CMC Real Estate Finance 3 — Questions and Answers
Question 1: What is a 'jumbo loan' in real estate finance?
- A loan with a term exceeding 30 years
- A mortgage that exceeds conforming loan limits set by the FHFA (Correct answer)
- A loan requiring less than 5% down payment
- A government-backed loan for large families
Correct answer: A mortgage that exceeds conforming loan limits set by the FHFA
A jumbo loan is a mortgage that exceeds the conforming loan limits established by the Federal Housing Finance Agency (FHFA).
Question 2: Which of the following best describes a 'short sale' in real estate?
- A property sold in under 30 days
- A sale where the lender agrees to accept less than the outstanding mortgage balance (Correct answer)
- A foreclosure auction sale
- A sale with no real estate agent commission
Correct answer: A sale where the lender agrees to accept less than the outstanding mortgage balance
A short sale occurs when the lender agrees to accept proceeds from a property sale that are less than the total amount owed on the mortgage.
Question 3: What is the difference between 'discount points' and an 'origination fee'?
- Discount points reduce the interest rate; origination fees compensate the lender for processing the loan (Correct answer)
- Origination fees reduce the interest rate; discount points are lender compensation
- Both are used interchangeably to reduce the loan balance
- Discount points apply only to ARMs; origination fees apply only to fixed-rate loans
Correct answer: Discount points reduce the interest rate; origination fees compensate the lender for processing the loan
Discount points are prepaid interest that permanently lower the mortgage rate, while origination fees compensate the lender for underwriting and processing.
Question 4: A homeowner wants to access equity without refinancing their first mortgage. Which product is most appropriate?
- FHA Streamline Refinance
- Home Equity Line of Credit (HELOC) (Correct answer)
- Cash-out refinance
- Rate-and-term refinance
Correct answer: Home Equity Line of Credit (HELOC)
A HELOC allows homeowners to borrow against their equity as a revolving credit line without disturbing their existing first mortgage.
Question 5: Under the Dodd-Frank Act, what is a 'Qualified Mortgage' (QM)?
- Any mortgage with a fixed interest rate
- A mortgage meeting specific underwriting standards that provides lenders safe harbor from ability-to-repay claims (Correct answer)
- A loan backed by a government agency like FHA or VA
- A mortgage with an LTV below 80%
Correct answer: A mortgage meeting specific underwriting standards that provides lenders safe harbor from ability-to-repay claims
A Qualified Mortgage meets specific ATR underwriting criteria and gives lenders legal protection from borrower claims of inadequate ability-to-repay assessment.
Question 6: What is 'negative amortization' in mortgage lending?
- When a borrower pays off their loan ahead of schedule
- When a loan balance increases because payments are less than the interest accruing (Correct answer)
- When a borrower's credit score decreases during repayment
- When a lender reduces the principal balance as a loss mitigation measure
Correct answer: When a loan balance increases because payments are less than the interest accruing
Negative amortization occurs when monthly payments are insufficient to cover accruing interest, causing the unpaid interest to be added to the loan balance.
Question 7: Which index is most commonly used to set rates on adjustable-rate mortgages in the US after LIBOR was phased out?
- Prime Rate
- SOFR (Secured Overnight Financing Rate) (Correct answer)
- Federal Funds Rate
- COFI (Cost of Funds Index)
Correct answer: SOFR (Secured Overnight Financing Rate)
SOFR replaced LIBOR as the primary benchmark index for ARMs in the US following LIBOR's phase-out.
CMC Real Estate Finance 3
What is a 'jumbo loan' in real estate finance?