HUD Housing Counseling Exam Questions & Answers Solved 100%

Back-end ratio - Answer The back-end ratio (or debt-to-income ratio) compares total debt to gross monthly income. The client's only debt is a $435 lease payment, so the $950 mortgage payment brings his total monthly debt to $1,385. He earns $50,000 per year, which equals $4,166.67 per month. The client's total current expenses divided by gross monthly income equals 52%. The client's combined current housing payment and car payment divided by gross monthly income equals 24%. Calculation: Debt: $435 + 950 = $1,385 Income: $50,000 / 12 = $4,166.67 Back-end ratio: $1,385 / $4,166.67 = 0.33 or 33% Reference: Module 2.1 Renting vs. Buying Page Number 22 to 24 Max Front-End Ratio/Back-End Ratio for Conventional Loan - Answer The maximum front-end ratio for a standard conventional loan is 28%, and the back-end ratio is 36%. The front-end ratio is calculated as 28% of the client's monthly income of $4,167, which is $1,167. The back-end ratio is calculated as 36% of the client's monthly income of $4,167 minus the client's monthly debt of $435, which equals $1,065. Therefore, the maximum loan payment that the client qualifies for is the lower of the two numbers, which is $1,065 .Reference: Module 2.1 Renting vs. Buying Page Number 11 to 24 The client is considering an FHA mortgage. What is the upfront mortgage insurance premium (UFMIP) for an FHA mortgage? - Answer Effective January 2015, the upfront mortgage insurance premium (UFMIP) is 1.75% for FHA mortgages. The annual MIP for FHA mortgages ranges between 0.8% and 1.05%. USDA loans charge an up-front Guarantee Fee of 2%. Reference: Module 2.2 Affordable Housing Options Page Number 13 to 13 Maximum Housing Payment Calculation - Answer To calculate the maximum housing payment, multiply the appropriate front-end ratio by the gross monthly income. The front-end ratio for an EEM loan is 33%, and the gross income is $50,000 divided by 12, or $4,167 per month.Calculation: 0.33 multiplied by $4,167 equals $1,375.Multiplying the front-end ratio for a rental (30%) would result in a payment of $1,250.Multiplying the traditional back-end ratio for EEM loans (45%) would result in a payment of $1,875 minus the debt of $435 equaling $1,440. Therefore, the front-end ratio applies because it results in a lower payment. Reference: Module 2.1 Renting vs. Buying Page Number 11 to 24 The client decides to purchase a townhouse through a down payment assistance program with a recapture clause. Three years later, the client remarries, and his wife owns a single family home. Which situation might cause an accelerated loan payment? A. Client moves to his wife's home and rents his townhouse to a tenant. B. Client moves to his wife's home and the townhouse loan is assumed by an eligible buyer. C. Client's wife moves into the townhouse and rents her house to a tenant. D. Client's wife moves into the townhouse and sells her house to a qualified buyer. - Answer A. Client moves to his wife's home and rents his townhouse to a tenant. Many down payment assistance programs (DPAs) require owner occupancy. The recapture clause is triggered when the husband rents or sells the townhouse, but the loan can be assumed by an eligible buyer. Which additional information should the housing counselor request from the client to determine her readiness to purchase a home? - Expenses - Pre-qualification letter - Current lease - Planned family size - Answer Expenses The counselor must create a budget to determine if the client can afford to purchase a home, and expenses must be identified in order to create a realistic budget.Reference: Module 4.1 Pre-Purchase Page Number 5 to 9 Lenders typically verify that a borrower has been in the same job for how many years? - Answer 2 What demographic are FHA loans designed for? - Answer Based on the client's income and down payment, she is well positioned for a conventional loan which offers the most favorable terms for her situation. FHA or USDA loans are designed for lower income buyers with less funds available for down payment, while a subprime loan is designed for buyers with poor credit who are ineligible for other loans. The client thinks her cost of living is going to be the same if her mortgage payment and her rental payment are comparable. What are three recurring costs associated with homeownership that are not part of home rental? > Homeowners insurance, property taxes, home repairs > Car insurance, property taxes, cable bill > Property taxes, renters insurance, utility bill > Utility bill, car insurance, renters insurance - Answer Homeowners insurance, property taxes, and home repairs are part of home ownership expenses. Other options contain one or more costs not exclusive to home ownership. Housing Ratio Calculation of 28% Income: $56,400 - Answer Using her stated Gross Annual Income of $56,400 and the given Housing Ratio of 28% calculate her maximum mortgage payment as follows: $56,400/12=$4,700 $4,700*.28= $1,316 Which is the minimum percentage of the purchase price that the client needs to make as a down payment to avoid having to pay mortgage insurance with a conventional mortgage? > 3.50% > 10% > 20% > 22% - Answer With a conventional mortgage, the client needs to put at least 20% down in order to avoid having to pay mortgage insurance. That means the