REAL ESTATE FINANCE AND MORTGAGE
PRACTICE QUESTIONS WITH DETAILED
EXPLANATIONS – ADVANCED MCQS FOR
EXAM PREPARATION
Q1. Which instrument is used to evidence the borrower’s debt in a real estate loan?
A) Mortgage
B) Promissory Note ✅
C) Deed of Trust
D) Lien
Explanation: The promissory note is the borrower’s written promise to repay the loan, while
the mortgage or deed of trust secures that note.
Q2. In a lien-theory state, a mortgage:
A) Transfers title to the lender
B) Creates a lien on the property ✅
C) Transfers possession to the lender
D) Is not enforceable in court
Explanation: Lien theory states that a mortgage is treated as a lien rather than a transfer of
ownership, meaning the borrower retains legal title.
Q3. A deed of trust involves how many parties?
A) Two
B) Three ✅
C) Four
D) One
Explanation: A deed of trust involves the borrower (trustor), lender (beneficiary), and a neutral
third party (trustee).
Q4. Which clause allows the lender to demand full repayment in the event of
default?
A) Acceleration clause ✅
B) Escalation clause
C) Alienation clause
D) Defeasance clause
Explanation: The acceleration clause permits the lender to declare the full balance due if the
borrower defaults on loan obligations.
Q5. Which clause requires full loan repayment when the property is sold?
A) Defeasance clause
B) Subordination clause
C) Alienation (due-on-sale) clause ✅
D) Escalation clause
Explanation: The alienation clause protects lenders by ensuring that loans are repaid before
ownership is transferred.
,Q6. What is the primary function of the mortgage?
A) Provide evidence of debt
B) Transfer title to lender
C) Pledge property as security for repayment ✅
D) Replace promissory note
Explanation: A mortgage secures the borrower’s promise to repay by pledging real estate as
collateral.
Q7. Which federal law requires lenders to disclose the true cost of credit, including
APR?
A) RESPA
B) Truth in Lending Act (TILA) ✅
C) Equal Credit Opportunity Act (ECOA)
D) Fair Housing Act
Explanation: TILA ensures borrowers are informed of the annual percentage rate (APR) and
other credit terms.
Q8. The process of selling mortgages to investors as securities is called:
A) Collateralization
B) Mortgage-backed securitization ✅
C) Subordination
D) Amortization
Explanation: Mortgage-backed securities (MBS) pool loans and sell them to investors,
providing liquidity in lending markets.
Q9. Which loan is insured by the Federal Housing Administration (FHA)?
A) VA loan
B) Conventional loan
C) FHA loan ✅
D) USDA loan
Explanation: FHA loans are designed to help lower-income or first-time buyers by insuring
lenders against borrower default.
Q10. A loan guaranteed by the Department of Veterans Affairs (VA) is available to:
A) All first-time buyers
B) U.S. military veterans and active service members ✅
C) Teachers and civil servants
D) Farmers only
Explanation: VA loans guarantee repayment for lenders and are offered to qualified U.S.
veterans and service members.
Q11. Which feature distinguishes an amortized loan from an interest-only loan?
A) Interest-only loans reduce principal faster
B) Amortized loans require equal payments that cover both principal and interest
✅
C) Interest-only loans have no balloon payment
D) Amortized loans always have variable rates
Explanation: Amortized loans gradually pay down principal and interest, unlike interest-only
loans, where principal remains until maturity.
, Q12. A partially amortized loan with a lump-sum payment at the end is called:
A) Interest-only loan
B) Balloon loan ✅
C) Straight note
D) Reverse mortgage
Explanation: Balloon loans combine regular payments with a final large balance due at the
end.
Q13. In a fixed-rate fully amortizing loan, what happens to the interest portion of
each payment over time?
A) It increases
B) It decreases ✅
C) It stays the same
D) It fluctuates randomly
Explanation: As principal decreases, interest owed declines while principal repayment
increases.
Q14. What type of loan is often used for short-term construction financing?
A) Conventional fixed loan
B) Bridge loan ✅
C) FHA loan
D) Reverse mortgage
Explanation: Bridge or interim loans provide temporary financing until permanent financing is
secured.
Q15. A loan where the interest rate adjusts periodically based on an index is:
A) Fixed-rate mortgage
B) Adjustable-rate mortgage (ARM) ✅
C) Balloon note
D) Reverse mortgage
Explanation: ARM ties the interest rate to an index plus a margin, causing periodic rate
changes.
Q16. In an ARM, the margin represents:
A) The lender’s profit added to the index ✅
B) The cap on rate increases
C) The discount rate from the Fed
D) The borrower’s equity
Explanation: The margin is a fixed percentage added to the index to determine the interest
rate.
Q17. A loan that allows homeowners 62 or older to borrow against home equity
without repayment until death or sale is:
A) Balloon note
B) Reverse mortgage ✅
C) FHA loan
D) Bridge loan
Explanation: Reverse mortgages convert equity into income for elderly homeowners.
