SAFE General Mortgage Knowledge 3 — Questions and Answers
Question 1: A borrower's gross monthly income is $6,000 and total monthly debt payments are $2,100. What is the DTI ratio?
- 28%
- 35% (Correct answer)
- 41%
- 43%
Correct answer: 35%
DTI = total monthly debts / gross monthly income = $2,100 / $6,000 = 35%.
Question 2: Which government agency insures FHA loans?
- Fannie Mae
- The Federal Reserve
- The Department of Housing and Urban Development (HUD) (Correct answer)
- The CFPB
Correct answer: The Department of Housing and Urban Development (HUD)
FHA loans are insured by HUD's Federal Housing Administration, which protects lenders against borrower default.
Question 3: What is the minimum down payment requirement for an FHA loan for a borrower with a credit score of 580 or higher?
- 0%
- 3%
- 3.5% (Correct answer)
- 5%
Correct answer: 3.5%
Borrowers with credit scores of 580 or above qualify for the minimum FHA down payment of 3.5% of the purchase price.
Question 4: What is 'private mortgage insurance' (PMI) designed to protect?
- The borrower against rate increases
- The lender against borrower default on conventional loans (Correct answer)
- The property against damage or loss
- The borrower against job loss
Correct answer: The lender against borrower default on conventional loans
PMI protects the lender (not the borrower) in the event of default when the borrower has less than 20% equity.
Question 5: Which of the following loan types does NOT require a down payment from qualifying borrowers?
- FHA loan
- Conventional loan
- VA loan (Correct answer)
- USDA loan
Correct answer: VA loan
VA loans, available to eligible veterans and service members, allow 100% financing with no down payment required.
Question 6: The 'margin' on an adjustable-rate mortgage is best described as:
- The maximum rate the loan can ever reach
- A fixed percentage added to the index to determine the interest rate (Correct answer)
- The difference between the start rate and the fully indexed rate
- The lender's profit on the loan origination
Correct answer: A fixed percentage added to the index to determine the interest rate
The margin is the lender's fixed markup added to the index; together they form the fully indexed rate on an ARM.
Question 7: Under the Homeowners Protection Act, when must a lender automatically cancel PMI?
- When LTV reaches 80%
- When the borrower requests cancellation
- When the loan reaches the midpoint of its amortization schedule
- When the loan balance reaches 78% of the original value (Correct answer)
Correct answer: When the loan balance reaches 78% of the original value
Lenders must automatically cancel PMI when the loan balance reaches 78% of the original purchase price based on the scheduled amortization.
SAFE General Mortgage Knowledge 3
A borrower's gross monthly income is $6,000 and total monthly debt payments are $2,100.
What is the DTI ratio?