loan-to-value (LTV) ratio needs to be 80% or less. Which factor determines whether the client will have to pay private mortgage insurance versus mortgage insurance premium? > Type of loan > Size of loan > Loan-to-value ratio > Credit score - Answer Private mortgage insurance (PMI) relates to conventional loans, and mortgage insurance premiums (MIP) are associated with FHA loans. Factors that could influence the cost of PMI include the loan size, loan-to-value ratio, and client's credit score. If the client submits a loan application, which document should she receive within three business days? > Loan Estimate > Closing Disclosure > Uniform Residential Loan Application > Purchase Agreement - Answer Within three days of receiving a loan application, lenders are required to supply the client with a loan estimate. The other documents are not relevant to the process at this time. This client is denied a loan to purchase a home because she has not lived in the country for at least ten years. Which advice should the housing counselor provide? > Report the action to the Federal Trade Commission as it is a violation of the Equal Credit Opportunity Act > Report the action to a local fair housing center as it is a violation of the Fair Credit Reporting Act > Report the action to a local fair housing center as it is a violation of the Equal Credit Opportunity Act > Report the action to the Federal Trade Commission as it is a violation of the Fair Credit Reporting Act - Answer The lender's action is a violation of the Equal Credit Opportunity Act, because lenders cannot discriminate based on national origin.Counselors should have a general working knowledge of the consumer protections available, particularly the Equal Credit Opportunity Act. Complaints about Equal Credit Opportunity Act should be filed with the Federal Trade Commission (FTC) Based on this client's household budget, as shown in the table below, which strategy would most likely reduce monthly variable expenses? (Refer to the budget below as needed.) > Reduce food expenses by cooking at home more and eating out less > Sell the car and buy a cheaper one with a lower monthly payment > Shop for school clothes at discount stores instead of department stores > Reduce utility expenses by unplugging appliances and adjusting the thermostat - Answer A monthly car payment is a fixed expense, so variable expenses will not be reduced by a lower car payment. Based on the budget, there is no information for a counselor to initiate a discussion on clothing expenses. The combined gas and electric expense of $110 appears reasonable in the absence of information on climate, but the client spends over $1,000 on food and groceries each month. Combined with the fact that the client buys breakfast every morning on the way to work, this line item signals a good place to start for a discussion on reducing monthly variable expenses. Which additional information would the housing counselor need to prepare the action plan for this client? > Documentation of household expenses > Client's current lease agreement > Listings for properties the client is interested in purchasing > Documentation of life insurance payout - Answer The client action plan outlines steps the client and counselor will take in order to achieve the client's housing goal. The client has identified home purchase as her goal, so the current lease is not required to create the action plan. Since the credit score and income are already known by the counselor, the next logical steps are to develop and verify budget, then to discuss strategies to reduce variable expenses and reallocate funds toward debt reduction or savings. The price range and life insurance balance has been established in the scenario, so property listings and a statement of the original insurance payment would not be helpful in preparing the client action plan. The client wants to move her family to a lower-priced rental unit to save money for a home, but is struggling with the upfront fees required to move to a new apartment complex. Which strategy would be most effective to help the client secure affordable housing and cover moving expenses quickly? > Find an individual landlord and negotiate > Apply for a loan to cover expenses > Save for the move instead of paying utilities > Submit application for a housing voucher - Answer The most effective option for the client to reduce moving costs is to find an individual landlord and negotiate. Apartment complexes also might negotiate but may not be as flexible. Applying for a short-term loan would be an expensive option. Nonpayment of utility bills could result in issues later. Submitting an application for a housing voucher might eventually allow the family to secure a more affordable unit, but the process could be quite lengthy. Which type of lease and tenancy would best protect the tenant if she moved into a new apartment? > A written lease with contractual tenancy > A written lease with tenancy at will > An oral lease with tenancy at will > An oral lease with tenancy at sufferance - Answer It is recommended that tenants request a written lease with contractual tenancy so they are fully protected to stay in the home. A written lease outlining tenancy at will would not fully protect the tenant, because the landlord does not define a formal rent payment or