CMPS Debt and Cash Flow Management 4 — Questions and Answers
Question 1: A self-employed borrower reports $120,000 in gross business revenue and $80,000 in business expenses on Schedule C. What income is used for mortgage qualifying?
- $120,000
- $80,000
- $40,000 (Correct answer)
- $60,000
Correct answer: $40,000
Net self-employment income ($120,000 - $80,000 = $40,000) is used for qualifying, subject to a 2-year average.
Question 2: A borrower's monthly housing expense is $2,100 and gross monthly income is $7,000. What is their front-end DTI ratio?
- 25%
- 30% (Correct answer)
- 33%
- 35%
Correct answer: 30%
$2,100 / $7,000 = 0.30, or 30% front-end DTI.
Question 3: Which type of debt is typically weighted most heavily in a CMPS cash flow optimization analysis because of its high average interest rate?
- Federal student loans
- Revolving credit card debt (Correct answer)
- Auto loans
- Medical debt
Correct answer: Revolving credit card debt
Revolving credit card debt typically carries the highest interest rates (18–29%+), making it the priority target in cash flow optimization.
Question 4: A client earns $5,000/month and has a $400 car payment, $200 student loan payment, and a proposed mortgage PITI of $1,500. What is the back-end DTI?
- 30%
- 38%
- 42% (Correct answer)
- 46%
Correct answer: 42%
($400 + $200 + $1,500) / $5,000 = $2,100 / $5,000 = 42% back-end DTI.
Question 5: What is the primary financial risk of using a HELOC to manage revolving consumer debt?
- HELOCs always have higher rates than credit cards
- Variable interest rates and home equity as collateral create foreclosure risk (Correct answer)
- HELOCs cannot be used to pay off consumer debt
- HELOC payments are not tax-deductible
Correct answer: Variable interest rates and home equity as collateral create foreclosure risk
HELOCs are secured by the home and often have variable rates, meaning a rate spike could jeopardize homeownership.
Question 6: In the context of mortgage planning, what does 'net discretionary income' represent?
- Gross income minus taxes only
- Income remaining after all fixed obligations and living expenses are paid (Correct answer)
- Total income before any deductions
- Income from part-time or freelance sources only
Correct answer: Income remaining after all fixed obligations and living expenses are paid
Net discretionary income is what remains after taxes, housing, debt payments, and living expenses—available for savings or extra debt payoff.
Question 7: A client has $15,000 in liquid savings and $8,000 in credit card debt at 20%. A CMPS recommends paying off the credit card with savings. What concern should be addressed?
- This will immediately lower the client's credit score
- The client's emergency reserve must be sufficient after payoff (Correct answer)
- Credit card payoff before a mortgage application is always prohibited
- The lender will require a letter of explanation
Correct answer: The client's emergency reserve must be sufficient after payoff
Using savings to eliminate high-rate debt is sound, but maintaining an adequate emergency fund is critical to financial stability.
CMPS Debt and Cash Flow Management 4
A self-employed borrower reports $120,000 in gross business revenue and $80,000 in business expenses on Schedule C.
What income is used for mortgage qualifying?