SAFE General Mortgage Knowledge 2 — Questions and Answers
Question 1: Which type of mortgage index is directly tied to U.S. Treasury securities?
- Prime Rate
- LIBOR
- Constant Maturity Treasury (CMT) (Correct answer)
- SOFR
Correct answer: Constant Maturity Treasury (CMT)
The Constant Maturity Treasury (CMT) index is based on the yield of U.S. Treasury securities and is commonly used to set ARM rates.
Question 2: A borrower has a 5/1 ARM. What does the '1' represent?
- The loan adjusts after 1 month of fixed rate
- The rate can adjust every 1 year after the initial period (Correct answer)
- The margin is 1%
- The cap on each adjustment is 1%
Correct answer: The rate can adjust every 1 year after the initial period
In a 5/1 ARM, the '5' is the initial fixed-rate period in years and the '1' means the rate adjusts every one year thereafter.
Question 3: What is the primary purpose of an escrow account in a mortgage?
- To hold the down payment until closing
- To collect monthly funds for taxes and insurance (Correct answer)
- To secure the lender's collateral interest
- To hold earnest money during underwriting
Correct answer: To collect monthly funds for taxes and insurance
An escrow account collects portions of monthly payments to cover property taxes and homeowner's insurance when they come due.
Question 4: Under RESPA, which of the following is considered a 'controlled business arrangement'?
- A lender offering discounted rates to repeat customers
- A referral between affiliated companies where compensation is paid (Correct answer)
- A rate lock agreement between borrower and lender
- A joint marketing agreement between two unaffiliated lenders
Correct answer: A referral between affiliated companies where compensation is paid
A controlled business arrangement (AfBA) occurs when a settlement service provider refers consumers to an affiliated company and receives compensation for that referral.
Question 5: What does 'loan-to-value ratio' (LTV) measure?
- Monthly payment as a percentage of gross income
- Loan amount divided by the appraised property value (Correct answer)
- Total debt divided by total assets
- Interest rate relative to market rates
Correct answer: Loan amount divided by the appraised property value
LTV is calculated by dividing the loan amount by the appraised value (or purchase price, whichever is lower), expressed as a percentage.
Question 6: Which mortgage product allows the borrower to make interest-only payments for a specified period?
- Graduated payment mortgage
- Interest-only mortgage (Correct answer)
- Balloon mortgage
- Reverse mortgage
Correct answer: Interest-only mortgage
An interest-only mortgage allows borrowers to pay only the interest portion for an initial period, after which payments include both principal and interest.
Question 7: What is the maximum loan amount for a conforming conventional mortgage in most U.S. counties for a single-family home in 2024?
- $548,250
- $647,200
- $726,200
- $766,550 (Correct answer)
Correct answer: $766,550
The FHFA set the 2024 conforming loan limit for most U.S. counties at $766,550 for a single-family home.
SAFE General Mortgage Knowledge 2
Which type of mortgage index is directly tied to U.S.
Treasury securities?