General Mortgage Knowledge — NMLS SAFE MLO practice questions

An automated underwriting system returns a recommendation of refer on a submitted file. The MLO should understand that this result:

1. means the application has been formally denied, so an adverse action notice must be issued to the applicant within thirty days
2. means the borrower is ineligible for that agency's programs, so the file must be moved to a government program instead
3. means the system found the documents illegible, so the file must be resubmitted with the same data and clearer images
4. means the file must be reviewed and decided by a human underwriter, and it is not by itself a denial of the application

Answer: D — means the file must be reviewed and decided by a human underwriter, and it is not by itself a denial of the application

A) is the most damaging misconception, since adverse action duties attach to an actual credit decision by the creditor. B) confuses the recommendation with the separate eligibility determination. C) invents a technical explanation the system does not make. D) Correct - an automated system evaluates the data submitted and returns a recommendation; a refer routes the file to manual underwriting, where an underwriter may still approve it, and an eligible finding speaks to program guidelines rather than to credit quality alone.

Which statement BEST distinguishes the primary market from the secondary market?

1. The primary market sells loans to investors, while the secondary market originates them
2. The primary market handles purchases only, while the secondary market handles refinances
3. The primary market originates loans to consumers, while the secondary market buys them
4. The primary market serves conventional loans, while the secondary market serves government loans

Answer: C — The primary market originates loans to consumers, while the secondary market buys them

C) Correct — origination to the borrower occurs in the primary market; the sale of closed loans among investors and aggregators occurs in the secondary market. A) Reverses the two definitions. B) Transaction purpose has no bearing on which market a loan belongs to. D) Both conventional and government loans move through both markets.

Which transfer is MOST likely to fall within a statutory exception to enforcement of a due-on-sale clause?

1. an arm's-length sale of the home to an unrelated third-party cash purchaser
2. a transfer to a surviving spouse or child upon the borrower's death
3. a transfer of the property into a partnership formed with a business associate
4. a sale of the property to a corporate relocation firm during a job transfer

Answer: B — a transfer to a surviving spouse or child upon the borrower's death

B) Correct — federal law shields certain family-related transfers, including transfers on death to a relative who occupies the property, from acceleration. A) An ordinary sale to a stranger is the classic triggering event. C) Conveying to a business partnership is not a protected family transfer. D) Relocation company purchases are commercial transfers outside the exceptions.

A borrower makes a large lump-sum principal reduction and asks the servicer to recast rather than refinance. Recasting BEST describes a process that:

1. issues a new note at current market pricing with a fresh set of closing costs
2. reamortizes the reduced balance over the remaining term at the existing rate
3. suspends payments for several months while the lump sum is applied to interest
4. extends the maturity date so the payment falls without reducing the balance

Answer: B — reamortizes the reduced balance over the remaining term at the existing rate

B) Correct — a recast keeps the original note, rate and maturity and simply recalculates the payment on the lower balance, typically for a modest servicer fee. A) A new note and full closing costs describe a refinance, the alternative being avoided. C) No forbearance occurs; payments continue on the new schedule. D) Extending maturity is a modification, and here the balance is what changed.

An adjustable-rate mortgage is BEST described as a loan:

1. Whose rate is fixed for the entire term but whose payment changes as escrow amounts change
2. Whose rate adjusts on a set schedule to an index plus a margin, subject to periodic and life caps
3. Whose rate may change at any time at the lender's sole discretion, with no stated ceiling or floor
4. Whose rate falls automatically each year as the borrower's outstanding principal balance declines

Answer: B — Whose rate adjusts on a set schedule to an index plus a margin, subject to periodic and life caps

B) Correct — an ARM's rate equals a published, externally verifiable index plus a contractually fixed margin, recalculated only on the scheduled change dates, and the note's periodic and lifetime caps bound how far it can move. A) describes a fixed-rate loan with an escrow account; payment movement alone does not make a loan adjustable. C) is the pre-regulation misconception — lender discretion is exactly what the index-plus-margin structure exists to prevent. D) confuses amortization with rate adjustment; paying down principal reduces interest paid, not the note rate.

A manufactured home is financed as real property rather than chattel. The condition MOST essential to that treatment is that the home is:

1. newer than the oldest model year the lender's guidelines will consider
2. affixed to a permanent foundation with the title to the unit surrendered
3. insured under a policy naming the lender as an additional loss payee
4. located within a community that maintains an active homeowners association

Answer: B — affixed to a permanent foundation with the title to the unit surrendered

B) Correct — real property treatment requires permanent affixation to a foundation on land and retirement of the vehicle-style certificate of title so the unit merges into the realty. A) Age limits are a guideline overlay, not what converts personal property to real property. C) Insurance protects the collateral but does not change its legal character. D) Association membership is irrelevant to the classification.

