General Mortgage Knowledge NMLS Practice Questions
General mortgage knowledge is about 20 percent of the SAFE exam and covers the fundamentals every loan officer should carry in their head: loan products, how interest works, basic mortgage math and the vocabulary of the industry. The questions reward people who actually understand how a mortgage is structured rather than those who memorized definitions.
Expect to compare fixed rate and adjustable rate mortgages, work through loan to value (LTV) and debt to income (DTI) calculations, handle discount points and how they change a rate, and recognize products like balloon loans, interest only loans, HELOCs and home equity loans. Simple arithmetic shows up often, so be comfortable converting percentages and reading a scenario for the numbers that matter.
What this section covers
Fixed vs adjustable rate mortgages (ARMs)
Loan to value (LTV) and combined LTV
Debt to income (DTI) ratios
Discount points and how they affect rate
HELOCs, home equity and balloon loans
Basic mortgage math
20 General Mortgage Knowledge practice questions
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Q1easy
What is the primary purpose of a lender's title insurance policy?
Explanation: A lender's title insurance policy (also called a loan policy) protects the lender's interest in the property if a title defect — such as an undisclosed lien, forgery, or ownership dispute — is discovered after closing. It does not protect against property damage (that's homeowner's insurance), does not guarantee appraisal value, and does not insure the borrower's equity or down payment. Borrowers who want personal protection must purchase a separate owner's title insurance policy.
Q2easy
A borrower purchases a home and moves in as their main residence. How is this property classified for mortgage purposes?
Explanation: A property where the borrower lives as their main, principal dwelling is classified as a primary residence (also called an owner-occupied property). A second home is a property used by the borrower part-time that is not rented out. An investment property is purchased primarily to generate rental income or appreciation. Non-owner-occupied is a broad term that encompasses investment properties but does not describe a borrower's primary home.
Q3easy
Which of the following is NOT a characteristic of a conventional loan?
Explanation: Conventional loans are NOT backed by a government agency — that's what makes them "conventional." Government-backed loans include FHA (insured by FHA), VA (guaranteed by VA), and USDA (guaranteed by USDA).
Q4easy
What does a lender's title insurance policy protect?
Explanation: A lender's (mortgagee) title insurance policy protects the LENDER against losses from title defects, up to the outstanding loan balance. An owner's policy separately protects the buyer/owner.
Q5easy
RESPA requires:
Explanation: RESPA requires lenders to provide borrowers with a disclosure of charges within 3 business days of application. RESPA also limits escrow accounts (2-month cushion), prohibits kickbacks for referrals, and requires clear disclosure of all settlement charges.
Q6easy
Compared to a fully amortizing loan with the same balance, rate, and term, what is the primary advantage of an interest-only mortgage payment structure during the interest-only period?
Explanation: During the interest-only period, the borrower's payment covers only the interest accrued, resulting in a lower monthly payment compared to a fully amortizing loan of the same balance, rate, and term. However, no equity is built through payments during this period — "Interest-only loans are guaranteed to carry a lower..." is incorrect. Interest-only loans are not guaranteed to carry lower rates than comparable fixed-rate products — "The borrower builds equity faster than with a conven..." is incorrect. Borrowers are never exempt from property taxes regardless of loan structure — "The monthly payment is smaller because no principal..." is incorrect.
Q7medium
A loan is originated by a small creditor and held in portfolio for 36 months without being 30 or more days past due. After the 36-month seasoning period, the loan may qualify as which type of QM?
Explanation: The Seasoned QM category (Regulation Z 12 CFR 1026.43(e)(7)) allows a non-QM or rebuttable presumption QM loan to achieve safe harbor QM status after a 36-month seasoning period, provided the loan is held in portfolio throughout the period, has no more than two 30-day delinquencies and no delinquencies of 60 or more days, and meets certain underwriting standards. This pathway was created to encourage lending to creditworthy borrowers who may not fit neat QM boxes at origination. "General QM, because it now meets all standard underw..." (General QM) requires compliance at origination — past performance cannot retroactively make a loan General QM. "GSE QM, because it has demonstrated payment history..." (GSE QM) requires eligibility under agency guidelines. "Small Creditor QM, but only if it continues to be he..." misidentifies the category — after seasoning, the appropriate designation is Seasoned QM, and it does not require permanent portfolio retention after the 36-month period.
