Mortgage Loan Originator (MLO) Licensing Practice Test

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Prepare for the Mortgage Loan Originator Licensing Exam. Study with flashcards and multiple choice questions, each question offers hints and explanations. Ace your exam with confidence!

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What is the structure of the Mortgage Insurance Premium (MIP) for FHA loans?

Upfront MIP is optional
Only annual MIP is collected
Upfront and annual MIP is collected
MIP is only collected if the borrower defaults

The correct answer is: Upfront and annual MIP is collected

The structure of the Mortgage Insurance Premium (MIP) for FHA loans includes both an upfront MIP and an annual MIP, making the third option the correct choice. When a borrower obtains an FHA loan, they are required to pay an upfront premium, which is typically added to the loan amount, as well as an annual premium that is divided into monthly payments. This two-part structure is designed to protect lenders against potential losses in case of borrower default. The upfront MIP is required for all FHA loans and helps fund the FHA insurance program, whereas the annual MIP is an ongoing cost that borrowers pay throughout the life of the loan, depending on the loan-to-value ratio and the duration of the loan. This layered MIP approach is distinct to FHA loans and is intended to lower the risk for lenders, thereby facilitating access to mortgage financing for borrowers who may have lower credit scores or smaller down payments.