CMPS Mortgage Products & Financial Strategies 3 — Questions and Answers
Question 1: A homeowner with a VA loan wants to lower their interest rate with minimal documentation and no appraisal. Which option is available?
- VA cash-out refinance
- VA Interest Rate Reduction Refinance Loan (IRRRL) (Correct answer)
- FHA streamline refinance
- Conventional rate-and-term refinance
Correct answer: VA Interest Rate Reduction Refinance Loan (IRRRL)
The VA IRRRL (also called a streamline refinance) allows eligible VA borrowers to lower their rate with reduced documentation and typically no appraisal or credit underwriting.
Question 2: What is the maximum seller concession allowed on a conventional loan with an LTV between 75.01% and 90%?
- 2%
- 3% (Correct answer)
- 4%
- 6%
Correct answer: 3%
Fannie Mae/Freddie Mac guidelines limit seller concessions to 3% of the purchase price for conventional loans with LTV between 75.01% and 90%.
Question 3: Which of the following describes a 'buy-down' mortgage strategy where the seller or builder pays to reduce the borrower's interest rate for the first two years?
- 2-1 buydown (Correct answer)
- Discount point purchase
- Temporary rate lock extension
- Interest-only conversion
Correct answer: 2-1 buydown
A 2-1 buydown reduces the borrower's rate by 2% in year one and 1% in year two, with the cost paid upfront by the seller, builder, or lender.
Question 4: In mortgage planning, what does the term 'debt-service coverage ratio' (DSCR) primarily measure for investment property loans?
- The ratio of the borrower's total debt to gross income
- The ratio of the property's gross rental income to its mortgage payment
- The ratio of net operating income to total debt service (Correct answer)
- The ratio of property value to total outstanding debt
Correct answer: The ratio of net operating income to total debt service
DSCR measures whether a property's net operating income is sufficient to cover its debt obligations, typically required to be 1.0 or higher for investment property DSCR loans.
Question 5: A borrower is considering a home equity line of credit (HELOC) versus a home equity loan. Which statement is accurate?
- A HELOC has a fixed interest rate while a home equity loan has a variable rate
- A HELOC provides a revolving line of credit while a home equity loan disburses a lump sum (Correct answer)
- A home equity loan requires no closing costs while a HELOC does
- A HELOC cannot be used for home improvement purposes
Correct answer: A HELOC provides a revolving line of credit while a home equity loan disburses a lump sum
A HELOC functions as a revolving credit line with a draw period, while a home equity loan provides a fixed lump-sum disbursement at closing.
Question 6: Which loan type is specifically designed to finance both the purchase price and renovation costs of a property in a single mortgage?
- FHA 203(k) loan
- Conventional HomeStyle renovation loan
- Both A and B (Correct answer)
- Construction-to-permanent loan
Correct answer: Both A and B
Both the FHA 203(k) and Fannie Mae HomeStyle renovation loans allow borrowers to finance purchase and renovation costs in one mortgage.
Question 7: When evaluating the financial benefit of paying discount points to lower a mortgage rate, the 'break-even point' is calculated as:
- Total points paid divided by the monthly payment savings (Correct answer)
- Monthly savings divided by the loan amount
- Total interest paid divided by the number of points
- Points paid multiplied by the loan term in months
Correct answer: Total points paid divided by the monthly payment savings
The break-even point equals the upfront cost of points divided by the monthly savings, indicating how many months until the borrower recoups the cost.
CMPS Mortgage Products & Financial Strategies 3
A homeowner with a VA loan wants to lower their interest rate with minimal documentation and no appraisal.
Which option is available?