Q8medium
A borrower has a $180,000 fixed-rate mortgage. She wants to pay it off faster than the scheduled 30-year term. Which strategy is consistent with how fixed-rate mortgage amortization works?
Explanation: On a fixed-rate amortizing mortgage, any payment above the required amount is applied to principal, reducing the outstanding balance. Because interest accrues on the remaining principal, a lower balance means less interest accumulates over time, shortening the payoff period. Lenders cannot simply reduce rates upon request ("Requesting a rate reduction from the servicer each y..."). Skipping payments adds fees and increases the balance ("Skipping payments occasionally to free up cash for l..."). Refinancing into an ARM introduces rate risk and does not directly relate to the fixed-rate payoff strategy ("Making additional principal payments each month so t...").
Q9medium
How does Ginnie Mae's role in the secondary market differ from Fannie Mae and Freddie Mac?
Explanation: This is a critical distinction. Fannie Mae and Freddie Mac are GSEs that actually PURCHASE conforming conventional loans from lenders, then securitize them into agency MBS. Ginnie Mae is a government agency that does NOT buy any loans. Instead, Ginnie Mae GUARANTEES the timely payment of principal and interest on MBS that are backed by government-insured loans (FHA, VA, USDA). The original lender or an approved issuer creates the MBS; Ginnie Mae's guarantee makes those securities attractive to investors. This guarantee function — rather than purchasing — is what makes Ginnie Mae unique.
Q10medium
A self-employed borrower applies for a mortgage but cannot provide traditional W-2 income documentation. The lender uses 24 months of bank statements to verify income and approves a 40-year loan term. Which statement best describes this loan's QM status?
Explanation: Qualified Mortgages have a maximum loan term of 30 years under 12 CFR § 1026.43(e)(2)(v). A 40-year term automatically disqualifies a loan from QM status regardless of the income documentation method used. Bank statement programs are commonly used for self-employed borrowers in the non-QM space precisely because they do not conform to standard QM underwriting requirements. GSE guidelines do not generally permit 40-year terms. The lender may still originate this loan as a non-QM, provided they make a good-faith ATR determination.
Q11medium
A borrower is considering a Limited 203(k) loan (formerly Streamline 203(k)). The property needs a new HVAC system costing $25,000 and interior painting costing $5,000. What is the maximum allowable repair limit for the Limited 203(k) program?
Explanation: The FHA Limited 203(k) program caps total rehabilitation costs at $35,000. In this scenario, $25,000 + $5,000 = $30,000 total, which falls within the $35,000 limit. Structural repairs are generally not permitted under the Limited program. $15,000 is a common misconception from older program guidelines. $50,000 and $75,000 exceed the actual cap and represent confusions with other renovation programs or the Standard 203(k).
Q12medium
A borrower obtains a USDA Section 502 Guaranteed loan for $180,000. What are the two guarantee fees typically charged on this program, and how may they be structured?
Explanation: The USDA Section 502 Guaranteed Loan program charges two fees: (1) an upfront guarantee fee of 1.0% of the loan amount, which may be financed into the loan amount, and (2) an annual fee of 0.35% of the outstanding loan balance, collected as a monthly escrow payment. The 1.75% upfront and 0.85% annual fees are associated with FHA MIP, not USDA. The 2% upfront / no annual structure and 0.50% upfront / 1% annual structure do not reflect current USDA program guidelines.
