22 General Mortgage Knowledge & Loan Products Practice Questions & Answers

1. 1. A loan officer is comparing government loan programs for a client. Which statement correctly describes how these programs protect the lender?

   • A.Both FHA and VA insure 100% of the outstanding loan balance against borrower default.
   • B.USDA Section 502 Guaranteed loans are insured by HUD in the same manner as FHA loans.
   • C.FHA insures the loan with premiums paid by the borrower into an FHA insurance fund, while VA guarantees the lender against loss on a portion of the loan.✓ Answer
   • D.VA insures the loan and FHA guarantees a portion of it; USDA provides neither insurance nor a guaranty.

   The programs differ structurally: FHA collects an up-front and an annual mortgage insurance premium into its insurance fund and insures the lender against loss, while VA charges a one-time funding fee and guarantees only a portion of the loan (the veteran's entitlement) rather than insuring it — which is why a VA loan carries no monthly mortgage insurance. USDA Section 502 loans are guaranteed by USDA Rural Development, not insured by HUD.

   Source: FHA Single Family Housing Policy Handbook 4000.1, I.A.1; VA Lenders Handbook M26-7, Ch. 3 (guaranty and funding fee); USDA HB-1-3555, Ch. 1Report a problem with this question

2. 2. A veteran sells her home to a buyer who will assume her existing VA-guaranteed loan with the approval of the lender and VA. Her credit score is 742 and the loan is current. What must occur for the seller's VA entitlement to be freed for use on a future home?

   • A.A release of liability by itself restores the seller's entitlement.
   • B.The buyer must be an eligible veteran who substitutes his or her own entitlement for the seller's, in addition to the seller obtaining a release of liability.✓ Answer
   • C.VA automatically restores the seller's entitlement 12 months after any approved assumption.
   • D.The loan must be paid in full at closing, because VA-guaranteed loans may not be assumed.

   VA loans are assumable with lender/VA approval, but two separate things are at stake: a release of liability protects the seller from debt liability, while only substitution of entitlement by an eligible veteran-buyer moves the guaranty onto the buyer's entitlement and frees the seller's. Without substitution, the seller's entitlement stays tied to the property even after a release of liability.

   Source: 38 CFR 36.4303 / VA Lenders Handbook M26-7, Ch. 5 (assumptions, release of liability, substitution of entitlement)Report a problem with this question

3. 3. A first-time buyer with a 680 credit score asks about the USDA Section 502 Guaranteed program. Which pair of requirements is characteristic of that program and distinguishes it from FHA and conventional financing?

   • A.The property must be located in a USDA-designated eligible rural area, and total household income must fall within the program's area-based income limit.✓ Answer
   • B.The borrower must make a minimum down payment, and only the income of the borrowers on the note is counted.
   • C.The borrower must be a first-time homebuyer, and the property must be located in a rural area.
   • D.The property may be a second home located anywhere, as long as the borrower's income qualifies.

   USDA Section 502 Guaranteed eligibility is driven by two screens no other major program uses together: the subject property must sit in an area USDA has designated as eligible (rural), and the adjusted annual income of the entire household — including adult members who are not on the loan — must be at or below the applicable area income limit. The program is owner-occupied only and requires no down payment, so first-time buyer status and a minimum down payment are not requirements.

   Source: USDA HB-1-3555, Ch. 5 (property eligibility) and Ch. 9 (adjusted annual household income); 7 CFR 3555Report a problem with this question

4. 4. On an FHA purchase, the contract price is $310,000 and the appraised value is $300,000. The base loan amount is $289,500, and the borrower elects to finance the up-front mortgage insurance premium of $5,066, producing a total loan amount of $294,566. The borrower's credit score is 690. What is the loan-to-value ratio for FHA purposes?

   • A.96.5%✓ Answer
   • B.98.2%
   • C.95.0%
   • D.93.4%

   FHA computes LTV as the base loan amount divided by the Adjusted Value, which is the LESSER of the contract price or the appraised value, and financed UFMIP is expressly excluded from the numerator. Here that is $289,500 ÷ $300,000 = 96.5%; using the $310,000 price or adding the financed UFMIP produces the incorrect answers.

