CMC Mortgage Products and Practices 3 — Questions and Answers
Question 1: What distinguishes a USDA Rural Development Guaranteed Loan from a USDA Direct Loan?
- Guaranteed loans are issued directly by USDA; Direct loans use private lenders
- Direct loans are made by USDA itself; Guaranteed loans are made by approved lenders with USDA backing (Correct answer)
- Guaranteed loans require higher credit scores than Direct loans
- Direct loans have higher income limits than Guaranteed loans
Correct answer: Direct loans are made by USDA itself; Guaranteed loans are made by approved lenders with USDA backing
USDA Direct loans are funded and serviced by USDA for very-low-income borrowers, while Guaranteed loans are made by approved lenders and backed by USDA.
Question 2: In a hybrid ARM, the notation '7/1 ARM' means:
- The rate adjusts 7 times over 1 year
- The rate is fixed for 7 years then adjusts annually (Correct answer)
- The initial cap is 7% and the periodic cap is 1%
- The margin is 7% with a 1-year lookback
Correct answer: The rate is fixed for 7 years then adjusts annually
In a hybrid ARM, the first number is the fixed-rate period in years and the second is the adjustment frequency in years thereafter.
Question 3: Which of the following best describes a 'teaser rate' on an ARM?
- A rate that adjusts quarterly
- An artificially low introductory rate below the fully-indexed rate (Correct answer)
- A fixed-rate period longer than 10 years
- A penalty rate charged for early payoff
Correct answer: An artificially low introductory rate below the fully-indexed rate
A teaser rate is an introductory ARM rate set below the fully-indexed rate (index + margin) to attract borrowers.
Question 4: What is the MIP structure for an FHA loan with a term greater than 15 years and LTV above 90% at origination?
- MIP is required for the first 5 years only
- MIP is required for the life of the loan (Correct answer)
- MIP is canceled automatically at 78% LTV regardless of loan age
- MIP is a one-time upfront payment only
Correct answer: MIP is required for the life of the loan
FHA loans with original LTV above 90% and terms over 15 years require annual MIP for the entire loan term.
Question 5: Which mortgage product allows seniors to receive loan proceeds as monthly payments, a lump sum, or a line of credit without making monthly mortgage payments?
- Shared equity mortgage
- Home Equity Conversion Mortgage (HECM) (Correct answer)
- Deferred payment loan
- Reverse annuity mortgage
Correct answer: Home Equity Conversion Mortgage (HECM)
The FHA-insured HECM is the standard reverse mortgage allowing seniors 62+ to access home equity with no required monthly payments.
Question 6: A conforming loan limit primarily determines:
- The maximum LTV ratio allowed by Fannie Mae
- The maximum loan amount eligible for purchase by Fannie Mae or Freddie Mac (Correct answer)
- The minimum credit score for conventional loans
- The maximum debt-to-income ratio for QM loans
Correct answer: The maximum loan amount eligible for purchase by Fannie Mae or Freddie Mac
Conforming loan limits set the maximum original principal balance that Fannie Mae and Freddie Mac will purchase, adjusted annually by FHFA.
Question 7: What is a key risk associated with negative amortization loans?
- The interest rate can never be reduced
- The loan balance can grow beyond the original amount borrowed (Correct answer)
- Prepayment is not allowed for the first 5 years
- The property must be owner-occupied
Correct answer: The loan balance can grow beyond the original amount borrowed
Negative amortization occurs when minimum payments are less than accrued interest, causing the unpaid interest to be added to principal.
CMC Mortgage Products and Practices 3
What distinguishes a USDA Rural Development Guaranteed Loan from a USDA Direct Loan?