18 Real Estate Exam Questions On Mortgage Instruments

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1. What is the primary purpose of a mortgage?
a) To transfer ownership of a property
b) To secure a loan with real estate as collateral
c) To guarantee a fixed interest rate
d) To increase the property’s value

Answer: b) To secure a loan with real estate as collateral
Explanation: A mortgage is a legal agreement in which a borrower pledges real estate as security for a loan.

2. Who holds the legal title in a title theory state?
a) The borrower
b) The lender
c) The real estate agent
d) The local government

Answer: b) The lender
Explanation: In title theory states, the lender holds the legal title to the property until the loan is paid off, while the borrower has equitable title.

3. Which document accompanies a mortgage to specify the terms of repayment?
a) Deed
b) Promissory note
c) Easement agreement
d) Lease agreement

Answer: b) Promissory note
Explanation: The promissory note is a written promise to repay the loan and includes the loan amount, interest rate, and repayment terms.

4. In a lien theory state, who holds the legal title to the property?
a) The lender
b) The borrower
c) The title company
d) The local government

Answer: b) The borrower
Explanation: In lien theory states, the borrower holds legal title, while the lender has a lien on the property as security for the loan.

5. What happens in a mortgage foreclosure?
a) The lender takes ownership of the property without a court process
b) The borrower sells the property to pay off the loan
c) The lender forces the sale of the property to recover the loan balance
d) The lender forgives the remaining loan balance

Answer: c) The lender forces the sale of the property to recover the loan balance
Explanation: Foreclosure is a legal process in which the lender forces the sale of a property due to the borrower’s failure to repay the loan.

6. What is a deed of trust?
a) A document that transfers ownership from seller to buyer
b) A legal instrument in which a third party (trustee) holds title until the loan is paid
c) A lease agreement between a landlord and tenant
d) A type of government-backed loan

Answer: b) A legal instrument in which a third party (trustee) holds title until the loan is paid
Explanation: A deed of trust involves a borrower, a lender, and a trustee. The trustee holds legal title until the borrower repays the loan.

7. What is the purpose of a mortgage acceleration clause?
a) To allow the borrower to make extra payments
b) To speed up the repayment schedule
c) To require immediate repayment of the loan if the borrower defaults
d) To reduce the interest rate

Answer: c) To require immediate repayment of the loan if the borrower defaults
Explanation: An acceleration clause allows the lender to demand full repayment of the loan if the borrower defaults.

8. Which of the following best describes a balloon mortgage?
a) A loan with a low initial interest rate that increases over time
b) A mortgage where equal payments are made for the full term
c) A loan with small payments followed by a large final payment
d) A loan that is fully paid off within five years

Answer: c) A loan with small payments followed by a large final payment
Explanation: A balloon mortgage has lower monthly payments with a large lump sum due at the end of the term.

9. What type of mortgage allows the lender to change the interest rate based on market conditions?
a) Fixed-rate mortgage
b) Adjustable-rate mortgage (ARM)
c) Reverse mortgage
d) Balloon mortgage

Answer: b) Adjustable-rate mortgage (ARM)
Explanation: An ARM has an interest rate that adjusts periodically based on market conditions.

10. What does private mortgage insurance (PMI) protect?
a) The lender in case the borrower defaults
b) The borrower in case of job loss
c) The real estate agent’s commission
d) The property against natural disasters

Answer: a) The lender in case the borrower defaults
Explanation: PMI is required for loans with low down payments and protects the lender if the borrower defaults.

11. What is an alienation clause in a mortgage?
a) A provision allowing the borrower to transfer the mortgage to a new owner
b) A clause that prevents the mortgage from being assumed
c) A requirement for the borrower to refinance every five years
d) A penalty for prepaying the mortgage

Answer: b) A clause that prevents the mortgage from being assumed
Explanation: An alienation clause (due-on-sale clause) requires the full loan balance to be paid if the property is sold.

12. Which type of mortgage is insured by the Federal Housing Administration (FHA)?
a) Conventional loan
b) VA loan
c) FHA loan
d) USDA loan

Answer: c) FHA loan
Explanation: FHA loans are backed by the government and require mortgage insurance.