Free Practice Exam

In some states, the Deed-of-Trust is used as the security instrument instead of the Mortgage, depending on whether the state follows lien-theory or title-theory.

The ARM's margin is set by the lender and represents the lender's and investor's operating expenses and profit margin, which is a fixed component of the interest rate calculation.

Lenders require borrowers to maintain hazard insurance to ensure that their collateral, the property, is protected against loss or damage. This is crucial for the lender as it ensures that the loan value is secured, aligning with the correct answer provided.

The correct answer is 'Falsely declaring their intent to occupy the property being financed' because borrowers often misrepresent their intentions to avoid higher costs and stricter criteria associated with non-owner-occupied properties.

Force-placed insurance is generally more expensive and offers less coverage than homeowner-chosen policies, contradicting the idea that lenders pass on savings to borrowers.

The closing agent's responsibilities include verifying identities and coordinating the closing process, but explaining the risks and benefits of specific loan products is beyond their role.

Standard homeowner's insurance does not cover loss from floods; only specific flood insurance does. This makes the statement incorrect compared to the other facts provided.

The correct answer is 'How promptly and consistently the applicant pays his or her obligations' because this reflects payment history, which is a major component (35%) of a credit score. The other options do not directly relate to the 35% component specified in the question.

A leasehold estate is the correct term for a situation where a homeowner owns their home but pays ground rent for the use of the land. This type of estate involves leasing the land while owning the building or home on it.

A revised LE can only be issued if there is a valid change of circumstance, such as inaccurate information provided by the borrower, a change in property value, or unexpected third-party charges.

Car loans are considered traditional credit as they are typically reported to credit bureaus. Nontraditional credit includes payments like rent and utilities that are not usually reported.

The LTV is calculated by dividing the first mortgage by the property value. CLTV includes the current HELOC balance, and TLTV includes the full HELOC limit. Given: Property value: $235,000 HELOC limit: $47,000 HELOC balance: $25,850 New first mortgage: $164,500 Step-by-step: LTV = First mortgage / Property value LTV = 164,500 / 235,000 = 0.70 or 70% CLTV = (First mortgage + HELOC balance) / Property value CLTV = (164,500 + 25,850) / 235,000 = 190,350 / 235,000 ≈ 0.81 or 81% TLTV = (First mortgage + HELOC limit) / Property value TLTV = (164,500 + 47,000) / 235,000 = 211,500 / 235,000 ≈ 0.90 or 90% Final Answer: LTV = 70% CLTV = 81% TLTV = 90% Explanation: LTV only looks at the new first mortgage compared to the home’s value. CLTV considers the first mortgage plus the amount already borrowed on the HELOC. TLTV assumes the borrower could borrow the full HELOC limit, so it includes the entire limit as potential debt.

For FHA loans, the ideal housing expense ratio is 31% of the borrower's income. This is part of the FHA's debt-to-income guidelines.

With a 6% start rate and adjustment caps of 2/1/5, the ARM would reach its rate ceiling of 11% in the 7th year, following incremental increases each year within the cap limits.

For the 7/1 ARM described, the initial adjustment cap is 2%, limiting the increase to a maximum of 7.875% despite the sum of the index and margin being higher.

A letter of recommendation from a former employer is not a prerequisite for engaging in the business of a loan originator.

Cousins are not typically considered immediate family members in the context of most legal and regulatory frameworks.

Sallie Mae deals with student loans and is not a destination for mortgage loan ownership, making answer 4 correct.

The interest rate on an adjustable-rate mortgage is limited by caps or ceilings, which are predetermined limits on how much the interest rate can increase during adjustment periods.

Nontraditional lending typically refers to any mortgage product that is not a 30-year fixed-rate mortgage, which is considered the standard or traditional mortgage product.

The Note is the document that contains the borrower's promise to repay the loan, detailing the terms and conditions of the loan agreement.

