (A) failure to pay property taxes and hazard insurance   (B) the loan balance growing larger than the property's value   (C) the property ceasing to be the borrower's principal residence   (D) the death of the last surviving borrower

19. HECM counseling from a HUD-approved agency is:

  (A) optional but recommended   (B) required, and the certificate must be in the file before the application proceeds   (C) required only where a non-borrowing spouse is present   (D) provided by the lender's in-house counselor

20. A Life Expectancy Set-Aside is:

  (A) a reserve the borrower funds monthly out of pocket   (B) a carve-out of principal limit reserved to pay property charges   (C) an annuity purchased with HECM proceeds   (D) the amount HUD sets aside to insure the loan

21. Short answer. A borrower's HECM principal limit is \$140,000, mandatory obligations are \$96,000, and a fully funded LESA is computed at \$62,000. What is available to the borrower, and what do you tell them?

22. On a second home, rental income:

  (A) may be used to qualify with a 25% vacancy factor   (B) may not be used, because a second home may not be subject to a rental agreement   (C) may be used only if documented on two years of tax returns   (D) may be used at 75% of gross

23. FHA, VA, and USDA financing is available for:

  (A) primary residences only   (B) primary residences and second homes   (C) primary residences and investment property   (D) any occupancy, at adjusted pricing

24. A borrower has a \$50,000 HELOC with \$0 drawn and applies for a new first mortgage. For HCLTV, the underwriter counts:

  (A) \$0   (B) \$25,000   (C) \$50,000   (D) whatever the borrower attests they intend to draw

25. Short answer. In two sentences, state the essential difference in risk between a HELOC and a closed-end second from the borrower's point of view — not the rate, the risk.

Answer key — work the quiz first **1. (C)** The loan is sized from an opinion of value *subject to completion per plans and specifications*, generally against a cost-based test as well, with the lesser controlling. §35.5 **2. (B)** Two closings and two sets of costs are the visible difference. The **re-qualification** a year later — against a new income picture, new rates, and new guidelines, on a house already built — is the risk that actually strands borrowers. §35.2 **3. (B)** Interest accrues on the **drawn balance** only, which is why the true carrying cost is far below a full year's interest on the commitment. §35.3 **4.** \$165,000 × 0.08 = **\$13,200.00** for the year. A full year on \$300,000 would be \$300,000 × 0.08 = **\$24,000.00**. \$13,200 ÷ \$24,000 = **55.0%** — the same as \$165,000 ÷ \$300,000. §35.3 **5. (B)** Unconditional: *I have been paid and I release my claim.* Conditional: *I will release when paid.* Require unconditional waivers for the **prior** draw and conditional for the **current** one. §35.3 **6. (C)** Retainage holds back a percentage of each draw until final completion, the certificate of occupancy, and final unconditional waivers — precisely because the punch list is the work a contractor is least motivated to finish once the money is nearly gone. §35.3 **7. (C)** Adding a room is structural. (A), (B), and (D) are non-structural and fall within the limited 203(k)'s scope, subject to its dollar cap. §35.4 **8. (B)** The **standard** 203(k) requires a HUD-approved consultant. HUD does not require one on the limited 203(k), though a lender may. §35.4 **9. (B)** HomeStyle Renovation is **Fannie Mae's**. Freddie Mac's counterpart is CHOICERenovation. 203(k) is FHA. §35.4 **10.** Cost test: \$240,000 × 0.965 = **\$231,600.00**. Value test: \$252,000 × 1.10 = **\$277,200.00**. The **cost test controls** (it is lower); base loan **\$231,600**. §35.5 **11. (B)** Improvements frequently cost more than they add. The value test is what stops the lender from financing that difference; the cost test is what prevents the loan from becoming a disguised cash-out. §35.5 **12. (B)** FHA-insured, HUD-administered. §35.6 **13. (A)** PLFs **rise with age** and **fall as the expected rate rises**. Property value does not change the factor — it changes the maximum claim amount the factor is applied to. §35.7 **14. (B)** Lesser of appraised value, the HECM national lending limit, or the sales price on a HECM for Purchase. §35.7 **15.** Principal limit = \$400,000 × 0.412 = **\$164,800.00**. Net principal limit = \$164,800 − \$122,000 = **\$42,800.00**. Note that the first-year disbursement limit may restrict how much of that \$42,800 is available in the first twelve months. §35.7 **16. (B)** The lender's recovery is limited to the property. The FHA insurance fund absorbs any shortfall — which is what the mortgage insurance on a HECM buys, and it buys it for the borrower's family. §35.7 **17. (C)** The borrower still owns the home. A HECM is a lien, not a transfer of title, and any surplus on sale belongs to the borrower or the estate. This is the most damaging misconception about the product. §35.7 **18. (B)** A balance exceeding value is not a default — it is precisely the situation the **non-recourse** feature and the FHA insurance exist to handle. (A), (C), and (D) are all maturity events. §35.7 **19. (B)** Counseling is a statutory requirement, must come from a HUD-approved agency, and the signed certificate must be in the file before the application proceeds. The lender may not steer the borrower to a particular counselor. §35.8 **20. (B)** A LESA is a carve-out of principal limit, required or permitted after the financial assessment, reserved to pay taxes and insurance. It may be fully or partially funded. §35.8 **21.** \$140,000 − \$96,000 − \$62,000 = **−\$18,000**. There is **no loan** — the principal limit cannot cover the mandatory obligations and the set-aside. Tell the borrower the truth, then turn to what is actually available: senior property-tax exemptions, deferrals or freezes, homestead exemptions, assistance programs, a HECM for Purchase into a less expensive home, or a sale. Do not shop for a lender with a looser assessment. §35.8 **22. (B)** A second home may not be subject to a rental or management agreement, so there is no rental income to count. That is the definitional distinction between a second home and an investment property — control and rental, not time spent there. §35.9 **23. (A)** Government programs are primary-residence programs. There are legitimate FHA structures for owner-occupied two-to-four unit properties; that is the program working as designed, not a workaround. §35.9 **24. (C)** HCLTV counts the **full line**, drawn or not, because the borrower could draw the balance tomorrow. A borrower who "has almost nothing on the HELOC" may still be over the CLTV limit. §35.10 **25.** A closed-end second gives the borrower **payment certainty** — the same amount in month 1 and month 240 — and retires the debt on a known date. A HELOC gives lower payments first and transfers two risks to the borrower: the rate can move, and the interest-only draw period ends in an amortizing repayment period, producing a payment increase a decade after the conversation in which it was explained. §35.10