General Mortgage Knowledge practice

All 28 free general mortgage knowledge questions

1. On a variable-rate loan, what does Regulation Z mean by the fully-indexed rate?

   • A The index plus the margin at consummation Correct
   • B The discounted rate the borrower starts on An introductory or discounted rate is what the borrower actually pays at first, which is a different figure.
   • C The maximum rate under the lifetime cap The lifetime cap sets the ceiling the rate may ever reach, not the rate the index and margin produce.
   • D The rate at the first scheduled adjustment The rate at the first adjustment turns on the index value on that later date, not on the value at consummation.

   The fully-indexed rate is the rate worked out from the index value and the margin at consummation, with no introductory discount applied. A lifetime cap only sets a ceiling, which is a different figure.

   Regulation Z, 12 CFR s. 1026.18(s)(7)(vi)

2. A borrower is offered a 5/1 adjustable-rate mortgage and asks when her rate can first move and how often after that. What do the two numbers tell her?

   • A The rate holds five years, then adjusts yearly Correct
   • B The rate holds one year, then adjusts every five This reverses the two numbers, and the first is the length of the initial rate period.
   • C The rate may adjust five times, once a year The second number is the adjustment period, not a count of how many adjustments the loan allows.
   • D The rate is capped at 5% for one year Neither number is a rate or a cap, because both describe timing.

   In a 5/1 adjustable-rate mortgage the first number is how long the initial rate lasts and the second is how often it changes afterward: five years fixed, then yearly adjustments. Reading the numbers the other way round gives one year fixed and a change every five.

   Consumer Handbook on Adjustable-Rate Mortgages, p. 4 Reference document, not law.

3. What kind of credit is a home equity line of credit, and what serves as the collateral for it?

   • A Revolving credit secured by the consumer's home Correct
   • B Closed-end credit secured by the consumer's home A closed-end loan is advanced once and then repaid, while a line lets the borrower draw again during the draw period.
   • C Revolving credit secured by the consumer's deposits The home is the collateral for these plans, and a deposit account is not.
   • D Closed-end credit advanced in a single unsecured sum A single unsecured advance describes a different product entirely.

   A home equity line of credit is revolving credit with the home as collateral, which lets the borrower draw, repay and draw again during the draw period. A closed-end loan, by contrast, is advanced once and then repaid.

   What You Should Know About Home Equity Lines of Credit, p. 6 Reference document, not law.

4. Under Regulation Z, when does the amount owed on a reverse mortgage become due, apart from default?

   • A On death, transfer or move-out Correct
   • B When the consumer reaches a stated age Reaching an age is not one of the three events that make the balance due.
   • C At the end of a fixed ten-year term The obligation is not written to a fixed maturity date of this kind.
   • D When the balance first exceeds the property's value The loan is nonrecourse, so a balance above the property's value does not by itself make it payable.

   A reverse mortgage transaction is a nonrecourse obligation on which principal, interest and any shared appreciation fall due, other than on default, only after the consumer dies, the dwelling is transferred, or the consumer stops occupying it as a principal dwelling.

   Regulation Z, 12 CFR s. 1026.33(a)(2)

5. A builder deposits money into an account that is released each month to cut a buyer's payment for the first two years. What is that arrangement?

   • A An interest rate buydown plan Correct
   • B A permanent rate reduction bought with discount points Discount points paid at closing cut the note rate itself for the life of the loan rather than subsidising early payments from an account.
   • C A lender credit toward closing costs A lender credit reduces what the borrower pays at closing and does not fund a monthly payment reduction.
   • D A yield spread premium paid to the broker A yield spread premium is compensation paid to an originator, not a fund that lowers the borrower's payment.

   A buydown plan gives the borrower lower payments in the first years of the loan, paid out monthly from an account the seller or another party funds. Discount points work differently: they cut the note rate itself for the life of the loan.

