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NMLS Safe Exam Pt 3

General Mortgage Knowledge

QuestionAnswer
What is a mortgage? A legal agreement by which a lender lends money in exchange for a lien on the borrower's property as collateral.
What is a promissory note? A written promise to repay a specified sum of money under agreed terms.
What is a lien? A legal claim against a property used as security for a loan.
What is the difference between a mortgage and a note? The note is the borrower's promise to repay; the mortgage secures that promise with property.
What does PITI stand for? Principal, Interest, Taxes, and Insurance.
What is the principal? The original loan amount borrowed.
What is interest? The cost of borrowing money, expressed as a percentage of the loan amount.
What are taxes and insurance in PITI? Property taxes and homeowner’s insurance that are often paid through escrow.
What is a fixed-rate mortgage? A loan with an interest rate that remains the same for the life of the loan.
What is an adjustable-rate mortgage (ARM)? A loan with an interest rate that changes periodically based on an index.
What is a hybrid ARM? An ARM that has a fixed interest rate for a period, then adjusts annually.
What is an interest-only loan? A loan where the borrower only pays interest for a set time before paying principal.
What is a balloon mortgage? A loan with small monthly payments and one large final payment due at the end.
What is negative amortization? When loan payments are less than the interest due, causing the balance to increase.
What is amortization? The process of paying off a loan over time through regular payments of principal and interest.
What is a fully amortizing loan? A loan that will be paid off in full at the end of the term.
What is the term of a loan? The length of time the borrower has to repay the loan.
What is a prepayment penalty? A fee charged if the borrower pays off the loan early.
What is a subprime loan? A loan given to borrowers with poor credit or high risk of default.
What is a conforming loan? A loan that meets the underwriting guidelines of Fannie Mae or Freddie Mac.
What is a non-conforming loan? A loan that does not meet Fannie Mae or Freddie Mac guidelines.
What is a jumbo loan? A loan that exceeds conforming loan limits set by FHFA.
What is a government loan? A loan insured or guaranteed by a federal agency (e.g., FHA, VA, USDA).
What is a conventional loan? A loan that is not backed by the government.
What are the two main categories of mortgage loans? Conventional and government-backed.
What is the purpose of the secondary mortgage market? To buy and sell mortgage loans, providing liquidity to lenders.
Who are the major players in the secondary market? Fannie Mae, Freddie Mac, Ginnie Mae.
What does Fannie Mae do? Buys conforming loans and packages them into mortgage-backed securities (MBS).
What does Freddie Mac do? Purchases mortgages from smaller banks and securitizes them.
What does Ginnie Mae do? Guarantees mortgage-backed securities for FHA, VA, and USDA loans.
What is the difference between Fannie Mae and Ginnie Mae? Fannie Mae is a GSE that buys conforming loans; Ginnie Mae guarantees government loans.
What is securitization? Pooling mortgages and selling them as securities to investors.
What are the benefits of the secondary market? Increases lender liquidity, stabilizes interest rates, spreads risk.
What is a portfolio loan? A loan that a lender keeps in-house instead of selling it on the secondary market.
What is a warehouse line of credit? A short-term funding source for mortgage lenders to fund loans until they’re sold.
What is the role of a mortgage servicer? Collects payments, manages escrow, and communicates with the borrower after closing.
What is loan servicing? The administration of a mortgage loan after closing.
What is the Uniform Residential Loan Application? The standard loan application form also known as Form 1003.
What is underwriting? The process of evaluating a borrower’s risk and eligibility for a loan.
What is the role of the underwriter? To assess risk and determine whether to approve the loan based on guidelines.
What is the front-end ratio? Monthly housing expense ÷ gross monthly income.
What is the back-end ratio? Total monthly debt ÷ gross monthly income.
What are typical qualifying ratios for FHA loans? 31% front-end and 43% back-end.
What are typical qualifying ratios for conventional loans? 28% front-end and 36% back-end.
What is loan-to-value ratio (LTV)? Loan amount ÷ lower of appraised value or purchase price.
What is combined loan-to-value (CLTV)? Total of all liens ÷ property value.
What is high LTV considered? Typically over 80%, which often requires mortgage insurance.
What is a debt-to-income ratio (DTI)? Monthly debt obligations divided by gross monthly income.
Why is DTI important? It helps assess borrower’s ability to repay.
What is the maximum DTI allowed for a Qualified Mortgage (QM)? 43% (although some exceptions apply).
