Loans Mortgage Loan 5 — Questions and Answers
Question 1: What is 'mortgage forbearance'?
- Permanent forgiveness of a portion of the loan balance
- A temporary pause or reduction of mortgage payments approved by the lender (Correct answer)
- A government program that refinances distressed loans
- The lender's right to increase the interest rate
Correct answer: A temporary pause or reduction of mortgage payments approved by the lender
Forbearance is a temporary agreement between lender and borrower to pause or reduce mortgage payments during a period of financial hardship.
Question 2: What distinguishes a USDA loan from other mortgage programs?
- It is for agricultural business purchases only
- It offers 100% financing for eligible rural and suburban homebuyers (Correct answer)
- It requires a minimum 5% down payment
- It is only available in states with large farming populations
Correct answer: It offers 100% financing for eligible rural and suburban homebuyers
USDA loans, backed by the U.S. Department of Agriculture, offer zero-down-payment financing to eligible borrowers in qualified rural and suburban areas.
Question 3: Which factor most directly determines the interest rate a lender offers on a mortgage?
- The borrower's employment industry
- The borrower's credit score, LTV ratio, and current market rates (Correct answer)
- The number of years the borrower has lived at their current address
- The property's square footage
Correct answer: The borrower's credit score, LTV ratio, and current market rates
Lenders price mortgage rates primarily on creditworthiness (credit score), loan-to-value ratio, and prevailing market rates tied to Treasury benchmarks.
Question 4: What is 'negative amortization' on a mortgage?
- When the loan balance decreases faster than scheduled
- When monthly payments are insufficient to cover interest, causing the loan balance to grow (Correct answer)
- A penalty for paying off the loan early
- A reduction in principal applied automatically each year
Correct answer: When monthly payments are insufficient to cover interest, causing the loan balance to grow
Negative amortization occurs when a borrower's payment doesn't cover all accrued interest, so the unpaid interest is added to the principal balance.
Question 5: Under the Dodd-Frank Act, what is a 'Qualified Mortgage' (QM)?
- A mortgage with a fixed rate for its entire term
- A loan meeting specific ability-to-repay standards that affords legal protection to lenders (Correct answer)
- Any FHA or VA loan
- A mortgage backed by a government-sponsored enterprise
Correct answer: A loan meeting specific ability-to-repay standards that affords legal protection to lenders
A Qualified Mortgage is a loan that meets CFPB standards under Dodd-Frank's ability-to-repay rule, granting lenders a safe harbor from certain legal claims.
Question 6: A lender quotes a mortgage with 'no closing costs.' What is typically happening?
- The lender waives all fees as a promotional offer
- Closing costs are rolled into the loan balance or offset by a higher interest rate (Correct answer)
- The government subsidizes the closing costs for the borrower
- Closing costs are paid entirely by the seller
Correct answer: Closing costs are rolled into the loan balance or offset by a higher interest rate
No-closing-cost mortgages typically shift costs into a higher interest rate (lender credit) or add them to the loan principal—the borrower still pays, just differently.
Question 7: What is the primary purpose of a home appraisal in the mortgage process?
- To determine the property's tax assessment
- To verify the property's market value so the lender knows collateral adequacy (Correct answer)
- To inspect the home for structural defects
- To confirm the buyer's intent to purchase
Correct answer: To verify the property's market value so the lender knows collateral adequacy
An appraisal establishes the property's fair market value, ensuring the lender isn't lending more than the home is worth as collateral.
Loans Mortgage Loan 5
What is 'mortgage forbearance'?