CMPS Mortgage Products & Financial Strategies 4 — Questions and Answers
Question 1: A married couple plans to use the equity in their current home for a down payment before selling. Which bridge financing strategy is most appropriate?
- Cash-out refinance of the new property
- Bridge loan secured by the departing residence (Correct answer)
- FHA 203(k) renovation loan
- DSCR investment loan
Correct answer: Bridge loan secured by the departing residence
A bridge loan provides short-term financing secured by the departing residence, allowing borrowers to access equity for a down payment before the old home sells.
Question 2: Under USDA Rural Development loan guidelines, which of the following borrower income rules applies?
- Qualifying income cannot exceed 115% of the area median income (Correct answer)
- There is no income limit for USDA loans
- Qualifying income cannot exceed 80% of the area median income
- USDA loans are limited to borrowers with incomes below the federal poverty level
Correct answer: Qualifying income cannot exceed 115% of the area median income
USDA Guaranteed loans require that the borrower's household income does not exceed 115% of the area median income for their county.
Question 3: Which of the following describes a 'jumbo' mortgage?
- Any loan with an LTV exceeding 80%
- A loan that exceeds the conforming loan limits set by FHFA (Correct answer)
- A loan insured by FHA for high-cost areas
- Any loan requiring a 20% down payment or more
Correct answer: A loan that exceeds the conforming loan limits set by FHFA
A jumbo mortgage is any loan that exceeds the conforming loan limits established annually by the FHFA, making it ineligible for purchase by Fannie Mae or Freddie Mac.
Question 4: What is the primary financial benefit of an interest-only mortgage during the initial IO period?
- The borrower builds equity faster than with a fully amortizing loan
- Monthly cash flow is maximized because no principal is paid during the IO period (Correct answer)
- The interest rate is guaranteed to be lower than comparable fixed-rate loans
- The loan balance is reduced through automatic principal curtailments
Correct answer: Monthly cash flow is maximized because no principal is paid during the IO period
During the interest-only period, borrowers pay only accrued interest, resulting in lower monthly payments and improved cash flow, though no equity is built through amortization.
Question 5: A client wants to compare the true cost of two loans with different rates and fees. Which metric standardizes the comparison by including both interest and fees?
- Note rate
- Annual Percentage Rate (APR) (Correct answer)
- Prime rate
- Effective gross yield
Correct answer: Annual Percentage Rate (APR)
APR includes the interest rate plus lender fees and other costs expressed as an annual rate, enabling an apples-to-apples comparison between loan offers.
Question 6: For a conventional loan with PMI, automatic cancellation of PMI is required by the Homeowners Protection Act when the LTV reaches which level based on the original amortization schedule?
- 80%
- 78% (Correct answer)
- 75%
- 70%
Correct answer: 78%
The Homeowners Protection Act mandates automatic PMI cancellation when the loan balance reaches 78% of the original purchase price based on scheduled amortization.
Question 7: Which mortgage product allows a homeowner to draw principal balance down as equity accumulates, then redraw it later, functioning like a line of credit tied to home equity?
- Adjustable-rate mortgage with a 5-year fixed period
- Home equity line of credit (HELOC) (Correct answer)
- Reverse mortgage
- Shared equity mortgage
Correct answer: Home equity line of credit (HELOC)
A HELOC functions as a revolving line of credit where borrowers can draw, repay, and redraw funds up to their credit limit during the draw period.
CMPS Mortgage Products & Financial Strategies 4
A married couple plans to use the equity in their current home for a down payment before selling.
Which bridge financing strategy is most appropriate?