What is private mortgage insurance (PMI)? Insurance that protects the lender when a borrower puts down less than 20% on a conventional loan.
When can PMI be automatically canceled? When the LTV reaches 78% based on the original amortization schedule.
What is the Homeowners Protection Act (HPA)? A law that governs PMI cancellation and borrower rights.
What is mortgage insurance premium (MIP)? Insurance required on FHA loans to protect lenders.
How is FHA MIP paid? As an upfront premium (UFMIP) and annual premium.
What is the UFMIP rate for FHA loans? Typically 1.75% of the loan amount.
What is the minimum down payment for an FHA loan? 3.5% with a 580+ credit score.
What is the minimum down payment for a VA loan? $0 – VA loans require no down payment.
What is the VA funding fee? A fee paid to the VA to help sustain the program, based on loan type, down payment, and prior use.
Who is eligible for a VA loan? Active duty military, veterans, certain reservists, and eligible spouses.
What is a Certificate of Eligibility (COE)? A document verifying a veteran’s entitlement to a VA loan.
What is an entitlement in VA lending? The amount the VA guarantees for a loan.
What is the maximum LTV for a USDA loan? 100% – no down payment required.
What type of areas are USDA loans available in? Rural and suburban areas as defined by USDA eligibility maps.
What is the USDA Guarantee Fee? A one-time and annual fee charged on USDA loans to fund the program.
What are the income limits for USDA loans? Household income must not exceed 115% of the area median income.
What is a non-QM loan? A non-qualified mortgage that doesn’t meet QM standards but still follows ATR rules.
What is the Ability-to-Repay (ATR) Rule? A rule requiring lenders to verify borrowers’ ability to repay before extending credit.
What are the 8 ATR factors? Income, employment status, monthly payment, payment on other loans, obligations, DTI, credit history, and assets.
What defines a Qualified Mortgage (QM)? A loan with stable terms, limits on points/fees, and verified income and ability to repay.
What is the points and fees cap for a QM? Cannot exceed 3% of the loan amount.
What is a temporary QM? A QM eligible for GSE purchase or government insurance.
What is an Alt-A loan? A loan for borrowers with good credit but limited documentation or other non-standard factors.
What is a stated income loan? A loan where income is stated by the borrower without full documentation (no longer QM-compliant).
What is a no-doc loan? A loan issued without verifying income, assets, or employment (high-risk, now mostly banned).
What is the difference between a fully amortizing and interest-only loan? Fully amortizing pays down principal and interest; interest-only pays interest for a set period before principal payments begin.
What is a reverse mortgage? A loan for homeowners 62+ that allows them to convert equity into cash without monthly payments.
What is the most common type of reverse mortgage? FHA-insured Home Equity Conversion Mortgage (HECM).
What is required before getting a reverse mortgage? HUD-approved counseling.
How is a reverse mortgage repaid? When the borrower dies, moves out permanently, or sells the home.
What is a construction loan? A short-term loan to finance the building of a home, usually interest-only during construction.
What is a construction-to-permanent loan? A loan that converts to a traditional mortgage after construction is complete.
What is a bridge loan? A short-term loan to bridge the gap between the sale of one home and the purchase of another.
What is a piggyback loan? A second loan used alongside a first to avoid PMI (e.g., 80/10/10 structure).
What is the purpose of title insurance? To protect against losses from defects in title.
What is lender's title insurance? Protects the lender's interest in the property.
What is owner’s title insurance? Protects the borrower’s ownership rights.
What is a title search? A review of public records to verify property ownership and identify liens.
What is a title commitment? A document stating the conditions under which the title company will issue insurance.
What are encumbrances? Claims or liabilities on a property, such as liens or easements.
What is a deed of trust? A security instrument placing title in a third-party trustee's name until the loan is repaid.
What is a mortgage (in legal terms)? A pledge of property to secure repayment, recorded as a lien.
What is a note rate? The stated interest rate on the mortgage loan.
What is the APR (Annual Percentage Rate)? The total cost of credit, including interest and fees, expressed as an annual rate.
What is per diem interest? Daily interest charged from funding date to first payment.
What is a closing cost? Fees paid at settlement including origination, appraisal, title, and escrow fees.
What is a rate lock? A lender’s guarantee to honor a specific interest rate for a set period.
What is a float? Allowing the interest rate to change until closer to closing.
What is escrow in mortgage terms? A third-party account used to hold funds for taxes and insurance.
What is the role of an appraiser? To provide an unbiased estimate of a property's value.
Created by: jenniferhudson
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