Seller contributions (financing concessions) of up to 6% of the lesser of the sales price or appraised value may be applied to closing costs, prepaids, and discount points, but FHA prohibits using seller contributions toward the borrower's required minimum down payment. Therefore, choice D is the exception (the feature that is NOT permitted), while A, B, and C are all true.

For FHA loans with a down payment of less than 10%, the mortgage insurance premium (MIP) is required for the life of the loan, unless the borrower refinances to a different product.

The amount of a surety bond must reflect the dollar value of loans originated by the loan originator, ensuring that the bond amount is adequate to cover potential liabilities.

When asked orally about the cost of credit, a mortgage professional must disclose the annual percentage rate (APR), which provides a comprehensive measure of the cost of borrowing.

Part-time, overtime, and bonus income can indeed be considered in income verification if they are consistent and documented, contrary to what is stated in answer choice 3, making it the exception.

An erroneous quote on a recording fee does not constitute a valid change of circumstance. Valid changes typically involve uncontrollable events or significant inaccuracies in initially relied upon information.

Having a dozen maxed out retail credit accounts would likely lower a credit score, not raise it, making answer 2 correct.

Table-funding is a process where a mortgage broker originates, closes, and funds a loan in their own name using a warehouse line of credit, immediately selling it post-closing.

According to NMLS guidelines, a licensee must wait 30 days between attempts after failing the qualified written exam up to three times.

A float agreement allows a borrower to lock in a loan rate at a later time, potentially benefiting from more favorable rates or points.

A bi-weekly mortgage payment plan involves making half of a monthly payment every two weeks, resulting in one extra full payment each year, which can reduce the loan term and interest paid over the life of the loan.

The 1998 Homeowner's Protection Act does not require a refund of all prior three years' premiums if PMI is not terminated when the LTV reaches 78%; it mandates automatic termination under these conditions.

PITI includes principal, interest, taxes, and insurance related to the property, such as mortgage insurance, hazard insurance, and flood insurance if required. It does not include credit life insurance.

A balloon loan may feature a conditional right to modify, allowing borrowers to request a modification under certain conditions, thus avoiding the need to refinance or make a balloon payment at the end of the loan term.

Buyback provisions are used by warehouse lenders to protect against fraud by requiring the originating lender to buy back loans if fraud or errors are discovered.

A title search does not ensure that all building codes are being followed. It primarily checks for legal ownership, liens, and encumbrances on the property.

VA-approved appraisers produce a Certificate of Reasonable Value (CRV), which is the official appraisal report for properties financed with VA loans.

Fannie Mae's Automated Underwriting System (AUS) is known as Desktop Underwriter (DU), and Freddie Mac's AUS is called Loan Prospector (LP).

Credit scores can differ among the three major credit reporting agencies because each may have different data and use variations of the FICO scoring engine.

The correct answer is 'The loan balance increases' because a reverse mortgage is designed to increase in balance over time as interest accumulates and is added to the principal amount.

With a $40,000 down payment on a $200,000 home, the LTV is 80%, and therefore, PMI is not required.

Recording fees are not zero-tolerance under TRID rules. Zero-tolerance fees include those paid to the creditor, mortgage broker, or their affiliates, fees for services where the lender required a specific provider, and real estate transfer taxes.

A title commitment is indeed a legal promise to issue title insurance under specified terms and conditions, which aligns with answer choice 4. This document outlines the conditions under which the title insurance will be provided.

For an FHA loan, the maximum PITI allowed is calculated as 31% of the gross monthly income, which for an annual income of $52,000 (or monthly $4,333.33) is $1,343.33.

A survey does not establish the condition of the property; it focuses on boundaries, easements, and placement of structures in relation to property lines.

A felony conviction within the seven years immediately preceding an application is a common ground for denying a mortgage license, aligning with industry regulations and standards.

The correct answer is '2258.33' because the total PITI is calculated by adding the monthly principal and interest, property taxes, hazard insurance, and mortgage insurance premium, which totals $2,258.33.

Construction-to-permanent and construction loans are specifically designed for financing the construction of a property, making them the correct types of loans for this purpose.

