CMPS Mortgage Products & Financial Strategies 2 — Questions and Answers
Question 1: A borrower wants to minimize monthly payments for the first 10 years while planning to sell before the adjustment period. Which product best fits this strategy?
- 30-year fixed-rate mortgage
- 10/1 ARM (Correct answer)
- 15-year fixed-rate mortgage
- Balloon mortgage due in 5 years
Correct answer: 10/1 ARM
A 10/1 ARM offers a fixed rate for 10 years before adjusting, matching the borrower's timeline and providing lower initial payments than a fixed-rate loan.
Question 2: Which of the following best describes negative amortization in a mortgage?
- The loan balance decreases faster than a standard amortization schedule
- The loan balance increases because monthly payments do not cover accrued interest (Correct answer)
- The interest rate adjusts downward each year
- Principal payments are deferred until the balloon payment date
Correct answer: The loan balance increases because monthly payments do not cover accrued interest
Negative amortization occurs when a borrower's payment is insufficient to cover accrued interest, causing the unpaid interest to be added to the loan principal.
Question 3: A FHA loan requires mortgage insurance for the life of the loan if the original LTV exceeds which threshold?
- 80%
- 85%
- 90% (Correct answer)
- 95%
Correct answer: 90%
FHA loans with an original LTV above 90% require MIP for the full loan term; those at 90% or below require MIP for 11 years.
Question 4: What is the primary purpose of a piggyback loan structure such as an 80-10-10?
- To secure a lower fixed interest rate on the first mortgage
- To avoid paying private mortgage insurance while financing more than 80% LTV (Correct answer)
- To qualify for FHA financing with a lower down payment
- To consolidate existing debt into a single mortgage payment
Correct answer: To avoid paying private mortgage insurance while financing more than 80% LTV
An 80-10-10 piggyback combines an 80% first mortgage with a 10% second mortgage and 10% down payment to eliminate the need for PMI.
Question 5: A HECM reverse mortgage requires the borrower to do all of the following EXCEPT:
- Be at least 62 years old
- Occupy the property as a primary residence
- Have no existing mortgage on the property (Correct answer)
- Complete HUD-approved counseling
Correct answer: Have no existing mortgage on the property
A HECM does not require the home to be free and clear; existing mortgages must simply be paid off from the reverse mortgage proceeds at closing.
Question 6: When comparing a 15-year versus a 30-year fixed mortgage at the same rate, the 15-year loan typically results in:
- Higher total interest paid but lower monthly payments
- Lower total interest paid and lower monthly payments
- Lower total interest paid but higher monthly payments (Correct answer)
- The same total interest paid with different amortization schedules
Correct answer: Lower total interest paid but higher monthly payments
A 15-year mortgage has higher monthly payments but significantly less total interest paid due to the shorter payoff period and faster principal reduction.
Question 7: Which mortgage strategy is most appropriate for a self-employed borrower with irregular income who wants to reduce their documented income for tax purposes while still qualifying?
- Bank statement loan using 12-24 months of deposits (Correct answer)
- Stated income loan with no documentation
- USDA rural development loan
- FHA streamline refinance
Correct answer: Bank statement loan using 12-24 months of deposits
Bank statement loans use 12-24 months of deposit history to calculate qualifying income, making them suitable for self-employed borrowers whose tax returns understate income.
CMPS Mortgage Products & Financial Strategies 2
A borrower wants to minimize monthly payments for the first 10 years while planning to sell before the adjustment period.
Which product best fits this strategy?