Mortgage Loan Origination Activities — NMLS SAFE MLO practice questions

Which borrower is MOST likely to be eligible for an escrow waiver on a conventional loan?

1. a borrower with a low loan-to-value ratio on a loan carrying no mortgage insurance
2. a borrower with a high loan-to-value ratio who agrees to pay taxes semiannually
3. a borrower on a higher-priced mortgage loan secured by a first lien on a principal dwelling
4. a borrower whose subject property lies within a designated special flood hazard area

Answer: A — a borrower with a low loan-to-value ratio on a loan carrying no mortgage insurance

A) Correct - waivers are an investor and lender concession generally reserved for lower loan-to-value files without mortgage insurance, where the risk of unpaid taxes is smaller. B) fails because high leverage is exactly where escrow is required. C) fails because escrow is mandated for such loans by regulation. D) fails because flood insurance escrow is required in designated areas.

An underwriter flags four items in a purchase file. Which one is MOST clearly a recognized category of mortgage fraud rather than an ordinary processing issue?

1. A buyer signs the note while a non-occupying party makes every payment and holds the keys
2. A buyer's middle credit score is reported two points lower than the score he had quoted
3. A buyer's legal surname is spelled two different ways on the note and on the deed
4. A buyer's earnest money deposit clears three days later than the contract required

Answer: A — A buyer signs the note while a non-occupying party makes every payment and holds the keys

A) Correct — that pattern describes a straw-buyer transaction, in which the named borrower is a nominee for the true beneficial owner; misrepresenting who is actually obtaining and occupying the property is a material misstatement to the lender and a federal crime. B) Tempting because credit-data errors do sit in the FCRA space, but a small scoring variance is a dispute/accuracy issue, not an intent to deceive. C) Tempting because name mismatches are a documented fraud red flag, yet standing alone a spelling variance is a curable clerical defect corrected before recording. D) Tempting because deposit timing gets scrutinized for sourcing, but a late-clearing deposit is a contract-performance matter unless the funds themselves are misrepresented.

An ARM at a current rate of 3.5% reaches its adjustment date. The index is 6.25%, the margin is 2.25% and the periodic adjustment cap is 2%. What is the new interest rate?

1. 8.5%
2. 6.25%
3. 3.5%
4. 5.5%

Answer: D — 5.5%

A) Results from applying the fully indexed rate and ignoring the periodic cap that limits the increase. B) Results from using the index alone without adding the margin. C) Results from assuming the cap prevents any increase at all. D) Correct - the fully indexed rate of 8.5% exceeds what the 2% periodic cap allows, so the rate rises only from 3.5% to 5.5% at this adjustment.

On a rescindable refinance signed Monday, with all required disclosures and two notices properly delivered that day, the creditor may disburse funds:

1. Only after seven business days, matching the waiting period that applies to the initial disclosure
2. After midnight of the third business day following consummation, once the period expires unused
3. On the third business day following consummation, since the borrower has already signed the notice
4. Immediately at signing, provided the borrower initials a statement waiving the waiting period

Answer: B — After midnight of the third business day following consummation, once the period expires unused

A) Tempts because seven business days is a real waiting period, but it belongs to the disclosure timing rule, not rescission. B) Correct - disbursement is barred until the rescission period lapses; the creditor must wait out the full three business days before funding. C) Tempts because day three sounds like the end, but the borrower has the entire third day to rescind. D) Tempts because waivers exist, yet a waiver requires a documented bona fide personal financial emergency, not a routine initial.

A note contains a due-on-sale clause. A buyer wants to take over the seller's existing loan. The MOST accurate statement is:

1. The clause requires the lender to permit an assumption if the buyer's credit is at least as strong
2. The clause bars any transfer of the property until the loan has been fully paid off and released
3. The lender may call the balance due on transfer, so the loan cannot be taken over freely
4. The buyer may assume the loan freely because the clause applies only to a transfer between relatives

Answer: C — The lender may call the balance due on transfer, so the loan cannot be taken over freely

A) Tempts because qualified assumptions exist on some programs, yet a due-on-sale clause creates no duty to approve one. B) Tempts because the clause restrains transfers, but it restricts the loan, not the owner's ability to convey. C) Correct - a due-on-sale clause gives the lender the option to accelerate on transfer, which is why an assumption requires lender approval where one is available at all. D) Tempts because certain family transfers are protected from acceleration, but that is a narrow exception, not the general rule.

A seller agrees to pay closing costs and the parties raise the contract price by the same amount. The appraisal comes in at the original, lower figure. The lender will:

1. treat the concession as a gift of equity and exclude it from the value calculation entirely
2. require the appraiser to revise the report upward to match the amended purchase agreement
3. base the loan-to-value ratio on the lower of the appraised value or the adjusted sales price
4. base the loan-to-value ratio on the contract price because the parties agreed to it in writing

Answer: C — base the loan-to-value ratio on the lower of the appraised value or the adjusted sales price

A) misapplies gift of equity, which involves a related seller selling below market. B) would be improper pressure on the appraiser and violates appraiser independence. C) Correct - the lower of value or price controls, so the concession-driven price increase does not create borrowing capacity when the appraisal does not support it. D) inverts the rule and is the classic misconception.

