CMA Client Communication & Financial Advice 2 — Questions and Answers
Question 1: A client is confused about the difference between a fixed-rate and an adjustable-rate mortgage. What is the most effective way to explain the distinction?
- Use an amortization table showing payment schedules for both over 30 years
- Explain that fixed rates never change while ARM rates adjust after an initial period based on an index (Correct answer)
- Tell the client that ARMs are always riskier and should be avoided
- Recommend they consult an attorney before choosing either option
Correct answer: Explain that fixed rates never change while ARM rates adjust after an initial period based on an index
Clearly contrasting fixed rate stability with the index-linked adjustability of ARMs gives clients an accurate and actionable understanding.
Question 2: A borrower asks why their Good Faith Estimate shows a higher APR than the stated interest rate. What should the advisor explain?
- The APR includes lender fees and closing costs, making it a broader measure of loan cost than the interest rate alone (Correct answer)
- The APR is always higher due to government regulations that add a surcharge
- The stated rate is incorrect and the GFE should be disregarded
- The APR only applies to adjustable-rate mortgages and can be ignored for fixed loans
Correct answer: The APR includes lender fees and closing costs, making it a broader measure of loan cost than the interest rate alone
APR incorporates fees and costs beyond the interest rate, so it reflects the true annual cost of the loan.
Question 3: When advising a first-time homebuyer on affordability, which debt-to-income ratio threshold is most commonly cited by conventional lending guidelines as the back-end limit?
- 28%
- 36%
- 43% (Correct answer)
- 50%
Correct answer: 43%
Conventional guidelines generally cap the back-end DTI at 43%, though some loan programs allow higher ratios with compensating factors.
Question 4: A client disagrees with the property appraisal and wants to challenge it. What is the advisor's appropriate role?
- Order a new appraisal from a different company at the client's expense without informing the lender
- Explain the reconsideration of value process and help the client gather comparable sales data to submit (Correct answer)
- Tell the client the appraisal is final and cannot be disputed
- Contact the appraiser directly and request a higher value to match the purchase price
Correct answer: Explain the reconsideration of value process and help the client gather comparable sales data to submit
The reconsideration of value (ROV) process allows borrowers to submit supporting comps through the lender for the appraiser to review.
Question 5: A self-employed client has inconsistent income over the past two years. How should the advisor communicate income qualification to this client?
- Use only the most recent year's income since it is the highest
- Average the two-year net income from tax returns and explain that lenders typically use this figure (Correct answer)
- Advise the client to apply as a W-2 employee by having an employer verify income
- Ignore the inconsistency and submit the application using projected future income
Correct answer: Average the two-year net income from tax returns and explain that lenders typically use this figure
Lenders typically average two years of self-employment income from tax returns to determine qualifying income for self-employed borrowers.
Question 6: A client is considering paying mortgage discount points to lower their rate. What financial concept should the advisor use to help the client evaluate this decision?
- Loan-to-value ratio
- Break-even analysis comparing upfront cost to monthly savings (Correct answer)
- Debt service coverage ratio
- Yield spread premium calculation
Correct answer: Break-even analysis comparing upfront cost to monthly savings
A break-even analysis divides the cost of points by the monthly savings to determine how long the borrower must keep the loan to benefit.
Question 7: During a refinance consultation, a client asks about a cash-out refinance versus a home equity line of credit (HELOC). Which key difference should the advisor highlight?
- A HELOC always has a lower interest rate than a cash-out refinance
- A cash-out refinance replaces the first mortgage with a new loan, while a HELOC is a separate revolving credit line (Correct answer)
- A cash-out refinance is only available for investment properties
- A HELOC requires the home to be free and clear of any existing mortgage
Correct answer: A cash-out refinance replaces the first mortgage with a new loan, while a HELOC is a separate revolving credit line
A cash-out refi closes the existing mortgage and issues a new one at a higher balance, while a HELOC adds a second lien revolving credit line.
CMA Client Communication & Financial Advice 2
A client is confused about the difference between a fixed-rate and an adjustable-rate mortgage.
What is the most effective way to explain the distinction?