Affiliate Broker Tennessee (TN PSI) National Practice Exam `

Which term best describes the risk that an underwriter assesses when evaluating a mortgage?

1. Investment potential

2. Credit risk

3. Market volatility

4. Interest rate trends

The correct answer is: Credit risk

The term that best describes the risk an underwriter assesses when evaluating a mortgage is credit risk. Credit risk pertains to the likelihood that a borrower may default on their loan obligations, which ultimately affects the ability of the lender to recover the money they have loaned. Underwriters analyze various factors to determine credit risk, such as the borrower's credit history, income stability, debt-to-income ratio, and employment status. This analysis is critical because it helps the lender determine whether to approve the mortgage application and under what terms. While investment potential could refer to the profitability of the loan as an investment, it does not specifically address the borrower's reliability in repaying the loan. Similarly, market volatility and interest rate trends relate more to external economic factors that might affect the mortgage market or loan pricing but do not directly assess the risk associated with the specific borrower obtaining the mortgage. Thus, credit risk is the most relevant term in this context, as it specifically focuses on the borrower's creditworthiness and the potential for default on the mortgage.