Mortgage General Mortgage Knowledge 3 — Questions and Answers
Question 1: 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 2: 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 3: 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 4: 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 5: 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 6: 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 7: 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.
Mortgage General Mortgage Knowledge 3
What is a home equity line of credit (HELOC)?