Mortgage General Mortgage Knowledge — Questions and Answers

Question 1: What is the purpose of an escrow account in a mortgage?

To hold the deed until the loan is paid off
To collect and pay property taxes and insurance on the borrower's behalf (Correct answer)
To store the down payment during closing
To fund home repairs required by the lender

Correct answer: To collect and pay property taxes and insurance on the borrower's behalf

Escrow accounts collect monthly contributions from borrowers so the lender can pay property taxes and homeowner's insurance when they come due.

Question 2: What does PMI stand for in the context of a mortgage?

Primary Mortgage Index
Private Mortgage Insurance (Correct answer)
Property Management Insurance
Pre-approval Mortgage Indicator

Correct answer: Private Mortgage Insurance

PMI (Private Mortgage Insurance) protects the lender if the borrower defaults and is typically required when the down payment is less than 20%.

Question 3: Which loan type is insured by the Federal Housing Administration and typically requires a lower down payment?

Conventional loan
VA loan
FHA loan (Correct answer)
USDA loan

Correct answer: FHA loan

FHA loans are government-backed mortgages that allow down payments as low as 3.5% and are more accessible to borrowers with lower credit scores.

Question 4: What is a balloon mortgage?

A mortgage with increasing payments over time
A loan with low or interest-only payments followed by a large lump-sum payment at the end (Correct answer)
A mortgage that adjusts annually based on inflation
A short-term bridge loan for moving expenses

Correct answer: A loan with low or interest-only payments followed by a large lump-sum payment at the end

A balloon mortgage features relatively low initial payments but requires a large lump-sum payment (the 'balloon') when the loan term ends.

Question 5: What is the 'principal' of a mortgage loan?

The total interest paid over the loan's life
The monthly payment amount
The original amount borrowed, excluding interest (Correct answer)
The lender's fee for originating the loan

Correct answer: The original amount borrowed, excluding interest

Principal refers to the original loan amount borrowed, which decreases as payments are made over time.

Question 6: What does 'amortization' mean in mortgage terms?

Paying off a loan through regular scheduled payments over time (Correct answer)
The process of increasing a mortgage's interest rate annually
Refinancing a loan at a lower rate
Transferring a mortgage to another borrower

Correct answer: Paying off a loan through regular scheduled payments over time

Amortization is the gradual repayment of a mortgage through fixed periodic payments that cover both principal and interest.

Question 7: Which document gives the borrower a detailed breakdown of all closing costs at least three business days before closing?

Good Faith Estimate
HUD-1 Settlement Statement
Closing Disclosure (Correct answer)
Mortgage Commitment Letter

Correct answer: Closing Disclosure

The Closing Disclosure, required under TRID rules, provides a final itemized list of loan terms and closing costs at least three business days before the closing date.

Question 8: What is a home equity line of credit (HELOC)?

A fixed-rate second mortgage for a lump sum
A revolving credit line secured by the borrower's home equity (Correct answer)
A government program for first-time buyers
A loan used exclusively for home renovations

Correct answer: A revolving credit line secured by the borrower's home equity

A HELOC is a revolving line of credit secured by home equity, allowing borrowers to draw funds as needed up to a set limit during the draw period.

Question 9: What is the debt-to-income (DTI) ratio used for in mortgage underwriting?

To determine the home's market value
To calculate the loan origination fee
To assess the borrower's ability to manage monthly payments relative to gross income (Correct answer)
To set the property tax escrow amount

Correct answer: To assess the borrower's ability to manage monthly payments relative to gross income

DTI compares a borrower's total monthly debt obligations to gross monthly income, helping lenders evaluate repayment capacity.

Question 10: What is the difference between a rate lock and a float-down option?

A rate lock fixes the rate; a float-down allows the rate to decrease if market rates fall before closing (Correct answer)
A rate lock adjusts monthly; a float-down freezes the rate at application
Both lock the rate but for different durations
A rate lock applies to FHA loans only; float-down is for conventional loans

Correct answer: A rate lock fixes the rate; a float-down allows the rate to decrease if market rates fall before closing

A rate lock guarantees a fixed interest rate for a set period, while a float-down option lets the borrower benefit if rates drop before closing.

Question 11: What is a 'jumbo loan'?

A mortgage with an adjustable rate above 10%
A loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac (Correct answer)
A FHA loan for luxury properties
A loan requiring a 50% down payment

Correct answer: A loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac

Jumbo loans exceed the conforming loan limits established by the FHFA and cannot be purchased by Fannie Mae or Freddie Mac.

