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SAMPLE TEST QUESTIONS

1. Robert and Rose bought a home in Lubbock, Texas for $96,500. They put $25,000 down. Today, the
market value of their house is $105,000 and their outstanding mortgage balance is $70,000. How much
equity do Robert and Rose have in their home? Can they get a home equity loan to remodel their house?
a. $14,000; yes
b. $14,000; no
c. $35,000; yes
d. $70,000; no
e. $70,000; yes

2. What is the maximum home equity loan Robert and Rose (from the above question) can take out on their
home as Texas residents?
a. $0
b. $7,200
c. $14,000
d. $28,000
e. $35,000

3. Ellen wants to purchase a house and is trying to qualify for the loan. Given the following information, what
is the highest PITI payment she could afford if the lender requires a 35% Overall (total) Debt Ratio?
Total income for the year $36,000
Monthly auto loan payment $ 325
Monthly student loan payment $ 175
a. $ 500
b. $ 550
c. $ 725
d. $1,050
e. $1,200

4. A home buyer who takes out a conventional mortgage generally must buy private mortgage insurance unless
she
a. promises her first-born child to the bank.
b. proves veteran status.
c. buys title insurance for both herself and the lender.
d. makes a down payment of at least 20%.
e. has an excellent credit rating.

5. Charles Grant earns $3,000 per month before taxes, and he wants to take out a mortgage for his dream
house. He has the following monthly expenses:
$650 Rent $200Auto loan payment
$ 50 Clothing $200School Loan payment
$120 Groceries
If a lender requires that the buyer's total monthly debt payments not exceed 35% of monthly before-tax
income, how much monthly mortgage payment (PITI) will Charles qualify for?
a. $ 0 (he can't afford a mortgage)
b. $ 480
c. $ 650
d. $ 850
e. $1,050

6. Which of the following are TRUE about "discount points" in terms of closing costs in a house purchase?
1. 1 point equals 1/10 percent of the price of the house.
2. Points are paid at closing.
3. Points serve to reduce interest rates on the loan.
4. Points apply toward equity in the house.
a. 1, 2, 3
b. 1, 3, 4
c. 2, 3
d. 2, 4
e. 1, 2, 3, 4
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Use the following information to answer the next two questions.

Penny and Cash are considering purchasing a home. They found a modest starter house that has a price of
$120,000. They plan to put a down payment of 20% on the house. They have a choice between the following two
conventional 30-year mortgage loans:
Mortgage A Mortgage B
5% interest rate with 0 discount points 4.5% interest rate with 2 discount points
Monthly payment = $626 Monthly payment = $466

Property taxes are estimated to be 3% of the value of the home.

Homeowner's insurance is estimated to be 1% of the value of the home.
The closing costs on the two loans are identical.

7. Suppose Cash expects a transfer to Los Angeles in three years, which loan should they take? (HINT:
Breakeven) (Assume monthly payments on the ARM will not change.)
a. Mortgage A
b. Mortgage B

8. Will they be required to purchase Private Mortgage Insurance by their lender?

a. Yes
b. No

9. When a homebuyer chooses a 15-year rather than a 30-year home mortgage loan, which of the following
things will be TRUE? (Assume everything other than the repayment period is the same).
1. S/He will get a greater tax advantage.
2. S/He will build up equity in the home faster.
3. S/He will pay more in interest over the life of the loan.
4. S/He will have a larger monthly payment.
5. S/He will have a larger down payment.
a. 1, 3, 5
b. 1, 2, 4
c. 1, 2, 3
d. 2, 4
e. 4, 5

Use the following to answer the next question.

Jack and Molly have decided to finance their first home with First American Bank. Jack and Molly are buying their
home for $94,000 and making a 10% down payment. They will also be paying $3,000 in closing costs and
prepaids. They feel that they will live in this home about 5 years before they are ready to move up to a larger home.
First American has offered them the following mortgage alternatives, all of which they can qualify for.
Interest Rate Loan Term # of Points Mo. Pmt. Caps
#1 10% fixed 30 years 2½ $742 ---
#2 9% fixed 30 years 4½ $681 ---

10. Assuming Jack and Molly want a 30-year fixed rate mortgage and have the money available to pay the
points, about long will it take before the higher monthly payments of loan #1 "break even" with loan #2
higher points?
a. 12 or 1 year
b. 18 or 1½ years
c. 22 or almost 2 years
d. 28 or 2⅓ years
e. 36 or 3 years
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11. Ozzie and Kathy are trying to qualify for a home mortgage loan. The lender requires that their gross monthly
income is 3 times the monthly house payment (PITI). In addition, their total monthly debt payments (PITI
plus all other debts) can be no more than 40% of their gross monthly income. Their gross annual income is
$40,000 and their monthly house payment will be $1,000. What is the maximum "other debt" payments they
can have and still qualify for this loan?
a. $ 333
b. $1,333
c. $3,333
d. $ 250
e. $ 500

12. Earnest money is the sum of money the homebuyer pays to

a. the realtor for his help in finding the desired home.
b. the realtor for his help in finding the desired financing.
c. the lender to originate the loan.
d. indicate his intent of purchase.

13. Which of the following are normally parts of the monthly payment on a typical home mortgage in Texas?
1. interest
2. principal
3. homeowner's insurance
4. real estate taxes
5. title insurance
a. 1, 2, 3,4
b. 2, 4
c. 1, 3, 5
d. 3, 4, 5
e. 1, 2, 3

Use the following information to answer the next two questions.

LOAN
9% APR
3 points
15% down payment

14. On a $100,000 house, how much money would be paid in points?

a. $2,550
b. $9,000
c. $3,000
d. $5,000
e. None of the above

15. In the above question, will the buyer be required to purchase private mortgage insurance?
a. Yes
b. No

16. Anthony and Antonia (Tony and Tonie) have obtained a 9¾% 15-year mortgage for a $85,000 loan. If their
monthly payments for principal and interest are $900, how much will they be paying in interest over the life
of the loan?
a. $ 77,000
b. $162,000
c. $239,000
d. $ 58,000
e. None of the above

17. The type of mortgage where the lender can increase the interest rate according to an index is the …
a. wrap-around mortgage.
b. renegotiable mortgage.
c. adjustable rate mortgage.
d. biweekly payment mortgage.
e. shared appreciation mortgage.
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18. Road Runner and Bugs Bunny have decided to purchase a $100,000 home together with a 10% down
payment. They are trying to decide between the following fixed-rate, 30-year mortgages.
Mortgage RR -- 12% with 2 discount points, $926/month payment for principal and interest
Mortgage BB -- 12.5% with 1.5 discount points, $961/month payment for principal and interest

How many months would they have to own this home before the extra front-end costs of the higher points
breaks even with the lower cost of the resulting monthly payments?
a. 5 months
b. 8 months
c. 13 months
d. 18 months