Financing Practice Questions

10 sample financing questions, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. Under a contract for deed used as a financing device, during the payment period the buyer holds:

   • ALegal title, with the seller holding only a lien
   • BEquitable title, with the seller retaining legal title until payment is completecorrect
   • CNo interest of any kind in the property until the final installment payment has been made and accepted
   • DA leasehold interest with an option to purchase

   Why: The installment buyer holds equitable title and possession while the seller keeps legal title as security until the price is paid in full. The buyer does hold an interest, so saying there is none until the last payment misstates the nature of equitable title.

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2. 2. Which feature distinguishes a VA-guaranteed loan from an FHA-insured loan?

   • AA minimum 3.5% down payment is required
   • BMonthly private mortgage insurance is always required
   • CAn eligible veteran may finance up to 100% of the purchase pricecorrect
   • DThe secured property must be in a designated rural area

   Why: VA loans allow no-down-payment financing for eligible veterans and carry no monthly mortgage insurance, though a funding fee applies. The 3.5% minimum investment is the FHA figure, and rural location is the USDA requirement.

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3. 3. At each adjustment on an adjustable-rate mortgage, the new interest rate is determined by:

   • AThe index alone
   • BAdding the margin to the current indexcorrect
   • CAveraging the original note rate with the current index
   • DThe margin alone

   Why: Index plus margin equals the new rate, subject to the loan’s caps. The index is the moving market measure the lender does not control; the margin is the lender’s fixed spread above it.

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4. 4. A qualified mortgage is best described as a loan that:

   • AMeets defined product and underwriting standards and gives the lender liability protectioncorrect
   • BIs guaranteed against borrower default by a federal agency
   • CHas been sold to a government-sponsored enterprise within a set number of days after the closing takes place
   • DCarries an interest rate below the current market average

   Why: A qualified mortgage satisfies specified product restrictions and underwriting requirements, which affords the lender a presumption of ability-to-repay compliance. Being sold to a government-sponsored enterprise is a separate secondary-market event and does not by itself make a loan qualified.

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5. 5. A brokerage owns an interest in a mortgage company and refers its buyers there. RESPA allows this only if:

   • AThe brokerage collects a $300 referral fee from the affiliate for each closing
   • BThe buyer signs a written waiver of RESPA protections
   • CThe referral is limited to buyers paying cash for the property
   • DIt is disclosed, use is not required, and payment is only a return on ownershipcorrect

   Why: An affiliated business arrangement survives RESPA only with written disclosure of the relationship, no required use of the affiliate, and no compensation beyond a return on the ownership interest. A per-closing referral fee is the prohibited kickback.

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6. 6. A promissory note is properly signed at closing, but the lender never records the mortgage securing it. Which statement is most accurate?

   • AThe loan automatically becomes an unsecured lease of the property
   • BThe debt is unenforceable because the security instrument was not recorded
   • CThe borrower still owes the debt, but the lender’s lien priority against later recorded interests is at riskcorrect
   • DRecording the promissory note instead would have preserved the lien

   Why: Recording protects priority, not validity: the note remains a binding personal obligation, while an unrecorded mortgage can be defeated by a later party who records first. Notes are not recorded in the public records at all.

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7. 7. Under traditional conventional qualifying guidelines written as 28/36, the second number refers to:

   • ATotal monthly debt including housing as a percentage of gross monthly incomecorrect
   • BHousing expense as a percentage of gross monthly income
   • CThe maximum loan term expressed in years
   • DThe maximum loan-to-value ratio permitted without mortgage insurance

   Why: The 36 is the back-end or total debt ratio, covering housing plus car loans, student loans, and minimum card payments. The 28 is the front-end ratio, which counts housing expense alone.

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8. 8. A borrower assumes the described conventional PMI cancellation rules automatically govern FHA mortgage insurance as well. What is correct?

   • AAll mortgage insurance programs have identical cancellation rules
   • BA conventional PMI request automatically cancels FHA insurance
   • CNo insurance rules apply to any government-backed loan
   • DFHA and VA loans have different requirements and should be checked separatelycorrect

   Why: The CFPB explanation expressly distinguishes FHA and VA requirements and lender-paid insurance. Applying one program's cancellation rule indiscriminately can produce a wrong answer.

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9. 9. The secondary mortgage market is where:

   • ABorrowers apply to lenders for new mortgage loans
   • BOnly second mortgages and home equity lines are originated
   • CJumbo borrowers are underwritten by portfolio lenders
   • DExisting loans are bought and sold among lenders and investorscorrect

   Why: The secondary market trades loans that already exist, which replenishes lenders so they can originate again. Taking applications from borrowers is the primary market, and the word "secondary" has nothing to do with second mortgages.

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10. 10. A lender will make an 85% loan on a home that sold for $370,000 and appraised at $360,000. The buyer’s minimum cash down payment is:

    • A$54,000
    • B$55,500
    • C$64,000correct
    • D$74,000

    Why: The 85% applies to the lower figure: 0.85 × $360,000 = $306,000 loan. The buyer must still pay the full $370,000 price, so the down payment is $370,000 − $306,000 = $64,000. Applying 15% to the sale price gives the $55,500 trap.

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