   Source: FHA Single Family Housing Policy Handbook 4000.1, II.A.2 (Adjusted Value; LTV based on base loan amount, excluding financed UFMIP)Report a problem with this question

5. 5. A borrower has a conventional loan with borrower-paid private mortgage insurance. The original value was $400,000 and the original loan amount was $360,000. The borrower is current on payments and there are no subordinate liens. Under the Homeowners Protection Act, when must the servicer terminate the PMI automatically, without any request from the borrower?

   • A.When the balance reaches 80% of the original value, but only if the borrower submits a written request.
   • B.When the loan balance is scheduled to reach 78% of the original value under the original amortization schedule, provided the borrower is current.✓ Answer
   • C.Never — private mortgage insurance on a conventional loan remains for the life of the loan.
   • D.Only when a new appraisal shows the balance is 78% of the current market value.

   The HPA sets two different triggers that candidates often blend together: the borrower may REQUEST cancellation at 80% of original value (in writing, current, good payment history, no subordinate liens), but the servicer must AUTOMATICALLY terminate at 78% of original value measured by the ORIGINAL amortization schedule — not by a new appraisal — with a final termination backstop at the midpoint of the amortization period. Automatic termination requires only that the borrower be current.

   Source: Homeowners Protection Act, 12 U.S.C. 4902(a)–(c)Report a problem with this question

6. 6. All of the following loan features are permitted in a General Qualified Mortgage EXCEPT:

   • A.A rate that is fixed for five years and then adjusts, with regular fully amortizing payments throughout.
   • B.A fixed rate with monthly escrow for taxes and insurance.
   • C.A 30-year fully amortizing term.
   • D.A payment feature that permits negative amortization.✓ Answer

   Regulation Z bars certain risky features from any Qualified Mortgage: negative amortization, interest-only periods, balloon payments (outside narrow small-creditor/rural exceptions) and terms longer than 30 years. A fully amortizing ARM is still eligible to be a QM, because it is the deferral of principal — or of interest, as with negative amortization — that is prohibited, not rate adjustment itself.

   Source: 12 CFR 1026.43(e)(2)(i)–(ii) (Qualified Mortgage product-feature restrictions)Report a problem with this question

7. 7. A borrower requests a $410,000 loan on a condominium that project review shows is non-warrantable, and qualifies using 24 months of personal bank statements rather than tax returns. The loan amount is below the applicable conforming loan limit for the county. How is this loan best classified?

   • A.Conventional and conforming, since neither the documentation type nor the condominium project affects conformity.
   • B.Conforming, because the loan amount is below the conforming loan limit for the county.
   • C.Jumbo, because any loan that cannot be delivered to Fannie Mae or Freddie Mac is by definition a jumbo loan.
   • D.Nonconforming, because it fails GSE eligibility criteria — a loan can be nonconforming for reasons other than size, and "jumbo" refers only to loan amounts above the applicable conforming limit.✓ Answer

   Conforming means the loan meets ALL GSE eligibility requirements — loan amount, credit, documentation and property — so failing any single one of them makes the loan nonconforming. Jumbo is only one species of nonconforming (loan amount above the applicable limit); here the size is fine but the non-warrantable project and the bank-statement documentation both defeat GSE eligibility. The loan is still conventional, because no government agency insures or guarantees it.

   Source: FHFA conforming loan limit definition; Fannie Mae Selling Guide Part B2 (borrower, credit, documentation and project eligibility)Report a problem with this question

8. 8. A self-employed borrower is approved for an owner-occupied loan that uses bank-statement income and includes a 10-year interest-only period, making it a non-QM loan. Which statement about the lender's obligation is correct?

