42 Loan Origination Activities Practice Questions & Answers

1. 1. A prospective borrower emails a loan originator her name, her monthly income, her Social Security number, the address of the property she wants to buy, her own estimate of the property's value, and the loan amount she is seeking. The originator replies that he cannot start the file until she signs an intent-to-proceed form and sends two pay stubs. Which statement is correct?

   • A.No application exists yet; income is one of the six required items, and a stated income figure does not count until the consumer documents it with pay stubs or W-2s.
   • B.An application exists only once the consumer has paid the appraisal fee, because a creditor need not commit resources to a file until a fee shows she is serious.
   • C.An application has already been received; all six required items are present, and the creditor may not require verification documents before issuing the Loan Estimate.✓ Answer
   • D.No application exists until the consumer signs a written statement of intent to proceed, since the creditor cannot treat an inquiry as an application without it.

   An application exists the moment the creditor receives six items — consumer name, income, Social Security number to pull credit, property address, an estimate of property value, and the mortgage loan amount sought — and no seventh item may be added to that list. The rule also expressly bars a creditor from requiring verification documents as a condition of providing the Loan Estimate, which is due within three business days of receiving those six items.

   Source: 12 CFR 1026.2(a)(3) and 1026.19(e)(1)(iii), (e)(2)(iii)Report a problem with this question

2. 2. A consumer's six application items are received on Monday. The originator has not yet delivered the Loan Estimate but wants to collect a $500 appraisal fee so the appraisal can be ordered immediately. What may the originator do?

   • A.Collect no fee other than a bona fide and reasonable charge for the credit report until the consumer has received the Loan Estimate and indicated intent to proceed.✓ Answer
   • B.Collect the appraisal fee now, because the consumer authorized it by phone and a documented oral authorization from the applicant counts as her intent to proceed.
   • C.Treat three business days of silence after delivery of the Loan Estimate as the consumer's intent to proceed, because the disclosure is deemed received and accepted once that waiting period runs, and then collect the fee.
   • D.Collect the appraisal fee as long as it is held refundable, because a charge the consumer can recover if the loan never closes is not treated as an upfront fee.

   Reg Z permits only a bona fide and reasonable fee for obtaining the consumer's credit report before the consumer has received the Loan Estimate and affirmatively indicated intent to proceed; all other fees, including appraisal fees, must wait. Silence or inaction is never intent to proceed, and the consumer may indicate intent at any time after receiving the disclosure.

   Source: 12 CFR 1026.19(e)(2)(i)(A)-(B) and (e)(2)(ii)Report a problem with this question

3. 3. Which information is captured in the final section of the Uniform Residential Loan Application?

   • A.The schedule of real estate the borrower already owns, saved for last to complete the picture of her assets
   • B.The borrower's declarations about intended occupancy and prior property ownership, signed last to attest to the entire form
   • C.The applicant's demographic (government monitoring) information, placed late so it cannot influence the credit decision
   • D.The loan originator's name and NMLS unique identifier together with the originating organization's NMLS identifier✓ Answer

   The Loan Originator Information section closes the application and must identify the individual originator by name and NMLS unique identifier and the originating company by its NMLS identifier, so the loan can be traced to a licensed or registered originator. Declarations, demographic information, and real estate owned are collected in earlier, separate sections.

   Source: Uniform Residential Loan Application, Section 9 — Loan Originator InformationReport a problem with this question

4. 4. An applicant completes an application face to face in the originator's office and declines to provide ethnicity, race, and sex on the demographic information addendum. What must the originator do?

   • A.Note that the applicant declined and record ethnicity, race, and sex on the basis of visual observation or surname✓ Answer
   • B.Tell the applicant the information is mandatory and that the application cannot proceed without it
   • C.Obtain the information from the co-applicant or from a public record, so the monitoring data set stays complete
   • D.Leave the fields blank and simply note in the file that the applicant refused to provide the information

   For applications taken in person (including by video with visual contact), the rule requires the originator both to note the applicant's refusal and to record ethnicity, race, and sex based on visual observation or surname, so that monitoring data are not lost. Only where there is no visual or telephone contact — mail or internet applications — does the originator simply record that the information was not provided.

   Source: Regulation C, 12 CFR 1003.4(a)(10)(i) and Appendix B; URLA Demographic Information AddendumReport a problem with this question

5. 5. During a face-to-face interview with a 34-year-old female applicant, which inquiry is permissible under Regulation B?