A veteran wants to use VA financing and asks what document proves he may do so. The MLO should explain that the Certificate of Eligibility:

1. is a commitment by the agency to pay the entire unpaid balance to the lender if the veteran ever defaults on the mortgage loan
2. is a statement of the property's value that the lender must use in place of an appraisal on any purchase transaction
3. evidences the veteran's service-based eligibility and the amount of entitlement available for the lender to apply to the loan
4. is an approval of the veteran's credit and income issued by the agency after it reviews the completed loan application file

Answer: C — evidences the veteran's service-based eligibility and the amount of entitlement available for the lender to apply to the loan

A) overstates the guaranty, which covers a portion of the loan rather than the whole balance. B) confuses eligibility with the Notice of Value produced from the agency appraisal process. C) Correct - the Certificate of Eligibility establishes that the applicant has qualifying service and shows entitlement available; the lender still underwrites credit, income and the property. D) tempts because both involve agency paperwork, but eligibility is about service, not about the borrower's ability to repay.

An applicant with large investment accounts but little monthly income is qualified through asset depletion. This method works by:

1. requiring the borrower to liquidate the accounts and prepay the loan balance
2. pledging the accounts to the lender as additional collateral securing the mortgage debt
3. converting eligible assets into an imputed monthly income stream for the ratios
4. counting the accounts as reserves that offset the borrower's revolving debts

Answer: C — converting eligible assets into an imputed monthly income stream for the ratios

C) Correct — asset depletion divides eligible, verified assets over a defined number of months to create a qualifying income figure used in the debt-to-income calculation. A) No liquidation or prepayment is required; the assets simply must be documented. B) Pledged-asset programs are a different structure involving a security interest. D) Reserves demonstrate cushion but do not cancel out monthly obligations.

A negatively amortizing loan is BEST described as one where:

1. The note rate stays fixed for the full term and the required payment never changes
2. The scheduled payment falls short of accrued interest, so the loan balance grows over time
3. Extra sums are applied to principal automatically, retiring the loan well ahead of schedule
4. The borrower may repay the loan early without triggering any prepayment penalty charge

Answer: B — The scheduled payment falls short of accrued interest, so the loan balance grows over time

B) Correct — because the payment does not cover accruing interest, the shortfall capitalizes into principal and the borrower owes more after each payment, steadily eroding equity and raising the risk of being underwater, which is why the feature is excluded from qualified mortgages. A) describes a plain fixed-rate loan, where amortization is positive by design. C) reverses the direction into accelerated amortization. D) describes the absence of a prepayment penalty, a separate loan term that has no bearing on how interest accrues.

Periodic and lifetime caps on an adjustable-rate mortgage serve to:

1. Guarantee that the fully indexed rate can never move above the initial teaser rate
2. Establish the maximum value the published index itself may reach during the term
3. Limit how far the rate may move at each adjustment and across the life of the loan
4. Remove the need for a margin, because the index alone then sets the adjusted rate

Answer: C — Limit how far the rate may move at each adjustment and across the life of the loan

C) Correct — caps bound the borrower's rate risk in two dimensions: the periodic cap restricts movement at any single adjustment date and the lifetime cap sets an absolute ceiling above the start rate for the whole term, which is why disclosures illustrate the worst-case payment at the lifetime cap. A) overstates the protection into a guarantee the note never gives, since the rate normally can exceed the initial rate. B) confuses the loan's contractual limits with the index, which is a market rate no lender controls. D) drops the margin, the fixed lender spread that remains part of the rate at every adjustment.

Contrast the roles of Fannie Mae, Freddie Mac and Ginnie Mae.

Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase conventional conforming loans, hold or securitize them, and publish the guidelines that define conforming underwriting; their guarantee is corporate rather than a direct obligation of the United States. Ginnie Mae buys no loans at all; it guarantees timely payment of principal and interest on securities backed by pools of FHA, VA and USDA loans issued by approved lenders, backed by the full faith and credit of the United States.

What is loan estimate fee tolerance under TRID?

Categories: 0% tolerance (cannot increase: lender's own charges, transfer taxes, third-party services if the lender does not allow shopping), 10% tolerance (can increase up to 10% in aggregate: recording fees, third-party services if lender allows shopping), no tolerance (can change: prepaid interest, property insurance, escrow, third-party services not on lender's list).

What are interested-party contribution limits and hazard insurance requirements on a conventional loan?

Interested-party contributions are closing cost concessions from a seller, builder or agent, and conventional guidelines cap them as a percentage of the sales price that varies with occupancy and loan-to-value; amounts above the cap are treated as a reduction in the sales price rather than a credit, which lowers the value used for the loan-to-value calculation. Concessions may pay closing costs and prepaid items but not the borrower's down payment. Separately, the lender requires hazard insurance covering the dwelling, naming the lender as mortgagee, in an amount sufficient to rebuild the improvements or at least cover the unpaid balance, with proof of coverage at closing and premiums usually escrowed.

How is lien position determined, and what does subordination accomplish?

Lien priority among consensual liens is generally set by recording order, first recorded first in right, subject to statutory priorities such as property tax liens that take precedence regardless of when recorded. A subordination agreement is a recorded document in which an existing lienholder voluntarily agrees to accept a lower priority position so a new loan can record ahead of it. This is what allows a homeowner with a HELOC to refinance the first mortgage without paying off the line: the HELOC lender subordinates so the new first stays in first position.