   • A.The Ability-to-Repay rule still applies: the creditor must make a reasonable, good-faith determination using verified and documented income, assets, debts and obligations; only QM's presumption of compliance is lost.✓ Answer
   • B.Because the loan is non-QM, the Ability-to-Repay rule does not apply to it.
   • C.The loan automatically becomes a higher-priced mortgage loan subject to a hard 43% debt-to-income limit.
   • D.Non-QM loans are prohibited on owner-occupied dwellings.

   Ability-to-Repay applies to virtually every closed-end consumer loan secured by a dwelling; Qualified Mortgage is merely a subset that earns a safe harbor or rebuttable presumption of compliance. Non-QM is therefore a classification, not a prohibition — products such as bank-statement, asset-depletion and interest-only loans are perfectly legal, but the creditor bears the full burden of proving it verified repayment ability.

   Source: 12 CFR 1026.43(c) (Ability-to-Repay) and 1026.43(e) (QM presumptions of compliance)Report a problem with this question

9. 9. An ARM has a note rate of 4.25% during the initial period. The loan documents state a margin of 2.25%, and at the time of application the index stands at 5.10%. Which statement is correct?

   • A.The margin will adjust at each change date along with the index.
   • B.The fully indexed rate is 7.35%; the margin stays fixed for the life of the loan while the index moves.✓ Answer
   • C.The fully indexed rate is 4.25%, because that is the rate stated on the note.
   • D.The fully indexed rate is 2.85%, found by subtracting the margin from the index.

   The fully indexed rate equals the index plus the margin (5.10% + 2.25% = 7.35%). The margin is the lender's fixed markup written into the note and does not change; only the index moves at each adjustment. A note rate below the fully indexed rate — as here — is a discounted or teaser rate, which is why payment shock must be discussed with the borrower.

   Source: 12 CFR 1026.20(c) and 1026.19(b) ARM disclosure requirements; CFPB CHARM booklet (index + margin = fully indexed rate)Report a problem with this question

10. 10. A 5/1 ARM closed with an initial note rate of 3.50%, a margin of 2.75%, and caps of 2/2/5. At the first adjustment date the index is 6.00%. What is the borrower's new interest rate?

    • A.8.50%
    • B.8.75%
    • C.5.50%✓ Answer
    • D.6.25%

    Caps are read left to right as initial / periodic / lifetime, so the first adjustment is limited to 2 percentage points above the 3.50% start rate, or 5.50%. The rate charged is always the LOWER of the fully indexed rate (6.00% + 2.75% = 8.75%) and the capped rate, so the borrower pays 5.50% and the remaining increase may only be applied at later adjustments, subject to the 2% periodic and 5% lifetime caps.

    Source: Standard ARM note cap structure; CFPB Consumer Handbook on Adjustable-Rate Mortgages (CHARM), 12 CFR 1026.19(b)Report a problem with this question

11. 11. An ARM originated with a note rate of 4.00% carries caps of 5/2/5. After several adjustments the current rate is 9.00%, and at the next change date the index plus margin equals 11.50%. What is the highest rate the loan may reach at that adjustment?

    • A.9.00% — the loan is already at its ceiling.✓ Answer
    • B.11.50%
    • C.14.00%
    • D.11.00%

    The lifetime cap is measured from the ORIGINAL note rate, not from the current rate, so the ceiling is 4.00% + 5 = 9.00%. Because the loan has already reached 9.00%, the rate cannot rise further no matter how high the fully indexed rate goes; adding the lifetime cap to the current rate (producing 14.00%) is the classic error.

    Source: Standard ARM note lifetime cap provision; 12 CFR 1026.19(b)(2) ARM program disclosureReport a problem with this question

12. 12. Under the 2006 Interagency Guidance on Nontraditional Mortgage Product Risks, how should a lender qualify a borrower for a payment-option ARM that allows a minimum payment smaller than the accrued interest?