   • A.The applicant's religious affiliation, to gauge community ties
   • B.Whether the applicant receives alimony, asked before telling her it need not be revealed unless she wants it considered
   • C.The applicant's age, so long as age is not used to discount or disfavor the application✓ Answer
   • D.Whether the applicant and her spouse intend to have more children

   Regulation B allows a creditor to ask an applicant's age because age is needed to determine capacity to contract and may be used only in an empirically derived, demonstrably sound scoring system or to favor an elderly applicant. Inquiries into childbearing intentions and religion are flatly prohibited, and alimony or child support may be asked about only after the applicant is told the income need not be disclosed unless she wants it counted.

   Source: 12 CFR 1002.5(b), (c), (d)(2)-(3), Regulation BReport a problem with this question

6. 6. An underwriter reviews two months of bank statements showing $28,000 that will remain after the down payment and closing costs are paid. This documentation primarily supports which of the four Cs of underwriting?

   • A.Capacity
   • B.Credit
   • C.Collateral
   • D.Capital✓ Answer

   Capital refers to the borrower's own funds — down payment, closing costs, and post-closing reserves — and is documented by sourced and seasoned asset statements. Capacity is documented by income and debt records, collateral by the appraisal and title work, and credit by the credit report and payment history.

   Source: Standard underwriting framework (four Cs); asset verification under 12 CFR 1026.43(c)(2)(i), (c)(4)Report a problem with this question

7. 7. A retired applicant receives $1,200 per month in non-taxable Social Security benefits. How should the underwriter treat this income?

   • A.It must be excluded, because the borrower has no employment income and qualifying income has to come from a verifiable job rather than from a benefit program.
   • B.It may be counted only if the borrower also has wage income, because benefit payments can supplement earnings but cannot stand alone as the source of repayment.
   • C.It may be counted at face value and, because it is non-taxable, adjusted upward ("grossed up") by the percentage the investor's guidelines allow, provided continuance is documented.✓ Answer
   • D.It may be counted only after being reduced by an assumed tax rate, because underwriting must convert every income source to an after-tax equivalent before the housing and total debt ratios are calculated.

   Qualifying income need not come from employment; it must be stable, verified, and reasonably expected to continue, which is why award letters and benefit statements are collected. Because ratios are computed on gross income, non-taxable income such as Social Security or certain disability benefits may be grossed up by the percentage stated in the applicable guidelines so it is compared fairly with taxable wages.

   Source: 12 CFR 1026.43(c)(2)(i) and (c)(4); agency stable-monthly-income and non-taxable income guidelinesReport a problem with this question

8. 8. A borrower is short on down payment funds. The seller's listing agent offers to gift $5,000, and the proposed gift letter states that the borrower will "take care of" the agent after closing. How should the originator treat this?

   • A.Acceptable if the gift letter is notarized, since a notarized letter becomes a sworn statement that an underwriter is entitled to rely on.
   • B.Permissible provided the $5,000 is disclosed on the application as other income, since funds reported to the lender cannot distort the file.
   • C.Workable if the funds are wired straight to the settlement agent rather than to the borrower, because money that never touches her account needs no sourcing.
   • D.Unacceptable — the donor is an interested party to the transaction, and gift funds may not carry any expectation of repayment.✓ Answer

   A valid gift letter must state the amount, the donor's name and relationship to the borrower, and that no repayment is expected; any repayment expectation converts the money into an undisclosed unsecured debt that distorts the debt ratio. Donors may not be interested parties to the transaction — seller, builder, real estate agent, or lender — because such a gift is effectively a seller concession affecting value and the borrower's true equity.

   Source: Agency gift-fund requirements (donor may not be an interested party; no repayment expected); URLA Section 4, Gifts or GrantsReport a problem with this question

9. 9. A processor hands the borrower a blank Verification of Deposit form and asks him to take it to his bank and bring the completed form back to the office. Which statement is correct?

   • A.Improper only when the loan is government-insured, because FHA and VA files demand direct verifications while conventional lenders may accept the fastest available route.
   • B.Acceptable if the depository stamps and signs the form, since the bank's seal and signature authenticate the figures whoever carries it.
   • C.Improper — third-party verifications must travel directly from the lender to the verifying party and back, never through the borrower's hands.✓ Answer
   • D.Acceptable, as long as the borrower does not open the sealed envelope, because an unbroken seal shows the contents were never altered.