Lisa would not be required to retake the licensing test in this case. Here’s why: SAFE Act Testing Rules The SAFE Mortgage Licensing Act requires state-licensed mortgage loan originators to pass the national test component. Once passed, the test result is valid indefinitely; however, if an MLO lets their license lapse, the question is whether they need to retest to regain a license. Five-Year Rule If an individual has not held a state license or been registered as a loan originator for five or more consecutive years, then the test must be retaken. However, time spent as a federally registered loan originator (e.g., working at a depository institution like Big Bucks Bank) does count toward this five-year lookback. Lisa’s Case She hasn’t had a state license for 5+ years. But for 3 of those 5 years, she was federally registered with Big Bucks Bank. Because registration counts, she does not have a full five-year gap. ✅ Conclusion: Lisa’s SAFE test remains valid, and she is not required to retake it when applying for a new state license.

The cost of 1.75 lender origination points on a $237,000 loan is calculated as 1.75% of 237,000, which equals $4,147.50.

Seller carry-back refers to a situation where the seller provides financing for the buyer, effectively acting as the lender.

Alimony is not typically grossed-up because it is considered taxable income. Social security, disability, and public assistance can be grossed-up as they are often not taxed.

An encumbrance refers to any claim against real property that may affect the ability to transfer ownership, such as liens or mortgages.

Mortgage contracts typically require the homeowner to maintain the property and pay taxes and insurance but do not require maintaining a reliable source of income as part of the contract.

For FHA loans, if a borrower's credit score is below 580, the minimum down payment required is 10%. Since the borrower's score is 543, a 10% down payment is necessary.

"Mattress money" refers to cash on hand, often hidden in or under a mattress, and is not allowed in mortgage transactions due to sourcing issues. This makes answer 3 correct.

The second mortgage amount is found by subtracting the first mortgage's LTV from the CLTV and applying the difference to the property value.

The correct answer is 'It is the amount the property owner will pay out of pocket in the event of a loss claim' because the deductible is the amount paid by the property owner before insurance coverage applies to a claim.

The correct answer is that the initial Loan Estimate must be issued within three business days of receiving a loan application, and the non-interest-related fees must be good for a minimum of ten business days from the date it was presented or mailed to the borrower.

Credit scoring models weigh credit utilization, which is the ratio of current revolving debt to the total available credit limit. Lower utilization rates positively impact credit scores.

The initial interest rate of 4.5% would increase based on the new LIBOR rate of 4.25% plus a margin of 2.5%, totaling 6.75%. However, with a CAP of 2%, the maximum increase allowed is to 6.5%.

A piggyback loan is often used to avoid paying private mortgage insurance (PMI) by taking out a second mortgage simultaneously with the first, keeping the first mortgage's loan-to-value ratio below 80%.

FHA loans are insured, and VA loans are guaranteed, which is a parallel relationship correctly reflected in answer choice 3.

The correct answer is Utilities because PITI includes principal, interest, taxes, and insurance, but does not include utilities, which are typically paid separately by the homeowner.

For FHA loans, Mortgage Insurance Premium (MIP) is required for a minimum of 11 years or the life of the loan depending on the loan's original LTV, not just until the LTV reaches 78%.

In a deed, the consideration is the value exchanged between parties, which can be expressed as either valuable or good. This makes answer 2 correct.

A loan originator license is valid for one year and must be renewed annually.

A deed must be in writing to be legally enforceable, making the statement that it does not need to be in writing false.

For the fully indexed interest rate to equal the margin, the index value would need to be zero, as the fully indexed rate is calculated as the sum of the index and the margin.

Regulation Z under TILA requires lenders to make a reasonable and good faith determination of a borrower’s ability to repay the loan, considering full amortizing payments and verified income.

Non-judicial foreclosure typically occurs in title theory states where the security instrument is a Deed-of-Trust. This allows the lender to foreclose without court proceedings.

If a loan originator has not renewed their license by December 31st, they are not permitted to conduct any loan originator activities until the license has been renewed.