rental period. Oral leases are easy and convenient but not very secure Which tactic would be most effective for the client to encourage a positive landlord-tenant experience if she wanted to terminate her lease early in order to move? > Communicate well with the landlord > Request return of the security deposit > Stop paying rent immediately > Leave furniture for an incoming tenant - Answer A landlord may release a tenant from a lease without any financial obligations if the landlord is given enough advance warning to find a new tenant. Good communication can minimize the negative effects of terminating a lease early. Stopping rent payments immediately might violate the lease agreement. If the landlord must later pay for the removal of furniture or other items, leaving items in the unit might reduce the amount of the rental deposit returned to the client. Return of the security deposit depends on the lease terms and state law. The client currently keeps the $45,000 remaining from the life insurance settlement in a regular checking account. Her goal is to use this money towards her down payment. Which action should the housing counselor suggest to this client? > Move funds to a large purchase savings account with limited accessibility > Leave the money in her current checking account for easy access > Move funds into a long-term Certificate of Deposit > Move the funds into a mutual fund - Answer When saving for a large purchase, it is best to keep designated money in a limited access account with good returns. A limited access account usually provides good returns which will help the client reach her savings goal more quickly. If the client leaves the money in her current checking account, she runs the risk of spending the money and will earn little or no interest. A Certificate of Deposit or mutual fund would normally tie up the money and may incur fees upon withdrawal The client's lease may expire before she can move into a new home. Which is the best advice for the housing counselor to provide? > Discuss a tenancy-at-sufferance agreement with the current landlord > Contact local Public Housing Agencies > Stay in her current unit until the landlord evicts her > Find a seller who will allow her to move in before closing - Answer The best case is for the client to be allowed to stay where she is until she can move into her new home, as this is less costly and more convenient. The Public Housing Agency is unlikely to be able to assist with temporary housing, and waiting for eviction can have significant negative impacts. Finding an owner who will allow her to occupy a home prior to closing is unlikely. Which is the best recommendation the housing counselor should give this client to help improve her credit score? > Pay more than the minimum payment each month to reduce the credit card balance > Apply for a loan to consolidate the credit card and auto loan balances > Set up automatic credit card and loan payments to ensure on time payment > Apply for a credit card with a lower interest rate and transfer the balance of the current card - Answer By paying more than the minimum balance over the next several months, the client will reduce the debt utilization ratio, which has significant impact on the overall score. A new credit card or a consolidation loan may provide a lower interest rate; however, new credit applications create hard inquiries which negatively impact credit scores, and increased monthly payments reduce balances more quickly than a slight reduction in interest rate. There is no information to suggest the client has difficulty making on-time payments, so setting up automatic payments will not impact the credit score. The client currently pays $2,050 in rent, though her mortgage payment could be higher. Which is the most effective strategy to be able to manage a higher payment? > Delay home purchase until the car loan is paid off > Utilize savings to pay the mortgage in the future > Consolidate car loan and credit card balances > Withdraw retirement account funds to pay down car and credit card balances - Answer Delaying home purchase until the car loan is paid off also allows the client time to save additional funds for a down payment and closing costs. Applying the current monthly savings to the mortgage payment in the future is a risky strategy, as the client should continue saving. Terms for unsecured loans, like a consolidated personal loan, can be risky, so the client would need to carefully evaluate this option. Pulling funding from a retirement account might incur fees that the client can avoid with other options. Which is the down payment required if the client purchases a $375,000 home with an FHA mortgage? > $13,125 > $18,750 > $45,000 > $75,000 - Answer The down payment would be 3.5% of the $375,000 purchase price, which is $13,125 ($375,000 multiplied by 0.035 equals $13,125).$75,000 is 20% of the purchase price, which could be an approximate amount required for closing.$18,750 is 5% of the loan amount.