6. What makes an account an escrow account under the Real Estate Settlement Procedures Act (RESPA)?

   • A The servicer establishes or controls it Correct
   • B It is called an impound account Trust account, reserve account and impound account are named as other local words for the same thing, so the label decides nothing.
   • C It holds tax and insurance money Holding money for taxes and insurance is not enough where the borrower keeps total control of the account.
   • D The borrower funds it each month How the account is funded does not answer who establishes or controls it.

   An escrow account means any account the servicer establishes or controls on the borrower's behalf to pay taxes, insurance premiums or other charges, and an account under the borrower's total control is excluded.

   Regulation X, 12 CFR s. 1024.17(b)

7. For a closed-end loan, what is a bona fide discount point under Regulation Z?

   • A 1% of the loan that cuts the rate Correct
   • B 1% of the purchase price paid at closing The base is the loan amount and not the purchase price, and the two differ whenever the buyer puts money down.
   • C 1% of the loan amount paid as origination An origination point buys no reduction in the interest rate, so it is not bona fide.
   • D Any fee the consumer pays to lower the payment A fee that lowers the payment without reducing the interest rate does not meet the definition.

   A bona fide discount point means 1 percent of the loan amount, paid by the consumer, that lowers the interest rate by an amount consistent with established industry practice. An origination point that buys no rate cut does not qualify.

   Regulation Z, 12 CFR s. 1026.32(b)(3)(i)

8. On a purchase below the appraised value, how is combined loan-to-value (CLTV) figured with a partly drawn home equity line?

   • A First mortgage plus drawn balance, over price Correct
   • B First mortgage plus full line, over price The undrawn part of the line is left out, because only the balance the borrower has actually withdrawn goes in.
   • C First mortgage plus drawn balance, over appraisal The divisor is whichever is lower, the appraised value or the sales price, and here that is the sales price.
   • D First mortgage alone, over appraisal A combined ratio counts the subordinate financing as well, so the first mortgage alone is not the whole numerator.

   Combined loan-to-value adds three amounts: the first mortgage's original loan amount, the part of any home equity line already drawn, and the unpaid balance of other subordinate financing. That sum is divided by whichever is less of the price and the appraised value, here the price. Counting the whole line overstates the ratio, since only the drawn part goes in.

9. What does private mortgage insurance (PMI) do for a borrower who puts down less than 20 percent?

   • A It insures the lender against the borrower's default Correct
   • B It pays the borrower's mortgage during a hardship Nothing here pays the borrower's monthly payment; the policy answers to the lender for a loss.
   • C It insures the borrower's title to the property Title insurance covers defects in ownership, which is a different policy bought at closing.
   • D It covers damage to the home from fire Fire damage is covered by homeowner's insurance, another separate policy on the property.

   Private mortgage insurance lets the borrower put less down because it insures the lender against loss if the borrower stops paying. It does nothing to cover the borrower's own payments in a hardship.

   Your Home Loan Toolkit, p. 9 Reference document, not law.

10. What maximum dollar loan amount does VA prescribe for a guaranteed loan?

    • A None is prescribed Correct
    • B The county conforming loan limit A conforming limit is a secondary market constraint on the lender rather than a maximum the program prescribes.
    • C The nationwide limit set for insured loans The insured programs set their own ceilings, and this program prescribes none of its own.
    • D Four times the veteran's available entitlement Entitlement drives the amount of the guaranty, and it is not a multiplier that caps the loan.

    No maximum dollar amount is prescribed for a VA-guaranteed loan, unlike the other home loan programs. Any conforming limit a lender applies is a secondary market constraint, not a program ceiling.

    VA Lenders Handbook 26-7, p. 96 Reference document, not law.

11. What distinguishes a balloon payment mortgage from a loan that fully amortizes over its term?

    • A The remaining balance falls due in one lump sum Correct
    • B The interest rate changes over the life of the loan A rate that adjusts through the loan describes an adjustable-rate mortgage, which can still fully amortize.
    • C The payments rise on a set schedule each year A scheduled rise in payments belongs to a graduated or stepped payment structure and says nothing about a lump sum at the end.
    • D The lender may call the loan at any time A demand feature is a separate contract term and is not what makes a loan a balloon.