   The evidentiary value of a Verification of Deposit or Verification of Employment depends on it coming from an independent third party without the borrower's involvement, so it must be sent and returned directly between the lender and the depository or employer. Allowing the document to pass through the borrower's hands creates an opportunity for alteration and makes the verification unreliable as a reasonably reliable third-party record.

   Source: Agency documentation standards for third-party verifications; 12 CFR 1026.43(c)(3)-(4) (reasonably reliable third-party records)Report a problem with this question

10. 10. A joint application is submitted. Borrower A's tri-merge scores are 704, 688, and 712. Borrower B's are 660, 672, and 651. Under the standard agency convention, what is the representative credit score for the file?

    • A.672
    • B.660✓ Answer
    • C.651
    • D.704

    For each borrower with three scores the representative score is the middle score — 704 for Borrower A and 660 for Borrower B — not the average and not the high or low score. When two or more borrowers are on the loan, the file's representative score is the lowest of the individual borrowers' representative scores, which is 660.

    Source: Agency representative-credit-score convention (middle of three; lowest of borrowers' representative scores)Report a problem with this question

11. 11. An automated underwriting system returns an "Approve/Eligible" recommendation with reduced documentation. What does that recommendation mean?

    • A.It is a recommendation generated entirely from the data entered; the file must still be documented as the findings direct, every condition cleared, and the data verified — inaccurate input voids the finding.✓ Answer
    • B.The loan is approved as submitted and no further income or asset documentation is needed, because a reduced-documentation finding means the system accepted the figures entered and waived any remaining verification duties for the file.
    • C.It confirms that the appraisal will support the value used in the application, because the system screens the property data against recent nearby sales before it returns a recommendation.
    • D.The recommendation by itself satisfies the ability-to-repay requirement, because an automated approval is a recognized way for a creditor to show the required factors were considered.

    An AUS evaluates only the data keyed into it, so its recommendation is conditional: the documentation the findings require must be obtained, all conditions cleared to close, and the entered data verified, and any material variance invalidates the recommendation. It is not a substitute for the creditor's independent obligation to consider and verify the ability-to-repay factors, and it says nothing about the appraised value.

    Source: 12 CFR 1026.43(c)(2)-(4); AUS findings are conditional on verified dataReport a problem with this question

12. 12. Which of the following is NOT among the minimum factors a creditor must consider and verify under the ability-to-repay rule?

    • A.The equity in the dwelling that the creditor could recover if the consumer defaulted✓ Answer
    • B.The consumer's monthly debt-to-income ratio or residual income
    • C.The consumer's monthly payment for mortgage-related obligations such as property taxes and insurance
    • D.The monthly payment on any simultaneous loan the creditor knows or has reason to know about

    The ability-to-repay rule requires the creditor to look at repayment capacity from income or assets other than the value of the dwelling securing the loan, precisely to stop collateral-based lending. The eight required factors cover income or assets, employment status, the covered-transaction payment, simultaneous-loan payment, mortgage-related obligations, current debts including alimony and child support, DTI or residual income, and credit history.

    Source: 12 CFR 1026.43(c)(2)(i)-(viii)Report a problem with this question

13. 13. Under the general qualified mortgage standard, which loan feature is permitted?

    • A.A payment schedule that permits the principal balance to increase
    • B.A period during which the consumer makes interest-only payments
    • C.A 30-year term with fully amortizing, substantially equal payments✓ Answer
    • D.A single balloon payment falling due at the end of the term

    A qualified mortgage may not contain negative amortization, interest-only payments, or a balloon payment, and its term may not exceed 30 years; these product restrictions exist because such features mask payment shock. Substantially equal, fully amortizing payments over a term of 30 years or less satisfy the QM product requirements, and only narrow small-creditor and rural balloon categories depart from the balloon prohibition.

    Source: 12 CFR 1026.43(e)(2)(i)-(ii)Report a problem with this question

14. 14. Which action by a lender's staff is permitted under the appraisal (valuation) independence rules?

    • A.Withholding the appraiser's payment until the reported value has been reconsidered and resubmitted
    • B.Telling the appraiser at assignment the value the file needs in order for the loan to close
    • C.Asking the appraiser to correct an objective factual error and to consider additional comparable sales✓ Answer
    • D.Removing an appraiser from the panel because a report came in below the contract price

    Valuation independence prohibits coercing, bribing, intimidating, instructing, or inducing an appraiser to reach a predetermined value, including withholding payment or future assignments or selecting appraisers by the values they deliver. It expressly permits asking an appraiser to consider additional information, to correct factual errors, or to provide further detail or substantiation for the conclusion.