Q13medium
A borrower owns a primary residence and wants to purchase a condo 200 miles away that she plans to visit several times per year and will not rent out. Under Fannie Mae guidelines, this property would most likely be classified as:
Explanation: Fannie Mae defines a second home as a one-unit property that the borrower occupies for some portion of the year, is not a rental property, and is suitable for year-round occupancy. The fact that the borrower plans personal use without renting and the property is a reasonable distance from the primary residence supports second home classification. It would be an investment property if rented to others. It cannot be a primary residence because she already has one and plans only periodic visits. 'Vacation rental' is not a distinct Fannie Mae category—rental intent determines investment vs. second home classification.
Q14medium
A borrower purchases a home for $320,000 and makes a down payment of $32,000. The lender charges a PMI premium of 0.85% per year on the outstanding loan balance. What is the borrower's approximate monthly PMI payment?
Explanation: Step 1: Calculate the loan amount. $320,000 - $32,000 = $288,000. Step 2: Calculate the annual PMI. $288,000 x 0.0085 = $2,448. Step 3: Divide by 12 months. $2,448 / 12 = $204.00. The LTV is $288,000 / $320,000 = 90%, which exceeds 80%, so PMI is required. $226.67 results from incorrectly applying the 0.85% rate to the full $320,000 purchase price instead of the loan balance ($320,000 x 0.0085 / 12 = $226.67). $240.00 results from using an incorrect 1% rate on the loan balance ($288,000 x 0.01 / 12 = $240.00). $172.00 results from incorrectly applying the 0.85% rate to only the $32,000 down payment portion and scaling up incorrectly.
Q15medium
A borrower uses a 2-1 buydown on a 30-year fixed mortgage with a note rate of 6%. How does the interest rate structure work during the buydown period?
Explanation: A 2-1 buydown temporarily reduces the interest rate by 2 percentage points in the first year and 1 percentage point in the second year, then the rate returns to the full note rate for the remaining term. On a 6% note: Year 1 = 4%, Year 2 = 5%, Year 3 onward = 6%. "The rate is fixed at 4% for the first two years, the..." incorrectly describes the year-two rate. "The rate is reduced by 2% in year one (to 4%) and by..." incorrectly adds an ARM adjustment feature. "The rate is reduced by 1% each year for two years, t..." describes discount points for a permanent buydown, not a 2-1 buydown.
Q16hard
An MLO's client owns a primary residence and wants to purchase a four-unit property. He intends to live in one unit and rent the other three. Under Fannie Mae guidelines, how is this property classified for occupancy purposes, and what is the minimum down payment required?
Explanation: Under Fannie Mae guidelines, a borrower who occupies one unit of a 2-4 unit property as their primary residence qualifies for owner-occupied financing, even though other units are rented. This is distinct from a non-owner-occupied investment property. For a 2-4 unit primary residence, Fannie Mae requires a minimum of 15% down payment (85% LTV). A four-unit property with owner-occupancy is NOT classified as an investment property simply because rental income exists — the owner's intent to occupy distinguishes it. It cannot be a second home because multi-unit properties (2-4 units) cannot be classified as second homes under Fannie Mae. The 3.5% down payment is an FHA guideline and does not apply to conventional loans. The 25% figure applies to investment (non-owner-occupied) multi-unit properties.
Q17hard
A borrower purchased a home for $500,000 with a first mortgage of $375,000 and a simultaneous second mortgage of $50,000. After making regular payments for 3 years, the borrower's first mortgage balance has amortized to approximately $355,000 (71% of the original value). The borrower requests PMI cancellation on the first mortgage, citing that the balance is below 80% of the original purchase price. Under the Homeowners Protection Act, which outcome is most accurate?