PRACTICE QUESTIONS WITH DETAILED
EXPLANATIONS – ADVANCED MCQS FOR
EXAM PREPARATION
Q1. Which instrument is used to evidence the borrower’s debt in a real estate loan?
A) Mortgage
B) Promissory Note ✅
C) Deed of Trust
D) Lien
Explanation: The promissory note is the borrower’s written promise to repay the loan, while
the mortgage or deed of trust secures that note.
Q2. In a lien-theory state, a mortgage:
A) Transfers title to the lender
B) Creates a lien on the property ✅
C) Transfers possession to the lender
D) Is not enforceable in court
Explanation: Lien theory states that a mortgage is treated as a lien rather than a transfer of
ownership, meaning the borrower retains legal title.
Q3. A deed of trust involves how many parties?
A) Two
B) Three ✅
C) Four
D) One
Explanation: A deed of trust involves the borrower (trustor), lender (beneficiary), and a neutral
third party (trustee).
Q4. Which clause allows the lender to demand full repayment in the event of
default?
A) Acceleration clause ✅
B) Escalation clause
C) Alienation clause
D) Defeasance clause
Explanation: The acceleration clause permits the lender to declare the full balance due if the
borrower defaults on loan obligations.
Q5. Which clause requires full loan repayment when the property is sold?
A) Defeasance clause
B) Subordination clause
C) Alienation (due-on-sale) clause ✅
D) Escalation clause
Explanation: The alienation clause protects lenders by ensuring that loans are repaid before
ownership is transferred.
,Q6. What is the primary function of the mortgage?
A) Provide evidence of debt
B) Transfer title to lender
C) Pledge property as security for repayment ✅
D) Replace promissory note
Explanation: A mortgage secures the borrower’s promise to repay by pledging real estate as
collateral.
Q7. Which federal law requires lenders to disclose the true cost of credit, including
APR?
A) RESPA
B) Truth in Lending Act (TILA) ✅
C) Equal Credit Opportunity Act (ECOA)
D) Fair Housing Act
Explanation: TILA ensures borrowers are informed of the annual percentage rate (APR) and
other credit terms.
Q8. The process of selling mortgages to investors as securities is called:
A) Collateralization
B) Mortgage-backed securitization ✅
C) Subordination
D) Amortization
Explanation: Mortgage-backed securities (MBS) pool loans and sell them to investors,
providing liquidity in lending markets.
Q9. Which loan is insured by the Federal Housing Administration (FHA)?
A) VA loan
B) Conventional loan
C) FHA loan ✅
D) USDA loan
Explanation: FHA loans are designed to help lower-income or first-time buyers by insuring
lenders against borrower default.
Q10. A loan guaranteed by the Department of Veterans Affairs (VA) is available to:
A) All first-time buyers
B) U.S. military veterans and active service members ✅
C) Teachers and civil servants
D) Farmers only
Explanation: VA loans guarantee repayment for lenders and are offered to qualified U.S.
veterans and service members.
Q11. Which feature distinguishes an amortized loan from an interest-only loan?
A) Interest-only loans reduce principal faster
B) Amortized loans require equal payments that cover both principal and interest
✅
C) Interest-only loans have no balloon payment
D) Amortized loans always have variable rates
Explanation: Amortized loans gradually pay down principal and interest, unlike interest-only
loans, where principal remains until maturity.
, Q12. A partially amortized loan with a lump-sum payment at the end is called:
A) Interest-only loan
B) Balloon loan ✅
C) Straight note
D) Reverse mortgage
Explanation: Balloon loans combine regular payments with a final large balance due at the
end.
Q13. In a fixed-rate fully amortizing loan, what happens to the interest portion of
each payment over time?
A) It increases
B) It decreases ✅
C) It stays the same
D) It fluctuates randomly
Explanation: As principal decreases, interest owed declines while principal repayment
increases.
Q14. What type of loan is often used for short-term construction financing?
A) Conventional fixed loan
B) Bridge loan ✅
C) FHA loan
D) Reverse mortgage
Explanation: Bridge or interim loans provide temporary financing until permanent financing is
secured.
Q15. A loan where the interest rate adjusts periodically based on an index is:
A) Fixed-rate mortgage
B) Adjustable-rate mortgage (ARM) ✅
C) Balloon note
D) Reverse mortgage
Explanation: ARM ties the interest rate to an index plus a margin, causing periodic rate
changes.
Q16. In an ARM, the margin represents:
A) The lender’s profit added to the index ✅
B) The cap on rate increases
C) The discount rate from the Fed
D) The borrower’s equity
Explanation: The margin is a fixed percentage added to the index to determine the interest
rate.
Q17. A loan that allows homeowners 62 or older to borrow against home equity
without repayment until death or sale is:
A) Balloon note
B) Reverse mortgage ✅
C) FHA loan
D) Bridge loan
Explanation: Reverse mortgages convert equity into income for elderly homeowners.