A borrower reports capital gains income from regularly selling investment holdings. The underwriter's BEST approach is to:

1. Average the gains reported on the last two years of returns and confirm assets remain to generate more
2. Use the most recent year's gains, since the latest year best predicts the coming twelve months of income
3. Exclude the gains entirely, because income from asset sales can never be used to qualify a borrower
4. Count the gains as an asset available for reserves rather than as any form of qualifying income

Answer: A — Average the gains reported on the last two years of returns and confirm assets remain to generate more

A) Correct - variable investment income requires a multi-year history and evidence the underlying asset base will continue to produce it. B) Tempts because recency matters, but a single year of a volatile source overstates stability, especially a rising year. C) Tempts because gains are irregular, yet a documented two-year pattern with a continuing asset base is usable. D) Tempts because the sold assets were assets, but the gains themselves are reportable income when a history exists.

Within the four Cs of underwriting, capacity is BEST described as the borrower's:

1. Willingness to repay as demonstrated by payment patterns appearing on the credit report
2. Cushion of liquid funds remaining after closing that could cover several months of payments
3. Equity position in the property, expressed as the relationship of the loan to the property's value
4. Ability to repay measured through income stability, debt obligations and the qualifying ratios

Answer: D — Ability to repay measured through income stability, debt obligations and the qualifying ratios

A) Tempts because it is a genuine C, but that description is credit, not capacity. B) Tempts because reserves support repayment, yet reserves are part of capital, the asset leg. C) Tempts because it is also a C, but loan-to-value describes collateral. D) Correct - capacity addresses whether documented income supports the proposed and existing obligations; ratios are its measurement.

A buyer's agent tells the borrower to overstate monthly income slightly so the file will 'look cleaner' to underwriting. The MLO learns of this and should:

1. Follow the agent's guidance, since the agent has a fiduciary duty to the borrower
2. Refuse the inflated figure, document actual income, and address the discrepancy
3. Submit a figure midway between the actual and the inflated income the agent urged
4. Use the inflated figure only on a government loan, where the agency insures the risk

Answer: B — Refuse the inflated figure, document actual income, and address the discrepancy

B) Correct — knowingly submitting overstated income is mortgage fraud regardless of who proposed it, and the originator's duty of accuracy is personal and non-delegable. A) Tempts because agents do owe duties to their client, but a fiduciary duty to a buyer never authorizes deceiving the lender. C) Tempts because a compromise feels like a small concession, yet any figure the MLO knows is unsupported is a knowing misstatement. D) Tempts because FHA and VA loans carry a guaranty, but insurance protects the lender and makes false statements to the agency a federal offense.

Which seller-paid item is generally treated as a financing concession rather than a normal cost of sale?

1. payment of the seller's outstanding mortgage payoff from the sale proceeds
2. payment of the borrower's first-year mortgage insurance premium at settlement
3. payment of the real estate commission owed to the listing brokerage at closing
4. payment of the seller's own recording and transfer charges required by state law

Answer: B — payment of the borrower's first-year mortgage insurance premium at settlement

A) fails because retiring the seller's own lien is simply settlement of the seller's debt. B) Correct - paying costs that customarily fall on the buyer, such as the borrower's prepaid items or mortgage insurance, is a financing concession and counts toward the limit. C) fails because a commission is the seller's ordinary cost of selling. D) fails because charges customarily borne by the seller are not concessions.

What must happen when servicing of a loan is transferred?

The borrower must receive notice from the transferring servicer in advance and from the new servicer after the transfer, identifying the new servicer, the effective date and where to send payments. During a sixty-day period following the transfer, a payment sent on time to the old servicer cannot be treated as late or reported adversely. The loan terms do not change on transfer, and borrowers are often confused on this point, so the MLO should make clear that only the payee changes.

What is an underwriter's role?

Reviews loan file to determine credit, capacity (income/DTI), collateral (appraisal), and conditions. Approves, denies, or counter-offers. Issues conditions (additional docs needed before closing).

What documentation supports salaried and hourly wage income?

Recent pay stubs showing year-to-date earnings, W-2 forms covering the required history, and a verification of employment from the employer, with a verbal reverification close to closing. Base pay is generally used at the current rate, while overtime, bonus and commission income must show a history and a reasonable likelihood of continuing. Income the borrower has just started earning with no track record is usually excluded.

How is a signer's identity proven in a remote online notarization?

The process normally combines credential analysis, in which the government identification is scanned and its security features tested, with knowledge-based authentication, out-of-wallet questions drawn from public and credit records that must be answered correctly within a time limit and a limited number of attempts. The notary must also visually confirm the person on camera matches the credential, and the audiovisual session is recorded and retained in the electronic journal for the period state law requires. If identity proofing fails, the notarization cannot proceed.