    A balloon payment mortgage does not fully amortize: payments run for a period, and the remaining balance falls due in one lump sum. A rate that changes over the life of the loan makes it an adjustable-rate mortgage, which can still fully amortize.

    CFPB mortgage origination examination procedures, p. 2 Reference document, not law.

12. What does a rate lock do, and for how long are rate locks typically offered?

    • A Sets the rate, usually 30, 45 or 60 days Correct
    • B Sets the rate for the life of the loan A lock holds the rate for a period of time, typically 30, 45 or 60 days, not for the whole loan.
    • C Caps the rate, typically for 90 or 120 days A lock fixes the rate rather than capping it, and the usual periods are shorter than these.
    • D Sets the closing costs for 30 or 60 days A rate lock sets the interest rate, not the closing costs.

    A rate lock sets the interest rate for a period of time, typically 30, 45 or 60 days, so a rate that is floating instead can move up or down until the borrower locks it. Changes to the loan amount, the credit score or the verified income can still move a locked rate.

    Your Home Loan Toolkit, p. 14 Reference document, not law.

13. The document that evidences the debt and the borrower's promise to repay it is the:

    • A Promissory note Correct
    • B Deed of trust A deed of trust is a security instrument, which evidences the lien on the property rather than the debt.
    • C Warranty deed A warranty deed transfers title to real property from one party to another and creates no debt.
    • D Closing Disclosure The Closing Disclosure sets out the final loan terms and costs; it is a disclosure form, not the promise to repay.

    A promissory note evidences the debt and the borrower's promise to repay it. A deed of trust only secures that debt with a lien on the home.

    CFPB mortgage servicing examination procedures, p. 37 Reference document, not law.

14. When a borrower repays a mortgage, amortization is best described as:

    • A A loan balance that rises over time A balance that rises over time is negative amortization, the opposite of paying the debt down.
    • B A rate that resets periodically A rate that resets describes an adjustable-rate loan, not how the debt is repaid.
    • C A lump sum due at maturity A lump sum due at maturity is a balloon payment, not the gradual payoff amortization describes.
    • D Paying down the debt through scheduled payments Correct

    Amortization means the gradual paying down of a mortgage through regular payments spread across the loan's term, and the balance drops with each one. A balance that grows instead is negative amortization.

15. A loan is called a jumbo loan when its amount exceeds:

    • A FHA's limit for the local area The Federal Housing Administration's limits apply to its insured loans, not to the jumbo test.
    • B 80% of the home's value A loan-to-value figure measures equity, not whether the amount is above the purchase limit.
    • C Fannie Mae and Freddie Mac's limit Correct
    • D The borrower's qualifying income Income decides qualification, not whether a loan is a jumbo.

    A jumbo loan is larger than the most the government-sponsored enterprises will purchase, which makes it nonconforming by size. The Federal Housing Administration's limits apply to its own insured loans and play no part in the jumbo line.

    OCC Comptroller's Handbook, Mortgage Banking, p. 26 Reference document, not law.

16. Of the two mortgage markets, the primary mortgage market is the one where:

    • A Loans are traded among investors Loans are bought and sold among lenders and investors in the secondary market.
    • B The Federal Reserve sets rates The Federal Reserve's policy is not a market where mortgages are made.
    • C Mortgage securities are issued Securities backed by pooled loans are traded in the secondary market.
    • D Lenders make loans to borrowers Correct

    In the primary market lenders originate mortgages by lending to homeowners and purchasers, and that makes it the place a loan is first made. Trading loans among investors belongs to the secondary market.

    OCC Comptroller's Handbook, Mortgage Banking, p. 5 Reference document, not law.

17. If the home is transferred without the lender's consent, a due-on-sale clause lets the lender:

    • A Raise the interest rate The clause lets the lender call the loan due, not change the interest rate.
    • B Add a late charge A late charge applies to a late payment under the note, not to a transfer.
    • C Demand the full balance Correct
    • D Cancel the hazard insurance The clause's remedy is payment in full, not cancelling the insurance.

