CHAMPIONS REAL ESTATE
FINANCE ACTUAL EXAM 2026/2027 |
TREC-Aligned Practice Test | Verified
Q&A | Pass Guaranteed - A+ Graded
SECTION 1: Mortgage Loan Fundamentals &
The Four C's of Lending (30 Questions)
The Four C's of Lending
Q1: Which of the Four C's of lending measures the borrower's willingness to make on-time
payments and is primarily revealed through their credit report?
● A. Capacity
● B. Character [CORRECT]
● C. Capital
● D. Collateral
Correct Answer: B
Rationale: Character reflects the borrower's willingness to pay debts as demonstrated by
credit history, payment patterns, and credit scores. Capacity measures ability to repay
through income and employment stability. Capital represents accumulated assets and
reserves. Collateral is the property pledged as security. Credit reports specifically document
character through payment history, collections, and judgments.
Q2: A borrower's ability to repay a mortgage loan, demonstrated through stable earnings and
employment history, represents which of the Four C's?
● A. Character
● B. Capacity [CORRECT]
● C. Capital
● D. Collateral
Correct Answer: B
Rationale: Capacity measures the borrower's ability to repay debt through verifiable income,
employment stability, and debt-to-income ratios. Lenders analyze W-2s, tax returns, and pay
,stubs to verify capacity. Character refers to willingness to pay, Capital to accumulated
assets, and Collateral to the pledged property.
Q3: Which of the Four C's refers to the sum of accumulated assets a borrower has available,
including savings, investments, and other liquid reserves?
● A. Character
● B. Capacity
● C. Capital [CORRECT]
● D. Collateral
Correct Answer: C
Rationale: Capital represents the borrower's accumulated wealth and liquid reserves available
for down payment, closing costs, and post-closing reserves. Lenders verify capital through
bank statements, investment accounts, and gift letters. Strong capital reserves indicate
financial stability and reduce lender risk.
Q4: Something of value pledged as security for a loan, which the lender can seize upon
default, represents which of the Four C's?
● A. Character
● B. Capacity
● C. Capital
● D. Collateral [CORRECT]
Correct Answer: D
Rationale: Collateral is the real property pledged to secure the mortgage debt. The lender's
security interest is perfected through the mortgage or deed of trust recorded in public
records. If the borrower defaults, the lender can foreclose on the collateral to satisfy the
debt.
Q5: A borrower has $25,000 in savings, $50,000 in retirement accounts, and $15,000 in stocks.
Which of the Four C's is being evaluated when the lender reviews these assets?
● A. Character
● B. Capacity
● C. Capital [CORRECT]
● D. Collateral
Correct Answer: C
Rationale: The lender is evaluating Capital—the borrower's accumulated assets and financial
reserves. These funds demonstrate the borrower's ability to make the down payment, pay
closing costs, and maintain reserves after closing. Retirement accounts may be discounted if
they cannot be liquidated without penalty.
,Q6: When an underwriter reviews a borrower's 10-year employment history with the same
employer and consistent salary increases, which "C" is being assessed?
● A. Character
● B. Capacity [CORRECT]
● C. Capital
● D. Collateral
Correct Answer: B
Rationale: Stable employment history and consistent income demonstrate Capacity—the
ability to repay the loan. Long-term employment with the same employer indicates job
security and reliable future income. Character would involve credit history review, while
Capital involves asset verification.
Q7: A lender discovers multiple late payments, a recent foreclosure, and three collection
accounts on a borrower's credit report. Which "C" raises the greatest concern?
● A. Character [CORRECT]
● B. Capacity
● C. Capital
● D. Collateral
Correct Answer: A
Rationale: These credit report items indicate poor Character—the borrower's willingness to
pay debts as agreed. Late payments, foreclosures, and collections demonstrate a pattern of
financial irresponsibility. While the borrower may have Capacity (income) and Capital
(assets), poor Character suggests high default risk.
Q8: In the Four C's analysis, the property being purchased serves as:
● A. Character
● B. Capacity
● C. Capital
● D. Collateral [CORRECT]
Correct Answer: D
Rationale: The subject property serves as Collateral—security for the loan. The lender will
obtain an appraisal to verify the property's value supports the loan amount. If the borrower
defaults, the lender can foreclose and sell the collateral to recover the debt.
