CMC Residential and Commercial Financing 3 — Questions and Answers
Question 1: A lender quotes a commercial loan with a 1.25 DSCR requirement. If annual debt service is $120,000, what minimum NOI must the property generate?
- $120,000
- $144,000
- $150,000 (Correct answer)
- $160,000
Correct answer: $150,000
Minimum NOI = Debt Service × DSCR = $120,000 × 1.25 = $150,000.
Question 2: What is the maximum loan-to-value (LTV) ratio typically allowed for a conventional conforming primary residence purchase without PMI?
- 85%
- 80% (Correct answer)
- 90%
- 95%
Correct answer: 80%
Conventional loans at 80% LTV or below do not require private mortgage insurance (PMI).
Question 3: In a commercial loan, what is a 'lockout period'?
- The time the borrower has to close after rate lock
- A period during which prepayment is completely prohibited (Correct answer)
- The seasoning period before refinancing is allowed
- The lender's review period for a loan modification
Correct answer: A period during which prepayment is completely prohibited
A lockout period is a specified timeframe in which the borrower cannot prepay the loan at all, protecting the lender's yield.
Question 4: Which federal regulation implements the Truth in Lending Act (TILA) for residential mortgages?
- Regulation B
- Regulation C
- Regulation X
- Regulation Z (Correct answer)
Correct answer: Regulation Z
Regulation Z implements TILA and requires lenders to disclose key loan terms including APR, finance charges, and total payments.
Question 5: A borrower takes out a $500,000 interest-only commercial loan at 6% annually. What is the monthly payment during the interest-only period?
- $2,500 (Correct answer)
- $3,000
- $2,000
- $4,000
Correct answer: $2,500
Monthly interest-only payment = $500,000 × 6% ÷ 12 = $2,500.
Question 6: What is 'yield maintenance' in the context of commercial mortgage prepayment?
- A fee equal to six months of interest
- A penalty calculated to compensate the lender for lost yield if rates have fallen (Correct answer)
- A requirement to maintain property yield above the cap rate
- A prepayment premium equal to 1% of the remaining balance
Correct answer: A penalty calculated to compensate the lender for lost yield if rates have fallen
Yield maintenance requires the borrower to pay a premium that compensates the lender for reinvestment risk when prepaying in a lower-rate environment.
Question 7: Under Dodd-Frank, a Qualified Mortgage (QM) generally prohibits which loan feature?
- Fixed interest rates
- Balloon payments on loans under 7 years for non-small creditors (Correct answer)
- 30-year amortization schedules
- Escrow accounts for taxes and insurance
Correct answer: Balloon payments on loans under 7 years for non-small creditors
Standard QM loans cannot have balloon payments (except for small creditors and certain rural/underserved lenders).
CMC Residential and Commercial Financing 3
A lender quotes a commercial loan with a 1.25 DSCR requirement.
If annual debt service is $120,000, what minimum NOI must the property generate?