Mortgage Terms 5 — Questions and Answers
Question 1: What is a 'rate lock' in mortgage lending?
- A penalty charged when the borrower switches lenders
- A lender's guarantee to hold a specific interest rate for a set period while the loan is being processed (Correct answer)
- A requirement to maintain the same lender for the life of the loan
- A clause preventing the borrower from refinancing for a set period
Correct answer: A lender's guarantee to hold a specific interest rate for a set period while the loan is being processed
A rate lock is a commitment by the lender to hold an agreed interest rate for a specified period (typically 30–60 days) while the loan is processed, protecting the borrower from rate increases.
Question 2: What is 'mortgage seasoning'?
- The process of adjusting a mortgage rate based on market conditions
- The length of time a borrower has held a mortgage, often required before refinancing or cashing out equity (Correct answer)
- Adding inflation adjustments to a mortgage payment over time
- The period during which a mortgage rate is fixed before adjusting
Correct answer: The length of time a borrower has held a mortgage, often required before refinancing or cashing out equity
Mortgage seasoning refers to the minimum time a borrower must have held a mortgage before being eligible for certain transactions like cash-out refinancing, typically 6–12 months.
Question 3: What is a 'recourse loan' in mortgage lending?
- A loan that can be refinanced without a credit check
- A loan where the lender can pursue the borrower's personal assets beyond the collateral if they default (Correct answer)
- A government-backed mortgage with special borrower protections
- A loan structured so the lender takes a share of any property appreciation
Correct answer: A loan where the lender can pursue the borrower's personal assets beyond the collateral if they default
With a recourse loan, if foreclosure proceeds don't cover the remaining balance, the lender can pursue a deficiency judgment against the borrower's other assets.
Question 4: What is a 'no-doc' or 'stated income' mortgage?
- A mortgage that requires no down payment
- A loan where borrowers state their income without providing traditional documentation to verify it (Correct answer)
- A mortgage with no origination fees or closing costs
- A loan that does not appear on the borrower's credit report
Correct answer: A loan where borrowers state their income without providing traditional documentation to verify it
Stated income (no-doc) mortgages allow borrowers to declare their income without standard verification documents; they were common before the 2008 financial crisis but are now heavily regulated.
Question 5: What is the 'primary mortgage market'?
- The largest mortgage lender in a given geographic region
- The market where mortgage loans are originated directly between lenders and borrowers (Correct answer)
- The government-sponsored entities that set mortgage guidelines
- The market where existing mortgages are bought and sold between investors
Correct answer: The market where mortgage loans are originated directly between lenders and borrowers
The primary mortgage market is where borrowers and mortgage lenders come together to originate loans—this is where you apply and receive a mortgage.
Question 6: What is 'mortgage recasting' (also called re-amortization)?
- Switching from an adjustable-rate to a fixed-rate mortgage mid-term
- Making a large lump-sum principal payment and having the lender recalculate a lower monthly payment over the remaining term (Correct answer)
- Extending the loan term to lower monthly payments without paying extra principal
- Combining two mortgages into a single loan
Correct answer: Making a large lump-sum principal payment and having the lender recalculate a lower monthly payment over the remaining term
Mortgage recasting allows a borrower to make a large principal payment, then the lender recalculates (recasts) the monthly payment based on the reduced balance over the remaining loan term.
Question 7: What is a 'satisfaction of mortgage' document?
- A borrower's written approval of the loan terms at closing
- A legal document issued by the lender confirming the mortgage has been fully paid off and releasing the lien (Correct answer)
- A lender's appraisal confirming the property meets loan requirements
- A document showing the borrower's payment history throughout the loan
Correct answer: A legal document issued by the lender confirming the mortgage has been fully paid off and releasing the lien
A satisfaction of mortgage (also called a discharge or release) is a recorded document the lender provides once the loan is paid in full, releasing the lien from the property's title.
Mortgage Terms 5
What is a 'rate lock' in mortgage lending?