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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What is essential for a borrower to be eligible for a fully-amortizing payment schedule for ARMs?

  1. Proof of income

  2. Must qualify at a fixed rate

  3. Ability to make monthly fully-amortizing payments

  4. No prior debt

The correct answer is: Ability to make monthly fully-amortizing payments

For a borrower to be eligible for a fully-amortizing payment schedule for Adjustable Rate Mortgages (ARMs), the ability to make monthly fully-amortizing payments is crucial. A fully-amortizing mortgage means that the borrower will make payments that cover both the principal and interest, ensuring that the loan is paid off in full by the end of the term. This is particularly important for ARMs, as they can have varying interest rates over time, which can affect payment amounts. When a borrower demonstrates the capacity to make these fully-amortizing payments, it shows that they can handle the financial obligation that comes with the loan. This is vital since ARMs may experience fluctuations in interest rates, which can significantly alter monthly payments after an initial fixed-rate period. Therefore, lenders need assurance that borrowers can manage potential increases in payment amounts over the life of the loan. While proof of income, qualifying at a fixed rate, and having no prior debt are all important factors in assessing a borrower's overall eligibility and creditworthiness, the specific ability to make the scheduled monthly payments is directly pertinent to securing a fully-amortizing payment schedule for ARMs. This focus on payment capability aligns with the underwriting standards necessary to evaluate whether a borrower can sustain their