NMLS Updated MLO Exam Questions and Answers by aliya

Interest-only mortgages are considered higher risk compared to traditional mortgages because the borrower’s scheduled payments only cover the interest on the loan, and none of the principal balance is reduced during the interest-only period. As a result, the loan balance remains unchanged, which increases the risk for both the borrower and lender if the value of the home decreases or if the borrower cannot make larger payments when the principal becomes due.

Other risks, such as exceeding the APOR (Average Prime Offer Rate) by a certain margin (C, D), apply to high-cost mortgages, not specifically interest-only loans.

References:

CFPB Qualified Mortgage and Ability-to-Repay Rule

Fannie Mae Guidelines on interest-only mortgages

Under RESPA (Real Estate Settlement Procedures Act), it is illegal to charge a fee for a settlement service if no services or only nominal services are performed. This is true regardless of who pays the fee, whether it’s the borrower, seller, real estate agent, or any other party. RESPA prohibits unearned fees, kickbacks, or payments for referrals in federally related mortgage transactions.

Even if someone other than the borrower pays, the charge is still illegal if it is not justified by actual services performed.

References:

RESPA Section 8 - Prohibition on kickbacks and unearned fees

CFPB RESPA Guidelines

Lenders are permitted to accept the employment information provided by the borrower on the initial loan application without asking for a letter of explanation when the borrower has a stable employment history, such as being employed by the same company for three years or more. This provides sufficient documentation of employment stability, reducing the need for further explanation.

Other options (A, B, C) involve situations where the employment status or job stability may raise concerns, thus requiring additional documentation or explanation.

References:

Fannie Mae Selling Guide on employment verification

Freddie Mac Employment History Guidelines

For subprime mortgages, the credit score of the applicants is a primary factor in determining the interest rate. Subprime loans are designed for borrowers with lower credit scores, typically below 620, and are offered at higher interest rates due to the increased risk of default.

Factors like the loan term (A), property location (B), and sales price (C) may influence other aspects of the loan, but the credit score is the key factor that determines whether a borrower qualifies for a subprime mortgage and the corresponding interest rate.

References:

Fannie Mae and Freddie Mac Subprime Lending Guidelines

CFPB Subprime Mortgage Standards