Free NMLS General Mortgage Knowledge Questions and Answers — Questions and Answers
Question 1: A prospective borrower is applying for a loan to purchase a home. The property's appraised value is $350,000 and the purchase price is $360,000. If the borrower makes a down payment of $72,000, what is the loan-to-value (LTV) ratio?
- 82%
- 80% (Correct answer)
- 78%
- 82.3%
Correct answer: 80%
The loan-to-value (LTV) ratio is calculated by dividing the loan amount by the lesser of the appraised value or the purchase price. In this case, the lesser value is the appraised value of $350,000. The loan amount is the purchase price ($360,000) minus the down payment ($72,000), which equals $288,000. However, lenders will base the loan on the $350,000 value. The down payment relative to the appraised value is effectively $350,000 - $280,000 (loan amount) = $70,000 from the lender's perspective. The correct calculation is Loan Amount ($350,000 - $70,000 = $280,000) / Appraised Value ($350,000), which equals 80%.
Question 2: Under the Gramm-Leach-Bliley Act (GLBA), which of the following is a primary requirement of the Safeguards Rule?
- Providing customers with an annual notice of the institution's privacy policies.
- Allowing customers to opt-out of sharing their nonpublic personal information with nonaffiliated third parties.
- Developing and implementing a comprehensive written information security program. (Correct answer)
- Prohibiting the practice of obtaining customer information through false pretenses (pretexting).
Correct answer: Developing and implementing a comprehensive written information security program.
The Safeguards Rule of the Gramm-Leach-Bliley Act specifically requires financial institutions to develop, implement, and maintain a comprehensive written information security program. This program must contain administrative, technical, and physical safeguards to protect customer information. The other options are requirements under other provisions of GLBA (Privacy Rule and pretexting provisions).
Question 3: According to the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, an individual is required to be licensed as a mortgage loan originator if they perform which of the following activities for compensation or gain?
- Performing purely administrative or clerical tasks on behalf of a licensee.
- Only negotiating the terms of a residential mortgage loan on behalf of an immediate family member.
- Taking a residential mortgage loan application and offering or negotiating terms. (Correct answer)
- Extending credit solely for timeshare plans.
Correct answer: Taking a residential mortgage loan application and offering or negotiating terms.
The SAFE Act defines a mortgage loan originator as an individual who, for compensation or gain, takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan. Individuals performing purely administrative or clerical tasks are exempt, as are those negotiating terms for an immediate family member without compensation. Certain transactions, like those for timeshare plans, may also be exempt.
Question 4: A veteran is using their VA loan benefit for the second time to purchase a home with no down payment. Which of the following statements is TRUE regarding the VA funding fee?
- The veteran is exempt from paying the funding fee because it is their second time using the benefit.
- The funding fee will be lower than the fee for a first-time use.
- The funding fee may be financed into the loan amount. (Correct answer)
- The funding fee is a monthly payment similar to mortgage insurance.
Correct answer: The funding fee may be financed into the loan amount.
The VA funding fee is a one-time charge, and for most veterans, it can be rolled into the total loan amount. The fee for a subsequent use with no down payment is typically higher than for a first-time use. The funding fee is not a monthly payment and replaces the need for monthly mortgage insurance. Certain veterans, such as those receiving VA disability compensation, may be exempt, but not simply for a second use.
Question 5: Under the ECOA Valuations Rule, a creditor must provide a copy of all appraisals and other written valuations to the applicant:
- Only if the loan is approved and closes.
- Within three business days of receiving the appraisal, but only if the applicant requests it in writing.
- Promptly upon completion, or at least three business days prior to consummation, whichever is earlier. (Correct answer)
- At the time of loan consummation, along with the other closing documents.
Correct answer: Promptly upon completion, or at least three business days prior to consummation, whichever is earlier.
The ECOA Valuations Rule requires creditors to provide the applicant with a copy of all appraisals and other written valuations promptly upon completion, or no later than three business days prior to consummation for closed-end credit, whichever is earlier. This requirement applies even if the application is denied, withdrawn, or incomplete.
Question 6: Which of the following best describes the 'back-end' debt-to-income (DTI) ratio used in conventional loan underwriting?
- The ratio of the proposed monthly housing expense (PITI) to the borrower's gross monthly income.
- The ratio of all recurring monthly debt, including the proposed housing expense, to the borrower's net monthly income.
- The ratio of all non-housing related monthly debt to the borrower's gross monthly income.
- The ratio of the borrower's total recurring monthly debt, including the proposed housing expense (PITI), to their gross monthly income. (Correct answer)
Correct answer: The ratio of the borrower's total recurring monthly debt, including the proposed housing expense (PITI), to their gross monthly income.
The back-end DTI, also known as the total DTI, calculates the percentage of a borrower's gross monthly income that goes toward all of their recurring monthly debt payments, including the proposed Principal, Interest, Taxes, and Insurance (PITI). Conventional guidelines generally prefer this ratio to be 43% or lower, though it can sometimes be higher with compensating factors.
Free NMLS General Mortgage Knowledge Questions and Answers
A prospective borrower is applying for a loan to purchase a home.
The property's appraised value is $350,000 and the purchase price is $360,000.
If the borrower makes a down payment of $72,000, what is the loan-to-value (LTV) ratio?