Certified Residential Appraiser Practice Exam

Which of the following best defines a mortgage?

1. A legal agreement to lease a property

2. A financial transaction for the purchase of real estate

3. A pledge that uses property as collateral for loan repayment

4. A guarantee of income from a property investment

The correct answer is: A pledge that uses property as collateral for loan repayment

A mortgage is fundamentally defined as a pledge that uses property as collateral for loan repayment. This reflects the nature of a mortgage agreement, where the borrower receives funds to purchase property, and in return, the property itself serves as security for the loan. If the borrower fails to repay the loan according to the terms of the agreement, the lender has the right to take possession of the property through a legal process known as foreclosure. The other choices do not accurately encompass the essential function of a mortgage. A legal agreement to lease a property pertains to rental agreements and does not involve the transfer of ownership or borrowing against property. A financial transaction for the purchase of real estate does describe aspects of a mortgage but fails to highlight the critical aspect of using the property as collateral. A guarantee of income from a property investment refers instead to the potential cash flows from property operations rather than the financial agreement between a borrower and a lender. Therefore, the definition highlighting the pledge of property as collateral most accurately captures the essence of a mortgage.