    • A.Using the minimum payment available during the first year.
    • B.Using the initial discounted rate with an interest-only payment.
    • C.Using the lifetime cap rate with an interest-only payment.
    • D.Using the fully indexed rate with a fully amortizing payment.✓ Answer

    When the payment does not cover accrued interest, the shortfall is added to principal — negative amortization — so the balance grows and the eventual recast payment can jump sharply. The interagency guidance therefore requires qualification at the fully indexed rate using a fully amortizing payment, and warns against risk layering (reduced documentation plus a simultaneous second lien plus high LTV) on such products.

    Source: Interagency Guidance on Nontraditional Mortgage Product Risks, 71 Fed. Reg. 58609 (Oct. 4, 2006)Report a problem with this question

13. 13. A 71-year-old homeowner is considering an FHA-insured HECM on the primary residence she has owned for 20 years. Her adult children ask what happens if the loan balance eventually grows larger than the home is worth. Which statement is accurate?

    • A.The borrower must make monthly principal and interest payments, or the loan becomes immediately due.
    • B.The heirs are personally liable for any shortfall between the loan balance and the sale price.
    • C.The required HUD-approved counseling may be waived if the borrower is working with a financial advisor.
    • D.A HECM is non-recourse: when the loan becomes due and the home is sold, the amount that must be repaid from the property is limited to the lesser of the loan balance or the home's value.✓ Answer

    A HECM is non-recourse by regulation: repayment is limited to the property's value at sale, and the FHA insurance fund — supported by the HECM mortgage insurance premiums — absorbs any shortfall, so neither the borrower nor the heirs owe the difference. Note also that HUD-approved counseling is mandatory before the loan may be processed, no monthly principal-and-interest payment is required, and the loan becomes due on death, sale, permanent move-out, or failure to pay property taxes, insurance or maintain the home.

    Source: 24 CFR 206.27(b) (non-recourse) and 24 CFR 206.41 (HECM counseling); HUD Handbook 4235.1Report a problem with this question

14. 14. A borrower is offered a home equity line of credit with a 10-year draw period followed by a 15-year repayment period. Which statement accurately describes how this product works?

    • A.The interest rate on a HELOC is fixed for the life of the plan.
    • B.During the draw period the borrower may advance and repay repeatedly, often with interest-only payments; once the draw period ends no new advances are permitted and the balance is repaid over the repayment period.✓ Answer
    • C.The entire outstanding balance is due in full on the last day of the draw period.
    • D.A HELOC is a closed-end loan disbursed in a single lump sum at closing.

    A HELOC is open-end revolving credit secured by the dwelling and governed by Regulation Z's open-end rules, with a variable rate usually tied to a published index such as prime. Because payments during the draw period are typically interest-only, the transition to a fully amortizing repayment period commonly produces payment shock — the opposite of a closed-end home equity loan, which is a fixed lump sum with set payments.

    Source: 12 CFR 1026.40 (requirements for open-end home-equity plans); Reg Z open-end vs. closed-end distinctionReport a problem with this question

15. 15. A seller agrees to fund a 2-1 temporary buydown on a 30-year fixed-rate loan with a note rate of 6.5%; the subsidy is deposited into an escrowed buydown account at closing. Which statement is accurate?

    • A.The unpaid difference is added to the loan balance each month, creating negative amortization.
    • B.The note rate is permanently reduced to 4.5% for the life of the loan.
    • C.The borrower's payment is calculated as if the rate were 4.5% in year one and 5.5% in year two, with the difference drawn from the buydown account; the note rate remains 6.5% and the loan balance is unaffected.✓ Answer
    • D.A 2-1 buydown and paying two discount points produce the same result for the borrower.

    A temporary buydown is a subsidy arrangement, not a change to the loan: escrowed funds supplement the borrower's reduced payment in years one and two, then the payment steps up to the full note-rate payment in year three. Discount points, by contrast, are a permanent buydown that actually lowers the note rate for the life of the loan, and because the buydown funds cover the shortfall there is no negative amortization.

