Certified Residential Appraiser Practice Exam

What is the purpose of a Guaranteed Mortgage?

1. To ensure the borrower receives a lower interest rate

2. To protect against default through third-party assurance

3. To allow for flexible repayment options

4. To consolidate multiple loans into one

The correct answer is: To protect against default through third-party assurance

A Guaranteed Mortgage serves primarily to protect against default through third-party assurance, making it a valuable option for both lenders and borrowers. This type of mortgage typically involves a government agency or a private insurer that guarantees the loan. In the event that the borrower defaults, the guarantor ensures that the lender recovers at least a portion of the outstanding loan balance. This assurance reduces the risk for the lender and can make it easier for borrowers, especially those with less-than-perfect credit history, to qualify for a mortgage. While the other options may contain elements relevant to mortgage lending, they do not accurately capture the essence of what a Guaranteed Mortgage offers. For example, lower interest rates could be a byproduct of the reduced risk stemming from the guarantee, but they are not inherent to the purpose of the mortgage itself. Similarly, flexible repayment options and loan consolidation serve different objectives within mortgage products and are not specifically tied to the concept of a guarantee against default. Through its protective mechanism, a Guaranteed Mortgage fosters greater access to home financing, especially for borrowers who might otherwise struggle to secure a loan.