    A sale or transfer of the property without the lender's prior written consent lets the lender demand immediate payment in full of all sums secured. The clause gives no power to raise the interest rate.

    CFPB guide to the closing forms, p. 2 Reference document, not law.

18. When a lender forecloses, what makes the foreclosure a judicial one?

    • A A trustee's sale A trustee's sale under a power of sale is the nonjudicial route.
    • B A short sale A short sale is a sale for less than the balance owed, not a court foreclosure.
    • C A deed in lieu A deed in lieu is a voluntary transfer of the property and involves no court case.
    • D A court action Correct

    A foreclosure is judicial when its procedure requires a court action or proceeding, begun by filing a document such as a complaint or petition with a court. A trustee's sale under a power of sale proceeds without one.

    Regulation X, 12 CFR Part 1024, Supplement I, comment 41(f)-1.i

19. The minimum required investment on an FHA purchase must equal at least this share of the Adjusted Value:

    • A 3% Three percent is below the FHA floor of 3.5 percent of the Adjusted Value.
    • B 3.5% Correct
    • C 5% Five percent is more than the handbook requires; the floor is 3.5 percent.
    • D 20% FHA sets no 20 percent investment; the minimum is 3.5 percent of the Adjusted Value.

    The borrower's minimum required investment, paid in cash or its equivalent under Section 203(b)(9) of the National Housing Act, must be at least 3.5 percent of the Adjusted Value of the property; 3 percent falls short of that floor.

    FHA Handbook 4000.1, p. 207 Reference document, not law.

20. A construction loan is best described as:

    • A Short-term interim financing Correct
    • B A 30-year permanent loan A 30-year loan is the permanent mortgage; a construction loan is short-term and ends when building is done.
    • C A home equity line A home equity line borrows against equity in an existing home, while a construction loan finances the cost of building one.
    • D A loan for land only A construction loan pays for the cost of construction, not for buying a lot alone.

    A construction loan is a short-term interim loan that pays for the cost of building, because it only has to carry the project until the home is finished. Long-term financing comes afterward, from a separate permanent mortgage or from the loan's conversion.

    FHA Handbook 4000.1, p. 498 Reference document, not law.

21. What makes a home sale a short sale?

    • A A sale within 30 days The definition sets no time limit on the sale; what matters is the price against the balance.
    • B A sale without an agent Whether an agent is used plays no part in the definition of a short sale.
    • C A price below the balance Correct
    • D A sale after foreclosure A short sale happens before the servicer forecloses, as an alternative to foreclosure.

    A short sale means the servicer lets the borrower sell the home for less than the mortgage balance before it forecloses. The servicer may also agree to forgive the shortfall, but that is its choice and not what makes the sale short.

    CFPB mortgage servicing examination procedures, p. 37 Reference document, not law.

22. Besides size limits and underwriting guidelines, a conforming loan must meet the Fannie Mae and Freddie Mac rules on:

    • A FHA mortgage insurance premiums FHA insurance makes a loan a government loan, and a conventional loan is not insured by the U.S. government.
    • B VA guaranty fees A VA guaranty is a government guarantee, which a conventional loan by definition does not carry.
    • C Terms and amortization periods Correct
    • D Sales to private investors Loans that miss the enterprises' standards are the ones sold to private investors; a conforming loan may be sold to Fannie Mae or Freddie Mac.

    A conforming loan must comply with the Fannie Mae and Freddie Mac loan size limits, terms, amortization periods and underwriting guidelines, so meeting the size limits and the guidelines is not the whole test. FHA insurance or a VA guaranty would make it a government loan rather than a conventional one.

    OCC Comptroller's Handbook, Mortgage Banking, p. 26 Reference document, not law.