    Source: Fannie Mae Selling Guide B2-1.4-04, Temporary Interest Rate Buydowns; Freddie Mac Selling Guide 4204.3Report a problem with this question

16. 16. A buyer purchases a home for $500,000 that appraises at $510,000. The financing is a $400,000 first mortgage plus a home equity line of credit with a $50,000 credit line, of which $20,000 is drawn at closing. What are the LTV, CLTV and HCLTV?

    • A.LTV 80%, CLTV 90%, HCLTV 84%
    • B.LTV 78.4%, CLTV 82.4%, HCLTV 88.2%
    • C.LTV 84%, CLTV 90%, HCLTV 90%
    • D.LTV 80%, CLTV 84%, HCLTV 90%✓ Answer

    All three ratios use the LESSER of sales price or appraised value as the denominator — here $500,000, not the $510,000 appraisal. LTV counts only the first lien ($400,000 ÷ $500,000 = 80%); CLTV adds the drawn balance of subordinate financing ($420,000 ÷ $500,000 = 84%); and HCLTV uses the FULL HELOC credit line whether drawn or not ($450,000 ÷ $500,000 = 90%), because the borrower can redraw it at any time.

    Source: Fannie Mae Selling Guide B2-1.1-01, Loan-to-Value (LTV), CLTV and HCLTV RatiosReport a problem with this question

17. 17. A borrower's gross monthly income is $7,200. The proposed housing payment is $1,908 (principal and interest $1,520, property taxes $250, hazard insurance $90, HOA dues $48). Other recurring monthly obligations are a car payment of $420, a student loan payment of $180, and a credit card minimum of $60. What are the housing (front-end) and total debt (back-end) ratios?

    • A.21.1% and 35.7%
    • B.35.7% and 26.5%
    • C.26.5% and 35.7%✓ Answer
    • D.26.5% and 30.8%

    The housing ratio uses the FULL housing payment — principal, interest, taxes, insurance and any HOA dues — over gross monthly income: $1,908 ÷ $7,200 = 26.5%. The total debt ratio adds all other recurring monthly obligations: ($1,908 + $420 + $180 + $60) = $2,568 ÷ $7,200 = 35.7%. Using P&I alone (21.1%) or omitting a debt are the common errors.

    Source: FHA Handbook 4000.1, II.A.5 (mortgage payment expense and total fixed payment ratios); Fannie Mae Selling Guide B3-6-02, Debt-to-Income RatiosReport a problem with this question

18. 18. A $265,000 loan at 6.00% closes on September 20, with the first payment due November 1. The lender uses a 365-day year and collects interest from and including the day of closing through the end of the month. How much prepaid (per-diem) interest is collected at closing?

    • A.$522.74
    • B.$441.67
    • C.$435.62
    • D.$479.18✓ Answer

    Per-diem interest = loan amount × rate ÷ 365: $265,000 × 0.06 = $15,900 ÷ 365 = $43.5616 per day. September 20 through September 30, counting the closing date, is 11 days: $43.5616 × 11 = $479.18. Mortgage interest is paid in arrears, which is why closing prepaid interest covers the remainder of the closing month and no payment is due until November 1.

    Source: 12 CFR 1026.4(b)(2) (interest as a finance charge); standard per-diem interest computation, interest paid in arrearsReport a problem with this question

19. 19. A buyer is purchasing a home for $335,000 with a loan amount of $320,000. The lender offers to reduce the monthly payment by $52 in exchange for 1.5 discount points paid at closing. What is the cost of the points, and approximately how long is the break-even period?

    • A.$4,800 and approximately 46 months
    • B.$4,800 and approximately 92 months✓ Answer
    • C.$5,025 and approximately 97 months
    • D.$3,200 and approximately 62 months

    One point equals 1% of the LOAN amount, not the sales price, so 1.5 points on $320,000 is $4,800 (the $5,025 answer wrongly uses the $335,000 price). Break-even is the up-front cost divided by the monthly savings: $4,800 ÷ $52 ≈ 92 months, or about seven and a half years — so the points make sense only if the borrower expects to keep the loan longer than that.

