Residential Mortgages: Free Florida Real Estate Practice Questions

1. 1. Under Florida law, a mortgage creates a security interest in real property rather than transferring legal title to the lender. This reflects Florida's status as a:

   • A) Lien theory state, in which the borrower retains legal title and the lender holds a lien as security
   • B) Title theory state, in which the lender holds legal title until the loan is fully repaid
   • C) Intermediate theory state, in which title shifts to the lender only upon default
   • D) Deed of trust state, in which a neutral third-party trustee holds title on behalf of both parties
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   Correct answer: A) Lien theory state, in which the borrower retains legal title and the lender holds a lien as security

   Florida is a lien theory state. The borrower (mortgagor) retains legal title throughout the loan term, and the lender (mortgagee) holds only a lien on the property as security for repayment. In title theory states, the lender holds actual legal title until the loan is satisfied. This distinction affects the lender's foreclosure process -- Florida requires judicial foreclosure because the lender never holds title.

2. 2. A homeowner tries to sell a property and allow the buyer to simply take over the existing loan payments without notifying or obtaining approval from the lender. The clause in the mortgage that prevents this type of unauthorized transfer is the:

   • A) Acceleration clause
   • B) Alienation (due-on-sale) clause
   • C) Subordination clause
   • D) Defeasance clause
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   Correct answer: B) Alienation (due-on-sale) clause

   The alienation clause (also called the due-on-sale clause) requires the full mortgage balance to be paid upon any transfer of ownership, preventing the buyer from assuming the loan without lender consent. Without this clause, a buyer could take over a below-market-rate loan without the lender's knowledge. The acceleration clause is triggered by default; the subordination clause affects lien priority order; the defeasance clause releases the lien upon full payoff.

3. 3. A conventional loan borrower makes a 10% down payment on a $300,000 home, resulting in a $270,000 loan. The lender requires Private Mortgage Insurance (PMI). Why?

   • A) PMI is required on all conventional loans regardless of down payment size
   • B) PMI is required specifically for first-time homebuyers on all loan types
   • C) PMI replaces the title insurance requirement on conventional loans
   • D) PMI is required because the loan-to-value ratio exceeds 80%, increasing the lender's default risk exposure
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   Correct answer: D) PMI is required because the loan-to-value ratio exceeds 80%, increasing the lender's default risk exposure

   On conventional loans, lenders require PMI when the borrower's down payment is less than 20%, producing an LTV above 80%. A 10% down payment on a $300,000 home results in a $270,000 loan -- an LTV of 90% ($270,000 / $300,000). PMI compensates the lender if the borrower defaults, since the equity cushion is insufficient to cover losses from a distressed sale. Under the Homeowners Protection Act, PMI must be automatically cancelled when LTV reaches 78% of the original purchase price.

4. 4. A seller agrees to finance $90,000 of a $250,000 purchase price because the buyer cannot obtain conventional financing for the full amount. The seller accepts a promissory note and secures it with a mortgage on the property. This arrangement is called a:

   • A) Blanket mortgage
   • B) Construction loan
   • C) Purchase money mortgage
   • D) Open-end mortgage
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   Correct answer: C) Purchase money mortgage

   A purchase money mortgage (PMM) is seller financing in which the seller extends credit to the buyer as part of the sale transaction, taking back a mortgage on the property rather than receiving all cash at closing. The seller effectively becomes the lender. A blanket mortgage covers multiple properties under a single loan; a construction loan funds the building of new improvements; an open-end mortgage allows the borrower to draw additional advances up to a set maximum after the initial funding.

5. 5. A lender charges a borrower 2 discount points to lower the interest rate on a $250,000 mortgage loan. How much does the borrower pay for these discount points at closing?

   • A) $250
   • B) $2,500
   • C) $5,000
   • D) $25,000
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   Correct answer: C) $5,000

   One discount point equals 1% of the loan amount. Two points on a $250,000 loan = 2% x $250,000 = $5,000, paid at closing as prepaid interest. Each discount point typically reduces the interest rate by approximately 0.125% to 0.25%, though the exact reduction varies by lender and market. The lender benefits from receiving interest upfront; the borrower benefits from a lower rate over the life of the loan.

6. 6. Which of the following correctly identifies all four components of a PITI mortgage payment?

   • A) Principal, Interest, Taxes (property), and Insurance (homeowners/hazard)
   • B) Principal, Interest, Title insurance, and Income tax
   • C) Payment amount, Interest rate, Transfer fees, and Insurance
   • D) Principal, Index rate, Taxes, and Insurance
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   Correct answer: A) Principal, Interest, Taxes (property), and Insurance (homeowners/hazard)

   PITI = Principal (loan balance repayment), Interest (cost of borrowing), Taxes (property taxes, typically escrowed monthly by the lender), and Insurance (homeowners/hazard insurance, also typically escrowed). Lenders often require escrow accounts to ensure these payments are made, protecting the collateral. Title insurance is a one-time closing cost, not a recurring component of the monthly payment; income taxes are not part of PITI.

Not affiliated with Pearson VUE, the Florida DBPR, or FREC. This is an independent study tool; questions are original and verified against Florida statutes and FREC rules.