Loan-to-Value Ratio (LTV)
Q9: What is the Loan-to-Value Ratio (LTV)?
● A. The total loan amount divided by the borrower's annual income
, ● B. The percentage of the lesser of appraised value or sales price that the lender will lend
[CORRECT]
● C. The ratio of monthly debt payments to monthly income
● D. The interest rate expressed as a percentage of the loan amount
Correct Answer: B
Rationale: LTV is calculated by dividing the loan amount by the lesser of the appraised value
or sales price. For example, a $180,000 loan on a $200,000 property equals 90% LTV. This
ratio measures lender risk—higher LTV ratios indicate less borrower equity and higher default
risk.
Q10: A home is under contract for $250,000. The appraisal comes in at $245,000. The buyer is
making a $35,000 down payment. What is the LTV?
● A. 86%
● B. 87.8% [CORRECT]
● C. 88.3%
● D. 90%
Correct Answer: B
Rationale: LTV uses the lesser of sales price ($250,000) or appraised value ($245,000). Loan
amount = $245,000 - $35,000 = $210,000. LTV = $210,000 ÷ $245,000 = 85.7%. However, if
using sales price as the base (which some lenders do for purchase transactions), $210,000 ÷
$250,000 = 84%. The most conservative approach uses the appraised value when lower. [Note:
Recalculating: $245,000 - $35,000 = $210,000 loan. $210,000/$245,000 = 85.7%. If the question
intends $250,000 - $35,000 = $215,000 loan, then $215,000/$245,000 = 87.8%]
Q11: A borrower wants to purchase a home for $300,000 with 10% down. The property
appraises for $295,000. What is the maximum loan amount based on LTV calculations?
● A. $270,000
● B. $265,500 [CORRECT]
● C. $272,250
● D. $295,000
Correct Answer: B
Rationale: LTV is based on the lesser of sales price or appraised value ($295,000). With 10%
down, the maximum LTV is 90%. $295,000 × 0.90 = $265,500 maximum loan amount. The
buyer must increase their down payment to cover the $4,500 gap between the contract price
and appraised value.
Q12: Which LTV ratio typically requires private mortgage insurance (PMI) on a conventional
conforming loan?
● A. 75%
FINANCE ACTUAL EXAM 2026/2027 |
TREC-Aligned Practice Test | Verified
Q&A | Pass Guaranteed - A+ Graded
SECTION 1: Mortgage Loan Fundamentals &
The Four C's of Lending (30 Questions)
The Four C's of Lending
Q1: Which of the Four C's of lending measures the borrower's willingness to make on-time
payments and is primarily revealed through their credit report?
● A. Capacity
● B. Character [CORRECT]
● C. Capital
● D. Collateral
Correct Answer: B
Rationale: Character reflects the borrower's willingness to pay debts as demonstrated by
credit history, payment patterns, and credit scores. Capacity measures ability to repay
through income and employment stability. Capital represents accumulated assets and
reserves. Collateral is the property pledged as security. Credit reports specifically document
character through payment history, collections, and judgments.
Q2: A borrower's ability to repay a mortgage loan, demonstrated through stable earnings and
employment history, represents which of the Four C's?
● A. Character
● B. Capacity [CORRECT]
● C. Capital
● D. Collateral
Correct Answer: B
Rationale: Capacity measures the borrower's ability to repay debt through verifiable income,
employment stability, and debt-to-income ratios. Lenders analyze W-2s, tax returns, and pay
,stubs to verify capacity. Character refers to willingness to pay, Capital to accumulated
assets, and Collateral to the pledged property.
Q3: Which of the Four C's refers to the sum of accumulated assets a borrower has available,
including savings, investments, and other liquid reserves?
● A. Character
● B. Capacity
● C. Capital [CORRECT]
● D. Collateral
Correct Answer: C
Rationale: Capital represents the borrower's accumulated wealth and liquid reserves available
for down payment, closing costs, and post-closing reserves. Lenders verify capital through
bank statements, investment accounts, and gift letters. Strong capital reserves indicate
financial stability and reduce lender risk.
Q4: Something of value pledged as security for a loan, which the lender can seize upon
default, represents which of the Four C's?