    Source: 12 CFR 1026.42(c)(1)-(3) and comment 42(c)(3)Report a problem with this question

15. 15. On a single-family residence, the sales comparison approach is given the greatest weight. A comparable sale has three full bathrooms while the subject has two. How does the appraiser handle the difference?

    • A.Average the values indicated by the three approaches, equally weighted, to reach the final opinion
    • B.Add the value of a full bathroom to the subject property's indicated value
    • C.Subtract the contributory value of the extra bathroom from the comparable's sale price✓ Answer
    • D.Subtract the value of a full bathroom from the subject property's own value

    In the sales comparison approach all adjustments are made to the comparables, never to the subject, because the subject's value is the unknown being estimated: subtract from a comparable that is superior and add to one that is inferior. The appraiser then reconciles the approaches using reasoned weighting rather than averaging, giving sales comparison the most weight for a residential property.

    Source: USPAP Standards Rule 1-4(a) and Standards Rule 1-6 (reconciliation)Report a problem with this question

16. 16. A federally related loan is secured by a home located in a Special Flood Hazard Area. How much flood insurance must the lender require?

    • A.The sales price of the property, because the price actually paid is the most reliable measure of what the lender stands to lose
    • B.The full appraised value of the property, including the land, so the collateral is protected against a total loss in a flood event
    • C.The lesser of the outstanding principal balance of the loan, the insurable value of the improvements, or the maximum coverage available under the NFIP✓ Answer
    • D.None; coverage becomes optional if the borrower signs a hold-harmless waiver accepting the flood risk, because the statute lets an informed owner assume the hazard

    Flood coverage is mandatory, not waivable, once a Standard Flood Hazard Determination places the building in a Special Flood Hazard Area, and the required amount is the lesser of the outstanding principal balance, the insurable value of the improvements, or the maximum NFIP limit. Land is excluded because it cannot be damaged by flooding in the insurable sense, and lenders must also accept qualifying private flood policies.

    Source: Flood Disaster Protection Act, 42 U.S.C. 4012a(b); National Flood Insurance Reform ActReport a problem with this question

17. 17. A borrower is refinancing the mortgage on her principal residence with a lender other than her current creditor and is taking cash out. Which statement about the right of rescission is correct?

    • A.The right to rescind runs for seven business days from consummation, because a cash-out refinance is treated as a higher-risk transaction with a longer cooling-off period than the ordinary three days, and the lender may disburse the cash-out portion on the eighth business day.
    • B.The right of rescission applies to purchase-money loans on a principal residence as well, so she receives the same three-day cancellation window she had when buying the home, measured from whichever comes first — consummation or delivery of the disclosures — and funds may be released.
    • C.She has three business days — counting Saturdays but not Sundays or federal legal holidays — measured from the latest of consummation, delivery of the material disclosures, or receipt of two copies of the notice of right to cancel, and no funds may be disbursed until that period expires.✓ Answer
    • D.There is no right of rescission, because refinances are exempt transactions under TILA just as purchase-money loans are, and the exemption applies whenever the proceeds of the new loan retire an existing mortgage on the same home rather than creating an entirely new obligation.

    Rescission attaches to refinances with a new creditor, home equity loans, and HELECs secured by the consumer's principal dwelling, but never to purchase-money loans; a same-creditor refinance is rescindable only as to any new money advanced. The three-day period uses the precise business-day definition (all calendar days except Sundays and federal legal holidays), runs from the latest of the three triggering events, and no disbursement or work may occur until it expires.

    Source: 12 CFR 1026.23(a)(3) and 1026.2(a)(6) (precise business-day definition)Report a problem with this question

18. 18. A home has a contract sales price of $320,000 and an appraised value of $330,000. The first mortgage is $256,000 and the borrower is also taking a simultaneous second lien of $16,000. What are the LTV and CLTV?

    • A.LTV 85%, CLTV 80%
    • B.LTV 77.58%, CLTV 82.42%
    • C.LTV 80%, CLTV 80%
    • D.LTV 80%, CLTV 85%✓ Answer

    Loan-to-value is the loan amount divided by the LESSER of sales price or appraised value, so the divisor is $320,000, not $330,000: $256,000 ÷ $320,000 = 80%. The combined loan-to-value adds all liens against the same value: ($256,000 + $16,000) ÷ $320,000 = $272,000 ÷ $320,000 = 85%.