$45,000 is the amount she has available. Which of the four C's of Credit is the basis for the client's? - Answer Capital Character Collateral Capacity Which government rule or regulation may have been violated when the loan officer denied the loan for the condo? > Fair Housing Act > Executive Order 11063 > Housing and Urban Development Act > Dodd-Frank Act - Answer The Fair Housing Act prohibits housing discrimination and protects seven characteristics: race, religion, color, national origin, familial status, disability, and sex. In this situation, the loan officer appears to have denied the loan based on the client's familial status.Executive Order 11063 prohibited discrimination in the sale, leasing, rental, or other disposition of properties and facilities owned or operated by the Federal Government or provided federal funds.The Housing and Urban Development Act was created with the goal of providing government-insured loans to moderate-income people.The Dodd-Frank Act protects borrowers from predatory lending practices. Which is the best advice a housing counselor can give this client who is concerned about high heating bills and wants information on how to plan for home maintenance? > Create a list of each key system in her home with target dates for maintenance and replacement > Use emergency funds to deal with system maintenance and replacement > Do maintenance and replacement only when they lead to significant financial tax benefits > Purchase a home warranty annually to ensure her home is properly protected from maintenance costs - Answer Proper home maintenance begins with the homeowner taking stock of the home, developing a schedule to maintain major systems, and making a plan as to when significant parts of the home might need to be repaired or replaced. This proactive approach is likely more effective and affordable than reacting to maintenance issues as they arise. Though sometimes there are tax benefits to maintaining a home, that is not the only reason why homeowners should be concerned with maintenance. Finally, home warranties can be a beneficial tool for maintaining a home. However, warranties should not replace a homeowner's own initiative to conduct home maintenance, as not maintaining the home can lead to setbacks both in convenient use and finances. Which is the best option for the client to consider if she needs to replace old windows in her home? > Explore an FHA Energy Efficiency loan > Hire a home energy efficiency inspector > Visit to learn about home energy improvement projects > Advise the client to replace one window at a time so the project is more affordable - Answer An FHA Energy Efficiency loan would be the most cost-effective way for the client to replace the windows and save money. The and websites list energy efficiency improvements that will give the client the most benefit. R is a website related to home safety improvements and disaster preparation. Which is the best advice a housing counselor can offer for this client to prepare and save for major household repairs? > Create a system maintenance plan > Track monthly expenses > Obtain a home improvement loan > Pay a contractor to repair items - Answer The system maintenance plan allows the client to maintain a list of all key home systems and their maintenance costs. Tracking expenses is an important step but does not address the issue of home repairs. Likewise, obtaining a home improvement loan and paying a contractor are recommended repair and replacement strategies but are not tools to help a client prepare for expenses.Reference: Module 4.2 Post-Purchase Which action could assist this client in addressing her current maintenance concerns? > Install window insulation kits > Install an ENERGY STAR qualified water heater > Install low-flow toilets > Plant shrubs and trees to provide shade - Answer Installing window insulation kits is a home improvement strategy to help with heating and window maintenance issues. Obtaining a new water heater or installing low-flow toilets are energy-efficiency improvements, but they would not help to resolve any of the client's current critical maintenance issues, including pipes, sewer, windows, and heating. Planting trees might help reduce cooling costs, but that is not one of the client's concerns. Which is the best financing option for the client to complete multiple home repairs over time without refinancing? > Home Equity Line of Credit > Streamlined 203k Loan > FHA 203K Loan > Home Equity Loan - Answer The Home Equity Line of Credit is the best option for the client. The client has more than one project, one that may require a consultant due to the sewer line being affected. This option is for homeowners who would like to conduct multiple repairs over a period of time, who do not have money for closing costs, and who want a longer payoff time frame.A Home Equity Loan is better suited to a one-time expense. A Streamlined 203K Loan is for minor rehabilitation and/or home improvement projects that will not require the involvement of consultants, engineers, and/or architects. An FHA 203K Loan allows the homeowner to refinance the home loan to perform repair. This client has $25,000 of equity in her home and needs $49,000 to replace her windows and pipes. Which finance option should the housing counselor recommend? > FHA 203k > Home Equity Line of Credit > Second Mortgage > Conventional Mortgage - Answer An FHA 203k loan is based on the future value of the property after repairs and will provide the funds for home improvements beyond the current equity in the house. There is insufficient equity for a Home Equity Line of Credit (HELOC), second mortgage or a conventional refinance.