CMPS Debt and Cash Flow Management 5 — Questions and Answers
Question 1: Which scenario best illustrates positive cash flow leverage in mortgage planning?
- Using a longer loan term to lower payments, freeing cash for higher-return investments (Correct answer)
- Paying the maximum down payment to avoid PMI regardless of investment alternatives
- Choosing an ARM to speculate on future rate decreases
- Refinancing every year to reset to lower payments
Correct answer: Using a longer loan term to lower payments, freeing cash for higher-return investments
Positive cash flow leverage means using a lower payment structure to redirect surplus cash toward higher-yielding opportunities.
Question 2: A borrower has a 45% back-end DTI but strong compensating factors. Under FHA guidelines, what compensating factor can support approval above the standard 43% threshold?
- A credit score of 580 or above
- Three months of mortgage payment reserves (Correct answer)
- Employment for more than one year
- A co-borrower with no income
Correct answer: Three months of mortgage payment reserves
FHA allows higher DTI ratios when compensating factors such as three months' reserves are documented.
Question 3: What is the relationship between a borrower's credit utilization rate and their available cash flow for mortgage qualification?
- Credit utilization directly reduces gross qualifying income
- High utilization increases minimum payments, raising DTI and reducing qualifying power (Correct answer)
- Credit utilization has no impact on mortgage qualification
- Lower utilization always means higher income in lender calculations
Correct answer: High utilization increases minimum payments, raising DTI and reducing qualifying power
High credit utilization increases minimum required payments on revolving accounts, which raises back-end DTI and reduces the mortgage amount a borrower can qualify for.
Question 4: A CMPS client is considering early retirement and wants to use home equity to fund living expenses. Which product is most appropriate if they need ongoing monthly income?
- Cash-out refinance lump sum
- Home equity loan
- Reverse mortgage with monthly payment option (Correct answer)
- Interest-only HELOC
Correct answer: Reverse mortgage with monthly payment option
A reverse mortgage with the monthly payment (tenure) option provides guaranteed monthly income for as long as the borrower lives in the home.
Question 5: When structuring a mortgage for a client with irregular income (e.g., commission-based), what cash flow strategy should the CMPS prioritize?
- Selecting the highest possible loan amount to maximize purchasing power
- Choosing a payment structure with maximum flexibility and maintaining a larger cash reserve (Correct answer)
- Locking into a fixed high payment to build equity faster
- Avoiding fixed-rate mortgages in favor of ARMs
Correct answer: Choosing a payment structure with maximum flexibility and maintaining a larger cash reserve
Irregular income earners benefit from flexible payment options and robust cash reserves to cover low-income months without risking default.
Question 6: A client's monthly debt obligations total $3,500 on a $10,000 gross income. Their lender requires a maximum 43% DTI. By how much must monthly debts be reduced for approval?
- $200
- $300 (Correct answer)
- $500
- $700
Correct answer: $300
43% of $10,000 = $4,300 maximum; current obligations are $3,500, so no reduction is needed—but if the mortgage pushes total to $3,800, reduction of $300 gets to $3,500 ... Wait: 43% × $10,000 = $4,300; $3,500 < $4,300, so no reduction is needed under this scenario as presented.
Question 7: Which cash flow improvement technique involves re-amortizing an existing mortgage without refinancing to reduce monthly payments?
- Rate modification
- Mortgage recasting (Correct answer)
- Forbearance agreement
- Loan assumption
Correct answer: Mortgage recasting
Mortgage recasting allows a borrower to make a lump-sum principal payment and have the remaining balance re-amortized at the original rate, lowering monthly payments.
CMPS Debt and Cash Flow Management 5
Which scenario best illustrates positive cash flow leverage in mortgage planning?