    Source: Standard LTV/CLTV computation (loan amount ÷ lesser of sales price or appraised value)Report a problem with this question

19. 19. A borrower's gross monthly income is $7,500. The proposed housing payment is $1,650 principal and interest, $250 property taxes, $100 hazard insurance, and $100 HOA dues. Recurring obligations are a $420 car payment with 32 payments remaining, a $180 student loan payment, $95 in credit card minimums, $300 in court-ordered child support, and a $250 personal loan payment with 8 payments remaining. Applying the convention that an installment debt with fewer than ten payments remaining is excluded, what are the housing (front-end) and total (back-end) ratios?

    • A.28.00% and 44.60%
    • B.26.67% and 39.93%
    • C.28.00% and 41.27%✓ Answer
    • D.22.00% and 41.27%

    The housing ratio uses the full PITI plus HOA: $1,650 + $250 + $100 + $100 = $2,100 ÷ $7,500 = 28.00%. The back-end ratio adds the recurring debts that count — $420 + $180 + $95 + $300 = $995, excluding the $250 personal loan because fewer than ten payments remain — giving ($2,100 + $995) ÷ $7,500 = $3,095 ÷ $7,500 = 41.27%.

    Source: Standard housing and total debt ratio computation; agency treatment of installment debts with fewer than ten remaining paymentsReport a problem with this question

20. 20. An applicant earns $24.00 per hour for a guaranteed 40 hours per week. Verified overtime was $3,600 over the most recent 12 months and $2,400 over the prior 12 months, and the employer confirms overtime is likely to continue. What is the qualifying gross monthly income?

    • A.$4,160
    • B.$4,410✓ Answer
    • C.$4,090
    • D.$4,460

    Hourly base income is annualized and divided by twelve: $24.00 × 40 hours × 52 weeks = $49,920 ÷ 12 = $4,160 per month. Variable income such as overtime is averaged over the documented two-year history because only a demonstrated, continuing pattern may be counted: ($3,600 + $2,400) ÷ 24 = $250, for total qualifying income of $4,410.

    Source: Agency stable-monthly-income calculation (hourly × hours × 52 ÷ 12; variable income averaged over 24 months)Report a problem with this question

21. 21. A $250,000 loan at 6.0% interest disburses on March 20. The lender collects prepaid interest from the disbursement date through the last day of the month using a 365-day year. How much prepaid (per diem) interest is collected?

    • A.$493.15✓ Answer
    • B.$452.05
    • C.$500.00
    • D.$1,250.00

    The daily rate is the loan amount times the annual rate divided by the stated day count: $250,000 × 0.06 = $15,000 ÷ 365 = $41.0959 per day. Interest is paid in arrears and is collected for March 20 through March 31 inclusive, which is 12 days: $41.0959 × 12 = $493.15 (using a 360-day year would have produced $500.00).

    Source: Standard per-diem (prepaid) interest computation: (loan amount × rate) ÷ day-count basis × daysReport a problem with this question

22. 22. A home sells for $410,000 and the borrower makes a 20% down payment. The lender charges a 1% origination fee plus 1.5 discount points. What is the total dollar amount of the origination fee and discount points?

    • A.$10,250
    • B.$3,280
    • C.$4,920
    • D.$8,200✓ Answer

    Points are always a percentage of the LOAN amount, not the sales price. With 20% down the loan is $410,000 × 0.80 = $328,000, and 1% + 1.5% = 2.5% of $328,000 = $8,200 (computing 2.5% on the $410,000 price would wrongly give $10,250).

    Source: Standard points computation: one point = 1% of the loan amountReport a problem with this question

23. 23. A borrower locks the interest rate ten days after receiving the initial Loan Estimate. Under TRID, when must the creditor provide a revised Loan Estimate reflecting the locked rate and updated rate-dependent charges?

    • A.Within 3 business days after the rate is locked✓ Answer
    • B.On the same business day the rate is locked
    • C.Only when the Closing Disclosure is issued
    • D.Within 7 business days after the rate is locked

    Locking a rate after the initial Loan Estimate is a permitted redisclosure event: Reg Z requires the creditor to deliver a revised LE within 3 business days of the date the rate is locked, updating the interest rate, points, and other rate-dependent charges.