Explanation: Under the Homeowners Protection Act (HPA), a borrower may request PMI cancellation when the loan balance reaches 80% of the original value, but lenders may impose requirements including: (1) a good payment history, (2) satisfactory evidence that the property value has not declined, and (3) certification that no subordinate liens exist that would impair the lender's equity position. The presence of a $50,000 second mortgage may give the lender grounds to deny the cancellation request because the combined LTV (CLTV) of approximately 81% ($355,000 first + $50,000 second = $405,000 / $500,000) still exceeds 80%. "s equity, and the outstanding second mortgage may be..." is incorrect because the HPA right to request cancellation at 80% does not guarantee automatic cancellation — lenders may impose the conditions listed above. "PMI automatically terminated at 78% LTV based on the..." is partially correct (automatic termination occurs at 78% per the original amortization schedule) but is not yet applicable since the balance has not reached 78% of the original value on the scheduled amortization. "PMI cancellation is granted only if the borrower can..." is incorrect — appreciation-based cancellation is a separate mechanism and is not required for a standard 80% original-value cancellation request.
Q18hard
A borrower has a $250,000 interest-only loan at 6% for the first 10 years, after which it converts to a fully amortizing loan for the remaining 20 years. After the interest-only period ends, which of the following BEST describes the impact on the borrower's monthly payment?
Explanation: During the 10-year interest-only period, zero principal is repaid. The full $250,000 balance remains outstanding. After year 10, this entire balance must be fully amortized over just the remaining 20 years (240 months) rather than the original 30. A 20-year amortization on $250,000 at 6% produces a monthly payment of approximately $1,791, compared to the interest-only payment of $1,250/month ($250,000 × 6% ÷ 12). This is a substantial jump. "The payment increases significantly because the same..." is incorrect; shorter remaining term increases the payment. "The payment stays the same because the note rate doe..." is incorrect; the same balance over fewer years requires a higher principal portion. "The payment increases modestly by the amount of the..." understates the increase — it is not merely a modest addition of deferred principal divided evenly.
Q19hard
A borrower has gross monthly income of $8,000. She has a proposed PITI payment of $2,200, a car loan payment of $450, minimum credit card payments of $300, and a student loan in income-based repayment (IBR) with a $0 current payment. Under ATR guidelines, if the $0 IBR payment cannot be documented as forgiven or canceled, how should the MLO treat the student loan?
Explanation: Under ATR/QM guidelines (aligned with GSE and agency standards incorporated by reference), when a borrower has student loans in income-based repayment with a $0 payment, the payment cannot simply be ignored. The standard treatment under Fannie Mae guidelines (which align with QM underwriting practice) is to use 0.5% of the outstanding balance as a monthly payment when the payment is $0 on an IBR plan and the $0 payment cannot be confirmed as permanent. Using 1% of the balance was the previous Fannie Mae standard, revised in 2021 to 0.5%. Under FHA guidelines, 0.5% applies as well (updated from 1%). Simply excluding a $0 IBR payment violates ATR's requirement to consider all current debt obligations. Using the fully amortizing payment would be overly conservative and is not the required standard for IBR loans.
Q20hard
A creditor originates a first-lien mortgage with a 30-year term, fixed rate, no balloon payment, no negative amortization, no interest-only period, and points/fees within the cap. The borrower's APR exceeds APOR by 7.2 percentage points. The loan is underwritten to full ATR standards. How does this loan fit within the QM framework?
Explanation: Under the revised General QM rule, a first-lien loan is ineligible for QM status if its APR exceeds APOR by more than 6.5 percentage points (for loan amounts ≥ $110,260, adjusted annually). A spread of 7.2 percentage points exceeds this threshold, making the loan ineligible for the General QM designation regardless of its structural features. The lender may still originate the loan as a non-QM, provided a good-faith ATR determination is made. The 8.5% threshold applies to first-lien loans on manufactured housing or subordinate liens, not standard first-lien mortgages. Structural compliance alone does not override the pricing threshold for QM eligibility.
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Practice the core formulas until they are automatic: LTV is loan amount divided by value, DTI is monthly debt divided by gross monthly income, and one discount point is one percent of the loan amount. Most math questions are testing whether you can set up the ratio quickly, not whether you can do hard calculations.