Mortgage Loan Originator (MLO) Licensing Practice Test

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Prepare for the Mortgage Loan Originator (MLO) Licensing Test. Study with flashcards and multiple-choice questions, each with hints and explanations. Get ready to succeed on your exam!

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How much hazard insurance does FNMA require on a property?

50% of the loan amount
Full market value of the home
100% of the lesser of the loan amount or the cost to restore improvements
No specific requirement

The correct answer is: 100% of the lesser of the loan amount or the cost to restore improvements

Fannie Mae (FNMA) requires that hazard insurance coverage be at least 100% of the lesser of the loan amount or the cost to restore improvements. This requirement ensures that if a property suffers a loss due to a hazard such as fire or wind damage, the insurance coverage is sufficient to cover the cost of repairs or reconstruction, thereby protecting both the borrower and the lender's investment. This approach to insurance coverage is designed to minimize risk for both parties. If the coverage were provided at full market value or simply based on the loan amount without considerations for actual restoration costs, it could lead to insufficient coverage in the event of a significant loss. The specifics of this requirement help maintain the financial security and integrity of the mortgage loan process by ensuring adequate protection against unforeseen events that could adversely affect the property’s value.