    Source: TILA/Reg Z, 12 CFR 1026.19(e)(3)(iv)(D)Report a problem with this question

24. 24. Between the Loan Estimate and the Closing Disclosure, which of the following charges is in the zero-tolerance category and may not increase at all?

    • A.Hazard insurance
    • B.Transfer taxes✓ Answer
    • C.Prepaid interest
    • D.Recording fees

    Reg Z places transfer taxes in the zero-tolerance bucket along with fees paid to the creditor, broker, or an affiliate and fees the borrower cannot shop for. Recording fees fall in the 10% cumulative bucket, while prepaid interest and hazard insurance may change without limit if the original estimate was made in good faith.

    Source: TILA/Reg Z, 12 CFR 1026.19(e)(3)(i)-(iii)Report a problem with this question

25. 25. For charges in the 10% cumulative tolerance category, such as recording fees, the 10% limit is applied to which figure?

    • A.Each individual charge in that category
    • B.The total loan amount at consummation
    • C.The sum of all charges in that category✓ Answer
    • D.The total of all disclosed closing costs

    The 10% test is aggregate, not per-fee: recording fees plus third-party services the borrower could shop for (when a provider from the written list is used) may together exceed the Loan Estimate total for that category by no more than 10%, so one fee can rise sharply if decreases elsewhere offset it.

    Source: TILA/Reg Z, 12 CFR 1026.19(e)(3)(ii)Report a problem with this question

26. 26. At closing, a zero-tolerance fee on the Closing Disclosure exceeds the amount shown on the Loan Estimate. To cure the tolerance violation, the creditor must refund the excess to the borrower within what period?

    • A.30 days after consummation
    • B.60 days after consummation✓ Answer
    • C.30 days after the error is found
    • D.60 days after the CD is issued

    Reg Z allows a good-faith violation to be cured by refunding the excess amount and delivering a corrected Closing Disclosure no later than 60 days after consummation; the clock runs from consummation, not from issuance of the CD or discovery of the error.

    Source: TILA/Reg Z, 12 CFR 1026.19(f)(2)(v)Report a problem with this question

27. 27. After the borrower receives the initial Closing Disclosure, which change requires a corrected CD and a NEW three-business-day waiting period before consummation?

    • A.The seller raises the closing credit by $500
    • B.Recording fees increase by $150 at closing
    • C.A misspelled borrower name gets corrected
    • D.The APR of a regular loan rises more than 1/8%✓ Answer

    Only three events restart the 3-business-day clock: the APR becomes inaccurate beyond tolerance (more than 1/8% on a regular loan, 1/4% on an irregular loan), the loan product changes, or a prepayment penalty is added. Any other change only requires a corrected CD at or before consummation, with no new wait.

    Source: TILA/Reg Z, 12 CFR 1026.19(f)(2)(ii)Report a problem with this question

28. 28. Before an applicant has received the Loan Estimate and indicated an intent to proceed, which fee may the creditor lawfully collect?

    • A.A rate-lock commitment charge
    • B.A bona fide credit report fee✓ Answer
    • C.A standard application intake fee
    • D.A deposit toward the appraisal

    TRID prohibits imposing any fee on a consumer before the consumer receives the Loan Estimate and indicates an intent to proceed, with a single exception: a bona fide and reasonable fee for obtaining the consumer's credit report. Application, appraisal, and rate-lock fees must all wait.

    Source: TILA/Reg Z, 12 CFR 1026.19(e)(2)(i)Report a problem with this question

29. 29. A creditor places the Closing Disclosure in the mail on Monday, and no federal holidays fall that week. Under the precise business-day definition, on what day is the borrower deemed to have received it?

    • A.Wednesday
    • B.Friday
    • C.Saturday
    • D.Thursday✓ Answer

    Mailed disclosures are deemed received 3 business days after mailing, and for this purpose Reg Z uses the precise definition: all calendar days except Sundays and federal holidays. Counting from Monday, the days are Tuesday (1), Wednesday (2), and Thursday (3), so receipt is deemed to occur Thursday.

    Source: TILA/Reg Z, 12 CFR 1026.19(f)(1)(iii) and 1026.2(a)(6)Report a problem with this question

30. 30. A self-employed applicant's net income was $80,000 two years ago and $60,000 in the most recent year, and the underwriter concludes it will remain stable at the lower level. What monthly qualifying income should be used?