    Source: 12 CFR 1026.4(a) (discount points as a finance charge); standard point cost = 1% of loan amount and break-even calculationReport a problem with this question

20. 20. Which of the following charges is NOT included in the finance charge, and therefore is NOT reflected in the annual percentage rate?

    • A.Prepaid (per-diem) interest collected at closing.
    • B.The loan origination fee charged by the creditor.
    • C.Discount points paid to reduce the interest rate.
    • D.The appraisal fee paid to an independent appraiser.✓ Answer

    The finance charge is the cost of consumer credit expressed as a dollar amount, and Regulation Z expressly excludes certain real-estate-related third-party fees — appraisal, credit report, title examination and title insurance, document preparation by a third party, notary, and recording fees — when they are bona fide and reasonable. Origination fees, discount points, mortgage insurance premiums and prepaid interest are all finance charges and therefore raise the APR above the note rate.

    Source: 12 CFR 1026.4(c)(7) (real-estate-related fees excluded from the finance charge); 1026.4(a)–(b)Report a problem with this question

21. 21. An MLO is explaining the secondary market to a borrower. Which statement correctly describes Ginnie Mae's role?

    • A.Ginnie Mae guarantees the timely payment of principal and interest on mortgage-backed securities backed by government-insured or guaranteed loans; it does not originate or purchase loans.✓ Answer
    • B.Ginnie Mae insures individual FHA loans against borrower default.
    • C.Ginnie Mae purchases conventional conforming loans in the same way Fannie Mae does.
    • D.Ginnie Mae is a shareholder-owned private corporation that securitizes jumbo loans.

    Ginnie Mae is a wholly government-owned corporation within HUD whose only function is to place the full faith and credit guaranty of the United States on MBS issued by approved issuers and backed by FHA, VA, USDA and PIH loans. Fannie Mae and Freddie Mac are the GSEs that actually purchase conventional conforming loans in the secondary market; the underlying loan insurance on an FHA loan comes from FHA, not Ginnie Mae.

    Source: 12 U.S.C. 1721(g); Ginnie Mae MBS Guide (HUD Handbook 5500.3), Ch. 1Report a problem with this question

22. 22. A homeowner is doing a rate-and-term refinance of the first mortgage. An existing HELOC, recorded after the original first mortgage, will remain in place. What must happen for the new loan to close in first lien position?

    • A.The new lender must require the HELOC to be paid off and closed; subordination is not available on a rate-and-term refinance.
    • B.Nothing — the HELOC remains automatically subordinate because it was recorded second in the first place.
    • C.The HELOC lender must sign a subordination agreement that is recorded with the new mortgage; otherwise the HELOC would advance to first position when the old first mortgage is paid off and released.✓ Answer
    • D.Lien priority follows loan size, so the larger new mortgage automatically takes first position.

    Lien priority is generally first-in-time, first-in-right based on recording order, so when the original first mortgage is paid off and its lien released, the previously junior HELOC moves up automatically. A recorded subordination agreement is the instrument by which the HELOC lender consents to stay junior to the new loan, which is why lenders require it before closing a rate-and-term refinance behind existing subordinate financing.

    Source: Fannie Mae Selling Guide B2-1.2-04, Subordinate Financing; state recording statutes establishing first-in-time lien priorityReport a problem with this question

Practice questions written to the published NMLS content outline for the SAFE MLO National Test Component with Uniform State Content, and to the underlying federal regulations (TILA/Regulation Z, RESPA/Regulation X, ECOA/Regulation B, HMDA, FCRA, GLBA, the Fair Housing Act, and the S.A.F.E. Mortgage Licensing Act). NMLS is a service of the Conference of State Bank Supervisors; this site is not affiliated with or endorsed by NMLS, the CSBS, the CFPB, or any state regulator. Dollar thresholds, loan limits, mortgage insurance factors, funding fees, license fees and bond amounts are adjusted periodically and are deliberately not tested here — confirm current figures and your own state's requirements with your state regulator before testing. Nothing here is legal or financial advice. About the NMLS SAFE MLO test →