Housing Counselor Certification (HUD) Practice Exam

Which factor is crucial when determining if a mortgage loan offer is potentially predatory?

1. The amount of the down payment

2. The client's credit score and debt-to-income ratio

3. The length of the loan term

4. The lender's reputation

The correct answer is: The client's credit score and debt-to-income ratio

When assessing whether a mortgage loan offer may be predatory, understanding the client's credit score and debt-to-income ratio is crucial. These two factors provide insight into the borrower's financial health and ability to repay the loan. A low credit score may indicate a history of poor financial decisions or inability to manage debt effectively. Predatory lenders may take advantage of borrowers with low credit scores by offering loans with exorbitant interest rates or unfavorable terms that put them at higher risk of default. Similarly, the debt-to-income ratio, which compares a borrower's total monthly debt payments to their monthly gross income, helps determine how much of their income is already committed to debts. A high ratio can signal that a borrower is over-leveraged, making them more vulnerable to falling into a predatory lending situation where they are offered loans they cannot realistically afford. While the other options can play a role in the overall lending landscape, they do not directly reflect the intent or fairness of a loan offer as comprehensively as the borrower’s financial indicators do. The down payment amount can vary based on personal choice or specific programs available, and though the lender's reputation can be an indicator of their practices, it doesn't provide concrete evidence of a specific loan offer's terms. The length of