    • A.$5,833, the average of the two years
    • B.$6,667, based on the higher earlier year
    • C.$5,000, based on the most recent year✓ Answer
    • D.$11,667, the two years' combined total

    When self-employment income is declining, the underwriter may not average the higher earlier year upward; qualifying income is limited to the lower, most recent figure — $60,000 ÷ 12 = $5,000 per month — and only if that level is expected to continue. Two-year averaging applies to stable or rising income.

    Source: Fannie Mae Selling Guide B3-3.1 (income stability; declining self-employment income)Report a problem with this question

31. 31. A home appraises for $400,000, matching its sales price. The borrower obtains a $300,000 first mortgage and a HELOC with a $50,000 credit limit, drawing $40,000 at closing. What is the CLTV?

    • A.75%
    • B.85%✓ Answer
    • C.97.5%
    • D.87.5%

    CLTV divides the sum of the drawn lien balances by value: ($300,000 + $40,000) ÷ $400,000 = 85%. Using the full $50,000 credit limit instead of the drawn amount produces the HCLTV of 87.5%; 75% is the first-lien LTV alone, ignoring the HELOC.

    Source: Standard CLTV/HCLTV definitions (Fannie Mae Selling Guide B2-1.1: ratio calculations)Report a problem with this question

32. 32. An underwriter conditions loan approval on the borrower holding two months of reserves after closing. In what units is this reserve requirement measured?

    • A.Months of principal and interest alone
    • B.A fixed percentage of the loan amount
    • C.A fixed percentage of the purchase price
    • D.Months of the full housing payment (PITI)✓ Answer

    Reserves are the liquid funds a borrower still has after closing, expressed as months of the complete monthly housing obligation — principal, interest, taxes, and insurance, plus any association dues (PITIA) — because the test measures how long the borrower could keep paying the full housing cost, not just the loan payment.

    Source: Fannie Mae Selling Guide B3-4.1 (reserves defined as months of PITIA)Report a problem with this question

33. 33. Under the ECOA Valuations Rule, on a first-lien loan secured by a dwelling, when must the applicant be given a copy of the appraisal?

    • A.No later than 3 business days before closing✓ Answer
    • B.Only in cases where the loan is denied
    • C.Only if the applicant asks for it in writing
    • D.At the closing with the other loan papers

    Regulation B requires the creditor to provide copies of all appraisals and written valuations promptly upon completion and no later than 3 business days before consummation, whether the application is approved, denied, or withdrawn — the borrower need not ask, and delivery at closing is too late.

    Source: ECOA/Reg B, 12 CFR 1002.14(a)(1)Report a problem with this question

34. 34. A borrower buys a home for $300,000, its appraised value, using a conventional loan with PMI. Under the Homeowners Protection Act, PMI must automatically terminate when the balance is first scheduled to reach which amount?

    • A.$210,000 (70% of the original value)
    • B.$225,000 (75% of the original value)
    • C.$234,000 (78% of the original value)✓ Answer
    • D.$240,000 (80% of the original value)

    The HPA requires automatic termination of PMI on the date the balance is first scheduled to reach 78% of the original value — $300,000 × 0.78 = $234,000 — provided the borrower is current. The 80% figure ($240,000) is the separate threshold at which the borrower may request cancellation in writing.

    Source: Homeowners Protection Act, 12 USC 4902 (automatic termination at 78% of original value)Report a problem with this question

35. 35. During processing, the originator orders a preliminary title report (title commitment) on the subject property. What does this report primarily disclose?

    • A.The current market value of the property
    • B.Recorded liens and encumbrances on the title✓ Answer
    • C.The structural condition of the dwelling
    • D.The property's flood zone determination

    The title commitment shows how title is currently vested and lists recorded liens, judgments, unpaid taxes, easements, and other encumbrances that must be cleared or excepted before the lender's mortgage can attach in first position. Value comes from the appraisal and flood status from a separate flood certification.

    Source: Standard title commitment practice (ALTA title commitment: vesting, liens, exceptions)Report a problem with this question

36. 36. A married applicant refinances a primary residence titled in both spouses' names, but only the applicant qualifies for and takes the loan. What must the non-borrowing spouse sign at closing?

