MLO NMLS Mortgage Loan Origination (SAFE MLO) Exam Free Practice Exam Questions (2025 Updated)

The upfront premium charged on an FHA mortgage is an example of government mortgage insurance. This upfront mortgage insurance premium (UFMIP) is required for FHA loans and protects the lender (creditor) in the event of borrower default. FHA loans are insured by the Federal Housing Administration (FHA), a government agency.

Private mortgage insurance (D) is used for conventional loans, while optional credit life insurance (A) and force-placed hazard insurance (B) are unrelated to FHA loans.

The main purpose of the secondary market is to fund additional loans by allowing lenders to sell existing mortgages to investors. This process replenishes the lender’s capital, enabling them to originate more loans. The secondary market is where mortgage-backed securities (MBS) are bought and sold, providing liquidity to the mortgage market.

Other options such as funding second mortgages or second home loans are specific transactions that do not capture the overall purpose of the secondary market.

The Truth in Lending Act (TILA, Regulation Z) applies to consumer credit transactions, which include home equity loans and other loans extended primarily for personal, family, or household purposes. TILA does not cover credit extended for business, commercial, agricultural purposes, or loans to entities rather than natural persons.

“Regulation Z applies to each individual or business that offers or extends credit when four conditions are met:

(1) the credit is offered or extended to consumers,

(2) the offering or extension of credit is done regularly,

(3) the credit is subject to a finance charge or payable by a written agreement in more than four installments, and

(4) the credit is primarily for personal, family, or household purposes.”

— 12 CFR § 1026.1(c); Regulation Z, TILA

Home equity loans are covered; agricultural, business, or commercial credit and credit to entities (not individuals) are excluded.

A borrower who knowingly makes false statements on a federally related mortgage loan to obtain property can face severe penalties under federal law. The penalties can include:

A fine of up to $1 million.

Imprisonment for up to 30 years.

These penalties fall under federal statutes such as 18 U.S.C. § 1014, which covers fraud and false statements related to loan applications. This is a serious offense, and the law is designed to deter fraud in federally related mortgage transactions.

The Real Estate Settlement Procedures Act (RESPA) requires disclosures intended to prevent lenders and mortgage loan originators (MLOs) from increasing fees during the loan origination process. RESPA mandates the disclosure of estimated fees through the Loan Estimate (LE) and ensures that fees do not change substantially from the Loan Estimate to the final Closing Disclosure (CD) unless specific conditions justify the changes. This protects borrowers from "fee increases" during the settlement process.

While TILA (A) deals with disclosure of loan terms and APR, RESPA (D) focuses specifically on fees and closing costs during origination.

A fixed-rate mortgage (FRM) is a mortgage loan where the interest rate remains constant for the entire term of the loan, regardless of changes in market interest rates. These loans typically come in terms of 15, 20, or 30 years, with 30-year fixed-rate mortgages being the most common in the U.S.

“A fixed-rate mortgage is one in which the interest rate remains the same for the entire term of the loan. The most common term is 30 years. This provides borrowers with a stable and predictable monthly payment over the life of the loan.”

— SAFE Mortgage Loan Originator Test Prep Guide (NMLS-approved)

“Unlike adjustable-rate mortgages, fixed-rate mortgages do not change over time. The interest rate is locked in at the time of loan origination.”

— U.S. Department of Housing and Urban Development (HUD), Mortgage Basics Guide

The other options describe adjustable-rate mortgages (ARMs) or balloon mortgages, which are distinctly different products:

Option A: Describes a type of step-rate mortgage, not a fixed-rate loan.

Option B: Refers to a 10/1 ARM, not a fixed-rate mortgage.

Option C: Refers to a balloon mortgage, where a large payment is due at the end of the term.

Therefore, only Option D accurately describes a true fixed-rate mortgage product.

When there is no tax return history for a rental property, FHA guidelines require lenders to reduce the gross rental income by 25% to account for vacancies and maintenance.

“If there is no history of rental income on the borrower’s tax returns, the lender must reduce the market rent by 25% before considering it as effective income.”

— HUD 4000.1 FHA Single Family Housing Policy Handbook

With an interest-only mortgage, the borrower makes payments that cover only the interest for a set period (such as 5 or 10 years). After this period, the borrower begins paying both principal and interest, which causes payments to increase.

“An interest-only mortgage is a loan with scheduled payments that for a period of time require payment of interest only, with no reduction of the principal balance.”

— CFPB, Consumer Handbook on Adjustable-Rate Mortgages; SAFE MLO National Test Study Guide

The debt-to-income (DTI) ratio is a key metric used by lenders to assess a borrower’s ability to manage monthly payments and repay a mortgage. It is calculated by dividing the borrower’s total monthly debt obligations, including:

Monthly housing expenses (principal, interest, taxes, and insurance, also known as PITI).

Any other recurring debt obligations (car loans, student loans, credit card payments, etc.).

This total is divided by the borrower’s gross monthly income (before taxes and deductions). This calculation helps determine whether the borrower meets lending standards, with most lenders preferring a DTI ratio below 43% for qualified mortgages.

