FIN 460 Real Estate Finance Exam
Practice Questions And Correct Answers
(Verified Answers) Plus Rationales 2027
Q&A | Instant Download Pdf
Question 1
Which characteristic most directly distinguishes real estate from many
financial securities?
A. Real estate is always highly liquid.
B. Real estate has no transaction costs.
C. Real estate is relatively heterogeneous and location-specific.
D. Real estate prices are determined only by interest rates.
Answer: C. Real estate is relatively heterogeneous and location-specific.
Rationale: Real estate properties differ by location, physical
characteristics, zoning, and use, making them relatively heterogeneous
and less liquid than standardized financial securities.
,Question 2
What is the primary purpose of a mortgage loan?
A. To provide unsecured consumer credit
B. To finance the purchase or refinancing of real property
C. To eliminate property taxes
D. To guarantee property appreciation
Answer: B. To finance the purchase or refinancing of real property.
Rationale: A mortgage is a secured loan in which real property serves as
collateral for the debt.
Question 3
In a mortgage loan, the borrower is commonly referred to as the:
A. Mortgagee
B. Trustee
C. Mortgagor
D. Beneficiary
Answer: C. Mortgagor.
Rationale: The mortgagor is the borrower who pledges property as
collateral, while the mortgagee is generally the lender.
,Question 4
Which measure represents the relationship between a mortgage balance
and the property's value?
A. Debt service coverage ratio
B. Loan-to-value ratio
C. Capitalization rate
D. Equity dividend rate
Answer: B. Loan-to-value ratio.
Rationale: The loan-to-value (LTV) ratio equals the loan amount divided by
the property's value and is a major measure of mortgage risk.
Question 5
A property is worth $500,000 and has a $400,000 mortgage. What is the LTV
ratio?
A. 60%
B. 70%
C. 80%
D. 90%
Answer: C. 80%.
Rationale: LTV = $400,000 ÷ $500,000 = 0.80, or 80%.
, Question 6
Which factor generally increases the interest rate charged on a mortgage?
A. Lower borrower risk
B. Lower LTV
C. Higher perceived credit risk
D. Larger down payment
Answer: C. Higher perceived credit risk.
Rationale: Lenders generally require higher interest rates to compensate
for greater expected default and credit risk.
Question 7
What is the principal amount of a mortgage?
A. The interest paid over the life of the loan
B. The original amount borrowed
C. The property's assessed tax value
D. The lender's expected profit
Answer: B. The original amount borrowed.
Rationale: Principal is the amount of debt outstanding, initially equal to
the amount borrowed.
Practice Questions And Correct Answers
(Verified Answers) Plus Rationales 2027
Q&A | Instant Download Pdf
Question 1
Which characteristic most directly distinguishes real estate from many
financial securities?
A. Real estate is always highly liquid.
B. Real estate has no transaction costs.
C. Real estate is relatively heterogeneous and location-specific.
D. Real estate prices are determined only by interest rates.
Answer: C. Real estate is relatively heterogeneous and location-specific.
Rationale: Real estate properties differ by location, physical
characteristics, zoning, and use, making them relatively heterogeneous
and less liquid than standardized financial securities.
,Question 2
What is the primary purpose of a mortgage loan?
A. To provide unsecured consumer credit
B. To finance the purchase or refinancing of real property
C. To eliminate property taxes
D. To guarantee property appreciation
Answer: B. To finance the purchase or refinancing of real property.
Rationale: A mortgage is a secured loan in which real property serves as
collateral for the debt.
Question 3
In a mortgage loan, the borrower is commonly referred to as the:
A. Mortgagee
B. Trustee
C. Mortgagor
D. Beneficiary
Answer: C. Mortgagor.
Rationale: The mortgagor is the borrower who pledges property as
collateral, while the mortgagee is generally the lender.
,Question 4
Which measure represents the relationship between a mortgage balance
and the property's value?
A. Debt service coverage ratio
B. Loan-to-value ratio
C. Capitalization rate
D. Equity dividend rate
Answer: B. Loan-to-value ratio.
Rationale: The loan-to-value (LTV) ratio equals the loan amount divided by
the property's value and is a major measure of mortgage risk.
Question 5
A property is worth $500,000 and has a $400,000 mortgage. What is the LTV
ratio?
A. 60%
B. 70%
C. 80%
D. 90%
Answer: C. 80%.
Rationale: LTV = $400,000 ÷ $500,000 = 0.80, or 80%.
, Question 6
Which factor generally increases the interest rate charged on a mortgage?
A. Lower borrower risk
B. Lower LTV
C. Higher perceived credit risk
D. Larger down payment
Answer: C. Higher perceived credit risk.
Rationale: Lenders generally require higher interest rates to compensate
for greater expected default and credit risk.
Question 7
What is the principal amount of a mortgage?
A. The interest paid over the life of the loan
B. The original amount borrowed
C. The property's assessed tax value
D. The lender's expected profit
Answer: B. The original amount borrowed.
Rationale: Principal is the amount of debt outstanding, initially equal to
the amount borrowed.
