CMC Advanced Mortgage Products 3 — Questions and Answers
Question 1: What is the primary purpose of a balloon mortgage product?
- To provide the lowest possible monthly payment with no lump-sum due
- To offer lower payments during the loan term with the full remaining balance due at maturity (Correct answer)
- To allow the borrower to skip payments during economic hardship
- To guarantee a fixed rate for the entire 30-year term
Correct answer: To offer lower payments during the loan term with the full remaining balance due at maturity
A balloon mortgage features lower monthly payments based on a long amortization schedule, but the entire remaining balance becomes due at the end of a shorter term.
Question 2: An Option ARM mortgage allows borrowers to choose from multiple payment options each month. Which payment option can lead to negative amortization?
- Interest-only payment
- Fully amortizing 30-year payment
- Fully amortizing 15-year payment
- Minimum payment below the interest accruing (Correct answer)
Correct answer: Minimum payment below the interest accruing
When the minimum payment on an Option ARM is less than the accruing interest, the unpaid interest is added to the loan balance, creating negative amortization.
Question 3: In the context of a HECM (Home Equity Conversion Mortgage), what is the 'Principal Limit'?
- The maximum appraised value of the home
- The maximum loan amount a borrower can receive based on age, rate, and home value (Correct answer)
- The minimum equity required before a reverse mortgage is issued
- The maximum monthly payment a borrower must make
Correct answer: The maximum loan amount a borrower can receive based on age, rate, and home value
The Principal Limit in a HECM is the maximum amount a borrower can receive, calculated using the borrower's age, expected interest rate, and the lesser of the appraised value or FHA lending limit.
Question 4: A lender offers a 2-1 buydown on a 7% fixed-rate mortgage. What rate does the borrower pay in year one?
- 7%
- 6%
- 5% (Correct answer)
- 4%
Correct answer: 5%
In a 2-1 buydown, the rate is reduced by 2% in year one and 1% in year two, so a 7% loan has a 5% rate in year one.
Question 5: Which feature differentiates a conforming jumbo loan from a standard jumbo loan?
- Conforming jumbos require no appraisal
- Conforming jumbos meet agency guidelines except for loan amount (Correct answer)
- Conforming jumbos are insured by the FHA
- Conforming jumbos have no DTI requirements
Correct answer: Conforming jumbos meet agency guidelines except for loan amount
Conforming jumbo loans (also called agency jumbos or high-balance loans) exceed standard conforming limits but meet all other Fannie Mae/Freddie Mac guidelines and are eligible for purchase in high-cost areas.
Question 6: A shared appreciation mortgage (SAM) typically requires the borrower to give the lender a portion of future appreciation. What does the borrower receive in exchange?
- A guaranteed rate lock for 10 years
- A below-market interest rate (Correct answer)
- Elimination of all closing costs
- A longer amortization period
Correct answer: A below-market interest rate
In a shared appreciation mortgage, the borrower accepts a below-market interest rate in exchange for giving the lender a share of any future appreciation in the property's value.
Question 7: What is a key characteristic of a physician mortgage loan that sets it apart from conventional financing?
- It requires a minimum 20% down payment
- It excludes student loan debt from DTI calculations or uses a favorable method (Correct answer)
- It is available only through the FHA
- It offers a fixed rate that never adjusts after closing
Correct answer: It excludes student loan debt from DTI calculations or uses a favorable method
Physician mortgage programs typically exclude deferred student loan debt from DTI calculations or use a more favorable income-driven repayment figure, recognizing the earning potential of medical professionals.
CMC Advanced Mortgage Products 3
What is the primary purpose of a balloon mortgage product?