California Real Estate Practice Exam

In residential real estate lending, when lenders "soften" their requirements to allow less than qualified buyers to "qualify," what happens to the overall financing costs?

1. Overall financing costs are not affected.

2. Overall financing costs tend to decrease.

3. Overall financing costs tend to increase.

4. Overall financing costs tend to remain the same.

The correct answer is: Overall financing costs are not affected.

When lenders soften their requirements to allow less qualified buyers to secure loans, it typically leads to an increase in overall financing costs. This is because lenders perceive a higher risk when lending to borrowers who do not meet the traditional qualification criteria. To mitigate this risk, lenders may charge higher interest rates, impose additional fees, or require private mortgage insurance (PMI) to protect against potential defaults. As the risk of default rises with lower borrowing standards, lenders adjust their cost structures. The result is that overall financing costs for consumers generally increase, reflecting the additional risk taken on by the lender. Therefore, the correct understanding of the relationship between lender requirements and financing costs would lead to the conclusion that overall financing costs tend to increase when requirements are softened.