23. A state usury law sets a limit on a loan's:

    • A Maximum interest rate Correct
    • B Down payment size Usury laws deal with the price of credit, and they say nothing about how much cash a buyer puts down.
    • C Loan-to-value ratio The ratio of loan to property value is an underwriting measure set by lenders and programs, and a usury law does not limit it.
    • D Closing date When a loan closes is agreed between the parties; a usury law limits the rate charged.

    A usury law is a state law that sets the highest interest rate a lender may charge. Where the loan contract carries no lifetime rate cap, that state ceiling is what limits how high the rate can go.

    CFPB TRID guide to the Loan Estimate and Closing Disclosure forms, p. 30 Reference document, not law.

24. Which borrowers is Fannie Mae's HomeReady product built to serve?

    • A Veterans and their spouses Loans reserved for veterans are the Department of Veterans Affairs program; HomeReady is a conventional product defined by the buyer's income.
    • B Buyers in rural areas only Financing tied to rural areas is the Department of Agriculture's guaranteed program, and the definition of HomeReady names no rural limit.
    • C Low- to moderate-income buyers Correct
    • D Investors in rental homes HomeReady is aimed at people buying or owning their own homes, and its definition does not describe rental investors.

    HomeReady is Fannie Mae's affordable lending product, and income sets who it serves: buyers and owners whose incomes are low to moderate. Military service and a rural address are the marks of other programs, and rental investors are outside its aim.

25. Which mortgage insurance premiums does FHA usually collect on an insured loan?

    • A An upfront premium only The upfront premium is only half of it; FHA also collects an annual premium spread over the monthly payments.
    • B An annual premium only The annual premium comes with a one-time upfront premium, which may be paid in cash or financed into the loan.
    • C Upfront and annual premiums Correct
    • D None with 20% down FHA's premium rules carry no waiver for a large down payment; both premiums are collected.

    The Federal Housing Administration (FHA) collects two premiums on most of its programs: a one-time upfront premium and an annual premium that is paid in monthly installments. Both apply to the loan, and an answer naming only one of them is incomplete.

    FHA Handbook 4000.1, p. 207 Reference document, not law.

26. What do 1.25 discount points cost on a $264,000 loan?

    • A $330 That figure is a tenth of the right amount, as if each point were a tenth of a percent instead of a full 1%.
    • B $2,640 That is one point only; the extra quarter point adds another $660.
    • C $3,300 Correct
    • D $33,000 That treats 1.25 points as 12.5% of the loan, ten times too much.

    One discount point equals 1% of the loan amount (Regulation Z, section 1026.32), so 1.25 points on a $264,000 loan cost $3,300. Points are figured on the loan amount, never on the price of the home.

    Regulation Z, 12 CFR s. 1026.32(b)(3)(i)

27. How soon after signing must at least one FHA borrower move into the home?

    • A Within 30 days The move-in deadline is twice that long; the borrower has 60 days from signing.
    • B Within 60 days Correct
    • C Within 90 days The deadline is shorter; occupancy must begin within 60 days of signing.
    • D Within one year One year is the period the borrower must intend to keep living there, and the time allowed to move in is much shorter.

    At least one borrower on a Federal Housing Administration (FHA) loan must occupy the home within 60 days of signing the security instrument and must intend to live there for at least one year. The one-year figure is how long the borrower must intend to stay, and the move-in deadline is the 60 days.

    FHA Handbook 4000.1, p. 184 Reference document, not law.

28. The set time in which a borrower may take advances on a home equity line is the:

    • A Repayment period The repayment period follows the draw period, when the borrower pays back what was borrowed instead of taking more.
    • B Draw period Correct
    • C Rescission period Rescission is the short window to cancel certain home-secured credit after opening it, and it is not the time for taking advances.
    • D Lock-in period A lock-in holds an interest rate on a mortgage application and has nothing to do with drawing on a credit line.

    A home equity line of credit (HELOC) often sets a fixed period, such as 10 years, in which the borrower may borrow against the line, and that span is the draw period. When it ends, the line may be renewed, or the borrower repays what is owed.

    What You Should Know About Home Equity Lines of Credit, p. 6 Reference document, not law.