Question 12: What happens during the mortgage underwriting process?

The title company searches for liens on the property
The lender evaluates the borrower's creditworthiness and the property's value to approve the loan (Correct answer)
The borrower signs the final loan documents
The escrow company disburses funds to the seller

Correct answer: The lender evaluates the borrower's creditworthiness and the property's value to approve the loan

Underwriting is the lender's risk assessment process, verifying income, assets, credit history, and the property appraisal before issuing a loan decision.

Question 13: What is a 'points' in mortgage terminology?

Credit score thresholds set by lenders
Upfront fees paid to the lender equal to 1% of the loan amount, often to reduce the interest rate (Correct answer)
Monthly charges added to the principal
Penalty fees for late payments

Correct answer: Upfront fees paid to the lender equal to 1% of the loan amount, often to reduce the interest rate

Mortgage points (discount points) are prepaid interest; one point equals 1% of the loan amount and typically lowers the interest rate by a set amount.

Question 14: What is the purpose of a title search in a real estate transaction?

To confirm the property's square footage
To verify that the seller has clear ownership and there are no outstanding liens or encumbrances (Correct answer)
To appraise the home's current market value
To inspect the property for structural defects

Correct answer: To verify that the seller has clear ownership and there are no outstanding liens or encumbrances

A title search examines public records to confirm the seller legally owns the property and to identify any liens, judgments, or claims that could affect the sale.

Question 15: If a borrower has a 30-year fixed mortgage at 7% interest, what remains constant throughout the loan?

The monthly payment amount and interest rate (Correct answer)
Only the property tax portion
Only the principal balance
The escrow contribution only

Correct answer: The monthly payment amount and interest rate

With a 30-year fixed-rate mortgage, both the interest rate and the principal-and-interest portion of the monthly payment remain unchanged for the life of the loan.

Question 16: What is 'loan-to-value' (LTV) ratio?

The ratio of down payment to total loan cost
The percentage of the property's value that the loan represents (Correct answer)
The ratio of monthly payment to home value
The proportion of the loan amount to the borrower's annual income

Correct answer: The percentage of the property's value that the loan represents

LTV is calculated by dividing the loan amount by the property's appraised value; a lower LTV indicates more equity and less risk for the lender.

Question 17: Under the Real Estate Settlement Procedures Act (RESPA), what is prohibited?

Charging an origination fee
Paying kickbacks or referral fees between settlement service providers (Correct answer)
Requiring title insurance
Collecting escrow for property taxes

Correct answer: Paying kickbacks or referral fees between settlement service providers

RESPA prohibits kickbacks and unearned fees between settlement service providers (e.g., realtors, lenders, and title companies) that inflate consumer costs.

Question 18: What is a 'short sale' in real estate?

Selling a home within one year of purchase
Selling a home for less than the outstanding mortgage balance with lender approval (Correct answer)
A quick cash sale that closes in under 30 days
A sale where the buyer pays less than the listing price

Correct answer: Selling a home for less than the outstanding mortgage balance with lender approval

A short sale occurs when a homeowner sells the property for less than what is owed on the mortgage, requiring the lender's approval to accept the reduced payoff.

Question 19: What is an 'assumption' of a mortgage?

A lender's estimate of future property taxes
A buyer taking over the seller's existing mortgage terms and balance (Correct answer)
The lender's assumption that the borrower will default
Pre-qualifying for a loan before finding a property

Correct answer: A buyer taking over the seller's existing mortgage terms and balance

An assumable mortgage allows a buyer to take over the seller's existing loan, including its interest rate and remaining balance, subject to lender approval.

Question 20: Which federal law requires lenders to disclose the Annual Percentage Rate (APR) to borrowers?

The Fair Housing Act
The Community Reinvestment Act
The Truth in Lending Act (TILA) (Correct answer)
The Equal Credit Opportunity Act

Correct answer: The Truth in Lending Act (TILA)

TILA requires lenders to clearly disclose the APR and other loan terms to help borrowers understand the true cost of borrowing.

Question 21: What is a 'prepayment penalty' on a mortgage?

A fee charged for making payments early or paying off the loan before its term ends (Correct answer)
A penalty for missing a payment
An additional charge for refinancing with the same lender
A fee assessed when property values decline

Correct answer: A fee charged for making payments early or paying off the loan before its term ends

A prepayment penalty is a fee some lenders charge if the borrower pays off all or a substantial portion of the mortgage before the scheduled maturity date.

Mortgage General Mortgage Knowledge

What is the purpose of an escrow account in a mortgage?

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