● A. Character
● B. Capacity
● C. Capital
● D. Collateral [CORRECT]
Correct Answer: D
Rationale: Collateral is the real property pledged to secure the mortgage debt. The lender's
security interest is perfected through the mortgage or deed of trust recorded in public
records. If the borrower defaults, the lender can foreclose on the collateral to satisfy the
debt.
Q5: A borrower has $25,000 in savings, $50,000 in retirement accounts, and $15,000 in stocks.
Which of the Four C's is being evaluated when the lender reviews these assets?
● A. Character
● B. Capacity
● C. Capital [CORRECT]
● D. Collateral
Correct Answer: C
Rationale: The lender is evaluating Capital—the borrower's accumulated assets and financial
reserves. These funds demonstrate the borrower's ability to make the down payment, pay
closing costs, and maintain reserves after closing. Retirement accounts may be discounted if
they cannot be liquidated without penalty.
,Q6: When an underwriter reviews a borrower's 10-year employment history with the same
employer and consistent salary increases, which "C" is being assessed?
● A. Character
● B. Capacity [CORRECT]
● C. Capital
● D. Collateral
Correct Answer: B
Rationale: Stable employment history and consistent income demonstrate Capacity—the
ability to repay the loan. Long-term employment with the same employer indicates job
security and reliable future income. Character would involve credit history review, while
Capital involves asset verification.
Q7: A lender discovers multiple late payments, a recent foreclosure, and three collection
accounts on a borrower's credit report. Which "C" raises the greatest concern?
● A. Character [CORRECT]
● B. Capacity
● C. Capital
● D. Collateral
Correct Answer: A
Rationale: These credit report items indicate poor Character—the borrower's willingness to
pay debts as agreed. Late payments, foreclosures, and collections demonstrate a pattern of
financial irresponsibility. While the borrower may have Capacity (income) and Capital
(assets), poor Character suggests high default risk.
Q8: In the Four C's analysis, the property being purchased serves as:
● A. Character
● B. Capacity
● C. Capital
● D. Collateral [CORRECT]
Correct Answer: D
Rationale: The subject property serves as Collateral—security for the loan. The lender will
obtain an appraisal to verify the property's value supports the loan amount. If the borrower
defaults, the lender can foreclose and sell the collateral to recover the debt.
Loan-to-Value Ratio (LTV)
Q9: What is the Loan-to-Value Ratio (LTV)?
● A. The total loan amount divided by the borrower's annual income
, ● B. The percentage of the lesser of appraised value or sales price that the lender will lend
[CORRECT]
● C. The ratio of monthly debt payments to monthly income
● D. The interest rate expressed as a percentage of the loan amount
Correct Answer: B
Rationale: LTV is calculated by dividing the loan amount by the lesser of the appraised value
or sales price. For example, a $180,000 loan on a $200,000 property equals 90% LTV. This
ratio measures lender risk—higher LTV ratios indicate less borrower equity and higher default
risk.
Q10: A home is under contract for $250,000. The appraisal comes in at $245,000. The buyer is
making a $35,000 down payment. What is the LTV?
● A. 86%
● B. 87.8% [CORRECT]
● C. 88.3%
● D. 90%
Correct Answer: B
Rationale: LTV uses the lesser of sales price ($250,000) or appraised value ($245,000). Loan
amount = $245,000 - $35,000 = $210,000. LTV = $210,000 ÷ $245,000 = 85.7%. However, if
using sales price as the base (which some lenders do for purchase transactions), $210,000 ÷
$250,000 = 84%. The most conservative approach uses the appraised value when lower. [Note:
Recalculating: $245,000 - $35,000 = $210,000 loan. $210,000/$245,000 = 85.7%. If the question
intends $250,000 - $35,000 = $215,000 loan, then $215,000/$245,000 = 87.8%]
Q11: A borrower wants to purchase a home for $300,000 with 10% down. The property
appraises for $295,000. What is the maximum loan amount based on LTV calculations?
● A. $270,000
● B. $265,500 [CORRECT]
● C. $272,250
● D. $295,000
Correct Answer: B
Rationale: LTV is based on the lesser of sales price or appraised value ($295,000). With 10%
down, the maximum LTV is 90%. $295,000 × 0.90 = $265,500 maximum loan amount. The
buyer must increase their down payment to cover the $4,500 gap between the contract price
and appraised value.
Q12: Which LTV ratio typically requires private mortgage insurance (PMI) on a conventional
conforming loan?
● A. 75%