    • A.Neither the note nor the security document
    • B.The security instrument but not the note✓ Answer
    • C.Both the note and the security instrument
    • D.The note but not the security instrument

    Everyone holding a vested ownership interest must sign the mortgage or deed of trust so the entire property is validly pledged as collateral, but only the parties responsible for repaying the debt sign the promissory note. The non-borrowing spouse therefore signs the security instrument without becoming liable on the note.

    Source: Standard closing rule: all vested owners execute the security instrument; only obligors sign the noteReport a problem with this question

37. 37. A refinance of a borrower's primary residence closes on a Friday, all required rescission disclosures are properly given, and no federal holidays follow. What is the earliest day the loan may fund?

    • A.Wednesday✓ Answer
    • B.Thursday
    • C.Tuesday
    • D.Monday

    The rescission period runs 3 business days after consummation, counting every calendar day except Sundays and federal holidays: Saturday (1), Monday (2), Tuesday (3). The right expires at midnight Tuesday, and because no funds may be disbursed until the period ends, the earliest funding day is Wednesday.

    Source: TILA/Reg Z, 12 CFR 1026.23(a)(3) and 1026.2(a)(6) (rescission business-day counting)Report a problem with this question

38. 38. A borrower timely exercises her right to rescind a HELOC secured by her primary residence. Within what period must the creditor return the fees and other money she has paid?

    • A.30 calendar days
    • B.20 calendar days✓ Answer
    • C.60 calendar days
    • D.3 business days

    When a consumer rescinds, the security interest becomes void and Reg Z gives the creditor 20 calendar days after receiving the notice of rescission to return any money or property given by the consumer, including fees paid. The 3-day figure is the rescission window itself, not the refund deadline.

    Source: TILA/Reg Z, 12 CFR 1026.23(d)(2)Report a problem with this question

39. 39. At closing, the borrower pays the premium for the lender's title insurance policy required by the mortgage lender. What does this policy protect?

    • A.The appraised value against market declines
    • B.The buyer's equity, up to the sales price
    • C.The lender's lien, up to the loan amount✓ Answer
    • D.The dwelling itself against physical damage

    A lender's title policy insures the validity and priority of the mortgage lien against title defects, up to the outstanding loan balance. Protecting the buyer's own equity requires a separate, optional owner's policy; physical damage is covered by hazard insurance, and no policy guarantees market value.

    Source: Standard title insurance definitions: lender's policy vs owner's policyReport a problem with this question

40. 40. A 5/1 ARM has an initial rate of 3.5% with 2/2/5 caps. At the first adjustment, the index is 4.25% and the margin is 2.5%. What interest rate applies after the adjustment?

    • A.4.25%
    • B.5.5%✓ Answer
    • C.6.75%
    • D.8.5%

    The fully indexed rate is index plus margin: 4.25% + 2.5% = 6.75%. But the first number in 2/2/5 caps the initial adjustment at 2 points above the start rate, so the new rate cannot exceed 3.5% + 2% = 5.5%. The 8.5% figure is the lifetime ceiling (3.5% + 5%), and 4.25% is the index alone.

    Source: Standard ARM mechanics: fully indexed rate (index + margin) limited by initial/periodic/lifetime capsReport a problem with this question

41. 41. A new loan of $240,000 carries a 6.0% annual interest rate with monthly amortization. How much of the first monthly payment is interest?

    • A.$1,200✓ Answer
    • B.$1,183.56
    • C.$14,400
    • D.$120

    Monthly interest equals the outstanding balance times the annual rate divided by 12: $240,000 × 0.06 = $14,400 per year, ÷ 12 = $1,200. The $14,400 figure forgets to divide by 12, $1,183.56 comes from a 365-day daily accrual over 30 days, and $120 misplaces the decimal point.

    Source: Periodic interest formula: principal balance × annual rate ÷ 12Report a problem with this question

42. 42. A buyer's fixed-rate loan has a 6.5% note rate, and the seller pays for a 2-1 temporary buydown. What payment rate applies during the second year of the loan?

    • A.4.5%
    • B.5.5%✓ Answer
    • C.7.5%
    • D.6.5%

    A 2-1 buydown reduces the payment rate by 2 percentage points in year one (6.5% − 2% = 4.5%) and by 1 point in year two (6.5% − 1% = 5.5%), with the full 6.5% note rate applying from year three onward. The escrowed buydown funds cover the payment difference; the note rate itself never changes.

    Source: Standard 2-1 temporary buydown structure (payment rate reduced 2 points year 1, 1 point year 2)Report 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 →