Sue Johnson's bi-weekly pay is multiplied by 26 to get her annual income, which is then divided by 12 to find her monthly income. This calculation results in $2,500 per month.

The term 'title' in real estate refers to the legal concept that signifies ownership of real property, not a physical document.

An appraisal is an independent, objective opinion of the market value of a property at the time of the appraisal. This aligns with the correct answer provided, emphasizing the role of appraisers in providing an unbiased estimate of a property's value.

A broker fee of two points represents 2% of the loan amount. 2% of $245,600 is $4,912.

In the worst-case scenario for an ARM loan with a 4% start rate and a 1% periodic cap, the new rate after the first adjustment would be 5%.

With a CLTV of 77% on a property valued at $295,000, and the second mortgage accounting for 10% LTV, the first mortgage would be 67% of the property value, which calculates to $197,650.

Judgments related to medical expenses are not considered when assessing an individual's financial responsibility in the context of licensing.

Occupancy intention is not one of the six items that constitute a live mortgage application, making answer choice 2 correct as it is not included in the list.

A loan modification involves a permanent change in the terms of a loan in response to a borrower's long-term inability to make payments, which is an alternative to foreclosure.

Property flipping is legitimate when a property is acquired and sold shortly thereafter for its true market value, without any deceptive practices such as fraudulent appraisals.

An 'air loan' involves falsifying all aspects of a mortgage transaction to entice a lender to fund a non-existent property. This makes answer 1 correct.

The Federal Housing Finance Agency (FHFA) oversees the GSEs, ensuring they use sound financial practices and maintain adequate capital for their operations.

For FHA loans, MIP is required for a minimum of eleven years or for the life of the loan, depending on the initial LTV, and includes both upfront and annual payments.

PMI covers a portion of the lender's potential losses in case of borrower default, specifically up to 80% of the loan value. This insurance is crucial for lenders as it mitigates the risk associated with lower down payments.

An underwriter might order a second appraisal when there is a question about the validity or credibility of the first appraisal. If the original appraisal was conducted by a trainee without proper oversight from a certified appraiser, it could raise concerns about the reliability of the report. While rural properties (choice B) may present challenges, limited sales data alone does not automatically justify a second appraisal. Borrower disagreement (choice A) is not typically sufficient to warrant a second appraisal, and high down payments (choice D) reduce lender risk and would be unlikely to trigger additional valuation scrutiny.

The borrower's gross monthly income is calculated by multiplying her hourly wage by the number of hours worked per week and then adjusting for the number of weeks in a year divided by 12 months, resulting in $7,020.

The sales comparison approach is most suitable for residential properties like a condo complex for people ages 55 and over, where comparable sales data is available.

Even though Buddy’s conviction was 17 years ago (well past the normal 7-year look-back for non-fraud felonies), fraud is in the special category that permanently disqualifies an individual from obtaining a mortgage loan-originator license in every state. Although Joe was convicted of felony assault, his felony conviction was past the 7-year look back period.

Caps on ARMs limit the amount the interest rate or payment can change, protecting the borrower from extreme fluctuations in payment amounts.

For refinances on investment properties, there is no rescission period, allowing the loan to fund immediately after settlement.

Automated underwriting systems do not inherently reduce closing costs to the borrower; they primarily provide speed and objectivity in loan processing.

The VA guarantees a loan amount at least four times the entitlement used. Therefore, using $50,000 of entitlement would result in a minimum loan amount of $200,000.

NADA is not a recognized term for a 'Low Doc' or 'No Doc' loan. NINA, SISA, and SIVA are all types of documentation reduction loans used in specific borrower situations.

A new cost disclosure must be provided within three business days if the annual percentage rate (APR) changes by more than 1/8%, ensuring borrowers are informed of significant changes in loan terms. Note that for an IRREGULAR closed-end transaction (one involving multiple advances, irregular payment periods, or irregular payment amounts, such as a construction loan), the APR is considered accurate within the larger tolerance of 1/4 of 1 percentage point.