A rate lock agreement is the document that specifies the time period during which a mortgage lender agrees to hold the interest rate at a certain percentage for the borrower. It guarantees that the rate will not change, even if market interest rates fluctuate, as long as the loan closes within the agreed-upon timeframe.

The loan application (A) initiates the mortgage process, but it does not secure the interest rate.

A preapproval letter (B) gives a preliminary loan approval but does not lock the rate.

The Closing Disclosure (C) provides final loan terms but does not set the rate lock.

Consumers should dispute errors in writing directly with the credit bureau that is reporting the incorrect information. This written notification triggers an official investigation by the bureau, which must respond within 30 days.

“To dispute an error on your credit report, write a letter to the credit reporting company identifying each item in your report you dispute. Include copies of documents that support your position.”

— Fair Credit Reporting Act (FCRA); CFPB Disputing Errors on Credit Reports

A quit claim deed is a legal document used in real estate transactions to convey ownership or interest in a property from one party to another. It transfers the grantor’s interest in the property without any warranties or guarantees about the property’s title.

Promissory notes (B) represent a borrower’s promise to repay a loan.

Mortgage instruments (C) create a lien on the property but do not convey ownership.

Occupancy certificates (D) certify that a property complies with regulations for occupancy but are not involved in transferring ownership.

The Truth in Lending Act (TILA) Regulation Z requires that advertisements for mortgage credit products that state a rate or terms must be clear and not misleading. Phrases like “with approved credit” are permissible when a specific APR is disclosed and required terms are provided. However, “no closing costs” or “variable rate starting at ___” are considered potentially misleading if not all relevant terms are disclosed.

“If an advertisement states a rate of finance charge, it must state the rate as an annual percentage rate (APR)… Disclosures must not be misleading. Stating ‘with approved credit’ in connection with an APR is permissible.”

— 12 CFR § 1026.24, Regulation Z

A fixed-rate mortgage is characterized by a fixed interest rate that remains constant throughout the life of the loan, ensuring that the borrower’s monthly principal and interest payments remain the same over time. This is the defining feature of a fixed-rate mortgage.

Other options:

A fixed margin (A) applies to adjustable-rate mortgages (ARMs).

Mandatory 30-year terms (C) and balloon payments (D) are not characteristics of a fixed-rate mortgage, as fixed-rate loans can have varying term lengths (15, 20, or 30 years) without balloon payments.

When applying for a Home Equity Line of Credit (HELOC), consumers should carefully review the APR and the total costs of acquiring and maintaining the HELOC. The APR reflects the overall cost of borrowing, including interest and certain fees, and is crucial for understanding the long-term expense of the HELOC. Additionally, consumers should consider fees associated with setting up and maintaining the HELOC, such as annual fees, transaction fees, and closing costs.

While HUD insurance (A) and FDIC deposit insurance (C) are unrelated to HELOCs, and private mortgage insurance (B) is generally not required for HELOCs, the APR and fees are critical factors that directly impact the cost of borrowing.

Coercion is the act of using force, threats, or pressure to influence another party’s actions or decisions. Imposing arbitrary and unreasonable time limits to force a borrower to act quickly—when such urgency is not legitimate—is considered a form of coercion.

“Coercion includes pressuring consumers to make decisions in haste or under duress, such as requiring immediate action to lock in a loan rate.”

— SAFE MLO National Test Study Guide; CFPB Consumer Protection Resources

This practice is prohibited and unethical.

The Gramm-Leach-Bliley Act (GLBA) prohibits the disclosure of nonpublic personal information about consumers to third parties, except as permitted by law (e.g., for processing the loan). Discussing a consumer’s credit history in a public place where privacy cannot be ensured is a violation of GLBA privacy rules.

“Financial institutions must protect the confidentiality of consumer records and information. Discussing customer information in public or unsecured locations can violate privacy regulations.”

— GLBA Privacy Rule; FTC Compliance Guidelines

Other choices reflect permissible or prudent actions, such as sharing information with authorized third parties or using secure data storage.

Under the Homeowners Protection Act (HPA) of 1998, PMI must be automatically terminated by the lender when the principal balance reaches 78% of the original value of the property (based on the original amortization schedule), provided the borrower is current on payments.

“PMI must be automatically terminated by the lender when the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property, if the borrower is current on payments.”

— 12 USC § 4901-4910, Homeowners Protection Act (HPA)

A home equity line of credit (HELOC) is a revolving form of credit secured by the equity in the borrower's home. What is unique about a HELOC, compared to traditional closed-end loans, is that the borrower can take multiple draws or advances up to the credit limit during the draw period.

“A HELOC is a line of credit extended to a homeowner that uses the borrower’s home as collateral. The distinguishing feature of a HELOC is that the borrower may take additional advances at his or her discretion, up to the approved credit limit, during the draw period.”

— SAFE MLO National Test Study Guide

Other answers:

Interest-only payments can occur in some loan types but are not unique to HELOCs.

Borrowing more than the property is worth (being "underwater") is not allowed.

Selling the property without paying off the loan is not permitted; the HELOC must be satisfied at sale.