CMPS Homeowner Cash Flow Scenarios 4 — Questions and Answers
Question 1: A homeowner's adjustable-rate mortgage has a 2/2/5 cap structure currently at 3.5%. What is the maximum interest rate they could ever pay?
- 5.5%
- 7.5%
- 8.5% (Correct answer)
- 10.5%
Correct answer: 8.5%
The lifetime cap of 5% is added to the start rate: 3.5% + 5% = 8.5% maximum possible rate.
Question 2: Which scenario best illustrates negative amortization and its cash flow risk to a homeowner?
- Making extra principal payments each month
- A minimum payment that doesn't cover accrued interest, causing the loan balance to grow (Correct answer)
- Skipping one mortgage payment per year
- Refinancing to a lower rate without extending the term
Correct answer: A minimum payment that doesn't cover accrued interest, causing the loan balance to grow
Negative amortization occurs when the minimum payment is insufficient to cover interest, causing unpaid interest to be added to the principal balance.
Question 3: A homeowner's PITI payment is $2,200/month. Their gross monthly income is $7,000. Which statement about their housing expense ratio is correct?
- Their front-end DTI is 28%, which meets conventional guidelines
- Their front-end DTI is 31.4%, which exceeds conventional guidelines
- Their front-end DTI is 31.4%, which is acceptable for FHA loans (Correct answer)
- Their front-end DTI is 22%, which is well below all guidelines
Correct answer: Their front-end DTI is 31.4%, which is acceptable for FHA loans
$2,200/$7,000 = 31.4%, which exceeds the 28% conventional guideline but is within FHA's 31% front-end limit (FHA allows up to 31%).
Question 4: A homeowner is 10 years into a 30-year mortgage. Why does refinancing into a new 30-year loan potentially harm their long-term cash flow despite lowering the monthly payment?
- The new rate will always be higher
- They restart amortization, paying more interest over the extended loan life (Correct answer)
- Their home equity immediately decreases
- Closing costs cannot be deducted
Correct answer: They restart amortization, paying more interest over the extended loan life
Restarting amortization resets the interest-heavy early payment schedule, often resulting in more total interest paid even at a lower rate.
Question 5: A self-employed homeowner's tax return shows $80,000 net income after $30,000 in business deductions. For mortgage qualification purposes, what income figure do lenders typically use?
- $110,000 (gross before deductions)
- $80,000 (net income as reported)
- $65,000 (after further adjustments)
- $95,000 (net plus depreciation add-back) (Correct answer)
Correct answer: $95,000 (net plus depreciation add-back)
Lenders typically add back non-cash deductions like depreciation to net income, so qualifying income is net income plus depreciation add-backs.
Question 6: A homeowner uses a 5/1 ARM to purchase a home, planning to sell in 4 years. How does this decision optimize their cash flow strategy?
- They benefit from a lower initial rate without exposure to rate adjustment risk (Correct answer)
- They guarantee protection from market rate increases
- They qualify for a higher purchase price due to higher rates
- They eliminate the need for mortgage insurance
Correct answer: They benefit from a lower initial rate without exposure to rate adjustment risk
Since the homeowner plans to sell before the first adjustment, they capture the lower initial ARM rate while avoiding rate-adjustment risk.
Question 7: A homeowner's monthly cash flow analysis shows housing expenses consuming 45% of net take-home pay. Which action is most appropriate for a CMPS specialist to recommend first?
- Immediately refinance to a 40-year mortgage
- Conduct a comprehensive budget review to identify expense reduction or income enhancement opportunities (Correct answer)
- Advise the homeowner to sell the property
- Apply for a reverse mortgage
Correct answer: Conduct a comprehensive budget review to identify expense reduction or income enhancement opportunities
A comprehensive cash flow and budget review is the appropriate first step before recommending product changes, as it identifies root causes and full financial picture.
CMPS Homeowner Cash Flow Scenarios 4
A homeowner's adjustable-rate mortgage has a 2/2/5 cap structure currently at 3.5%.
What is the maximum interest rate they could ever pay?