The dollar amount of two discount points on a loan amount of $180,000 (after a 10% down payment on a $200,000 house) is $3,600, calculated as 2% of $180,000.

Tom and Cindy Lewis paid $3,600 in discount points on a $240,000 loan amount, which equates to 1.5 points, as each point costs $2,400.

The Sales Comparison Approach (also called the market data approach) is the most common method for valuing single-family homes. It involves analyzing recent sales of comparable properties and making adjustments based on differences in features, location, or condition.

The Red Flags Rule (under the FACT Act) requires financial institutions and creditors to have procedures in place to detect and respond to signs of identity theft. Multiple addresses and hesitation are potential red flags.

Reverse redlining is the practice of targeting specific geographic areas for predatory lending practices, which is the scenario described in the question.

The correct answer is 'The appraiser's final estimated market value readily allows for an increase in settlement costs up to 10% before the closing' because this statement is false. Appraisals do not typically allow for arbitrary increases in settlement costs; they strictly represent the property's market value to guide lending decisions.

Lenders may establish their own underwriting standards for conventional loans, making the statement that they may not do so false.

The process described is known as 'buy and bail,' where a homeowner purchases a second home and then allows the first home to go into foreclosure.

The 'loan suitability test' is a process used by originators to ensure that a loan product, such as an interest-only loan, is appropriate for a borrower's financial situation and understanding.

Overtime income can be considered if it has been consistently earned for at least two years and is likely to continue, ensuring financial stability and reliability.

Under the Gramm Leach Bliley Act, a 'consumer' uses financial products and services, while a 'customer' has an established relationship with the financial institution. This makes answer 1 correct.

The Home Mortgage Disclosure Act (HMDA) requires lenders to disclose data about their lending practices in the communities they serve, which helps examiners evaluate these practices.

In the Cost Approach to valuation, depreciation is calculated only for the buildings and improvements, not for the land, as land does not depreciate.

Don's housing ratio on the proposed loan is calculated by dividing the new PITI payment of $1,500 by his gross monthly income of $6,800, resulting in approximately 22%.

The Federal Reserve uses three primary tools to reduce the money supply: increasing the reserve requirement, raising the discount rate, and selling securities in the open market.

The sales comparison approach is based on the principle of substitution, which posits that a buyer will not pay more for a property than they would for a similar, readily available alternative property.

Based on the borrower's weekly income, the monthly income is calculated and then applied to conventional and FHA loan ratios to determine the maximum affordable PITI.

The correct answer is 'Go to court and/or sell the property if the owner defaults on any of the provisions of the mortgage' because a mortgage lien provides the lender the right to foreclose on the property if the borrower defaults, ensuring the lender can recover the loan amount.

In a lien theory state, the borrower holds the title to the property and the lender has a lien against it. In a title theory state, the lender holds the title until the loan is paid off.

The correct approach when a credit report shows only a balance on a revolving debt is to identify the true payment amount. This ensures accurate calculation of the applicant's debt-to-income ratios.

Credit repair companies primarily dispute negative entries on credit reports, hoping that the creditor fails to respond in time, which would legally require the credit bureau to remove the entry.

VA loans are not available for investment properties. They are intended for personal use by veterans, such as for a primary residence.

The correct answer is 'Report appraiser misconduct to the appropriate state certifying agency' because AIR requires lenders to report any suspected misconduct by appraisers to maintain the integrity and independence of the appraisal process.

Even if an account is generally in good standing, a severely late payment will still negatively impact a consumer's credit profile, contrary to what the answer choice suggests.

The first mortgage amount is calculated by subtracting the percentage of the second mortgage from the CLTV and then applying the remaining percentage to the property value.

TRID applies to various types of loans but not to open-ended ARMs, making answer 4 correct.

Compensating a loan originator based on loans that contain a pre-payment penalty is prohibited under the Loan Originator Compensation Rule of 2013, as it could incentivize disadvantageous loan terms for consumers.

Dividing PITI by a borrower's monthly gross income calculates the housing expense ratio, which assesses the affordability of the housing based on the borrower's income.