Mortgage Loan Originator (MLO) Licensing Practice Test 2025 - Free MLO Practice Questions and Study Guide

The correct answer is that there is no cap on the tolerance for prepaids in a Loan Estimate. Prepaids typically include items such as homeowners insurance premiums, property taxes, and mortgage insurance, which are costs that the borrower must pay in advance at closing.

Unlike other categories of charges in the Loan Estimate, which may have specific tolerance levels (like the 10% tolerance for certain services) or restrictions, prepaids are not subject to any such limit. This means that lenders can disclose these costs in the Loan Estimate without having to adhere to a specific percentage limit on how much the actual charges can differ from what was estimated. This flexibility is important because prepaid items can vary significantly based on factors like the time of year or local tax assessments.

Understanding this aspect of the Loan Estimate can help borrowers grasp the overall cost of their mortgage and better prepare for their closing expenses.