CMA Mortgage Products & Loan Types 2 — Questions and Answers
Question 1: A borrower wants a loan where the rate is fixed for 7 years and then adjusts annually. Which product best fits?
- 30-year fixed-rate mortgage
- 7/1 ARM (Correct answer)
- Interest-only mortgage
- Balloon mortgage
Correct answer: 7/1 ARM
A 7/1 ARM has a fixed rate for the first 7 years, then adjusts every 1 year thereafter.
Question 2: Which loan type is specifically designed to help veterans and active-duty military members purchase homes with no down payment?
- FHA loan
- USDA loan
- VA loan (Correct answer)
- Conventional loan
Correct answer: VA loan
VA loans, guaranteed by the Department of Veterans Affairs, allow eligible servicemembers to purchase homes with zero down payment.
Question 3: What distinguishes a 'conforming' loan from a 'non-conforming' loan?
- Conforming loans have adjustable rates; non-conforming have fixed rates
- Conforming loans meet Fannie Mae/Freddie Mac purchase guidelines including loan limits (Correct answer)
- Conforming loans require PMI; non-conforming loans do not
- Conforming loans are only for primary residences
Correct answer: Conforming loans meet Fannie Mae/Freddie Mac purchase guidelines including loan limits
Conforming loans meet the underwriting standards and loan limits set by Fannie Mae and Freddie Mac for purchase on the secondary market.
Question 4: A balloon mortgage with a 5/25 structure means the borrower must:
- Make payments for 5 years, with a 25-year amortization, then pay the remaining balance in full (Correct answer)
- Pay a fixed rate for 5 years then switch to ARM for 25 years
- Make interest-only payments for 25 years with a balloon at year 5
- Refinance every 5 years over a 25-year term
Correct answer: Make payments for 5 years, with a 25-year amortization, then pay the remaining balance in full
A 5/25 balloon mortgage amortizes over 25 years but requires the remaining balance to be paid in full at year 5.
Question 5: Which of the following is TRUE about USDA Rural Development loans?
- They require a minimum 10% down payment
- They are only available to farmers
- They offer 100% financing for eligible rural properties (Correct answer)
- They require private mortgage insurance paid upfront only
Correct answer: They offer 100% financing for eligible rural properties
USDA Rural Development loans provide 100% financing (no down payment) for eligible properties in qualifying rural and suburban areas.
Question 6: An interest-only mortgage during its interest-only period results in:
- Principal balance decreasing faster than a fully amortizing loan
- No reduction in the principal balance (Correct answer)
- A fixed payment that never changes
- Elimination of the need for PMI
Correct answer: No reduction in the principal balance
During the interest-only period, none of the monthly payment reduces the loan principal, so the balance remains unchanged.
Question 7: A 'piggyback loan' (80-10-10) structure is typically used to:
- Avoid FHA mortgage insurance by keeping the first mortgage below conforming limits
- Avoid PMI by keeping the first mortgage at 80% LTV while financing 10% with a second loan (Correct answer)
- Combine a fixed and adjustable rate into one loan
- Finance both the purchase and renovation costs simultaneously
Correct answer: Avoid PMI by keeping the first mortgage at 80% LTV while financing 10% with a second loan
An 80-10-10 piggyback uses an 80% first mortgage, 10% second mortgage, and 10% down payment to avoid PMI on the first loan.
CMA Mortgage Products & Loan Types 2
A borrower wants a loan where the rate is fixed for 7 years and then adjusts annually.
Which product best fits?