Free CMC Mortgage Products and Practices Questions and Answers 1 — Questions and Answers
Question 1: A 65-year-old borrower is selling their current home and using the proceeds to purchase a new primary residence. They want to minimize their monthly housing payment in retirement. They are considering a HECM for Purchase loan. Which of the following is a key structural feature of this specific mortgage product?
- The borrower must make interest-only payments for the first 10 years.
- A down payment of at least 20% is required, with the remaining balance financed by the HECM.
- The loan requires no monthly mortgage payments, but the borrower must pay property taxes and homeowners insurance. (Correct answer)
- Seller contributions are permitted to cover the entire FHA-required down payment.
Correct answer: The loan requires no monthly mortgage payments, but the borrower must pay property taxes and homeowners insurance.
A Home Equity Conversion Mortgage (HECM) for Purchase is a reverse mortgage product that allows seniors aged 62 and older to buy a new home. A primary feature is that no monthly mortgage payments (principal and interest) are due. However, the borrower remains responsible for paying property taxes, homeowners insurance, and maintenance costs.
Question 2: A veteran is selling their home, which has an existing VA loan with a favorable interest rate. A non-veteran buyer wants to assume the loan. Which statement accurately describes a critical requirement and consequence of this VA loan assumption?
- The non-veteran buyer is exempt from paying the VA funding fee.
- The seller's full VA entitlement will be restored immediately upon the non-veteran's assumption of the loan.
- The buyer must be approved by the loan servicer and, in most cases, the Department of Veterans Affairs. (Correct answer)
- Loan assumption is not possible because the buyer is not an eligible veteran.
Correct answer: The buyer must be approved by the loan servicer and, in most cases, the Department of Veterans Affairs.
VA loans are generally assumable by both veterans and qualified non-veteran (civilian) buyers. The assumption process requires the new buyer to be financially qualified and approved by both the current loan servicer and, for loans closed after March 1, 1988, the VA. The seller's VA entitlement used for the original loan will remain tied to the property unless the loan is paid in full or assumed by another eligible veteran who substitutes their own entitlement.
Question 3: A client wishes to purchase a fixer-upper that requires moving a load-bearing wall and has estimated repair costs of $45,000. Which renovation loan program is most suitable for this scenario, and why?
- FHA 203(k) Limited, because the repair costs are less than $50,000.
- FHA 203(k) Standard, because the repairs are structural and exceed the typical cost limit for the Limited program. (Correct answer)
- A conventional home equity line of credit (HELOC), because it offers the most flexibility for construction draws.
- A Fannie Mae HomeStyle loan, as it is the only program that allows for major structural alterations.
Correct answer: FHA 203(k) Standard, because the repairs are structural and exceed the typical cost limit for the Limited program.
The FHA 203(k) Standard program is designed for properties requiring major rehabilitation, including structural repairs like moving a load-bearing wall. It has a minimum required repair cost of $5,000 and can finance costs exceeding the cap of the Limited 203(k) program (which is typically around $35,000 and restricted to non-structural work). The Standard 203(k) also requires the use of a HUD-approved consultant to oversee the project.
Question 4: Under Regulation Z's Loan Originator Compensation Rule, which of the following methods for compensating a mortgage loan originator is permissible?
- A 1.0% commission on loans with an interest rate below 5.0% and a 1.25% commission on loans with an interest rate at or above 5.0%.
- A flat fee paid by the borrower plus a bonus from the lender for originating a loan with a prepayment penalty.
- A tiered commission structure based on the total dollar volume of loans closed during a calendar quarter. (Correct answer)
- A bonus payment for each loan that is sold to a specific investor on the secondary market.
Correct answer: A tiered commission structure based on the total dollar volume of loans closed during a calendar quarter.
Regulation Z prohibits loan originator compensation from being based on the terms of a transaction, such as the interest rate, loan program, or inclusion of a prepayment penalty. However, it is permissible to base compensation on the total amount of credit extended (loan amount) or the total volume of loans originated over a period, as this is not tied to the specific terms of an individual loan transaction.
Question 5: A self-employed borrower with a strong credit score and significant cash reserves has been in business for five years. Due to substantial, legitimate business expense write-offs, their adjusted gross income on their tax returns does not meet traditional underwriting guidelines. Which mortgage product is specifically designed to address this type of scenario?
- A government-backed FHA loan with a co-signer.
- A conforming conventional loan with a higher down payment.
- A portfolio loan, such as a Non-Qualified Mortgage (Non-QM) bank statement loan. (Correct answer)
- A Hard Money loan from a private investor.
Correct answer: A portfolio loan, such as a Non-Qualified Mortgage (Non-QM) bank statement loan.
Non-Qualified Mortgages (Non-QM) are designed for borrowers who do not meet the strict guidelines for Qualified Mortgages (e.g., Fannie Mae/Freddie Mac). A common type of Non-QM product is a bank statement loan, which allows self-employed borrowers to use their business bank statements to prove income and cash flow, rather than relying solely on tax returns which may not reflect their true ability to repay.
Question 6: When originating a construction-to-permanent loan subject to the TILA-RESPA Integrated Disclosure (TRID) Rule, what option does the creditor have for providing the required disclosures?
- The creditor must always issue two separate sets of Loan Estimates and Closing Disclosures: one for the construction phase and one for the permanent phase.
- The creditor may choose to issue either one combined disclosure covering both phases or two separate sets of disclosures for each phase. (Correct answer)
- TRID rules do not apply to construction loans; disclosures are made using the old Good Faith Estimate (GFE) and HUD-1 settlement statement.
- The creditor must provide a single, combined Closing Disclosure but can issue separate Loan Estimates for each phase of the loan.
Correct answer: The creditor may choose to issue either one combined disclosure covering both phases or two separate sets of disclosures for each phase.
Under Regulation Z, for a transaction involving both a construction and a permanent phase (a construction-to-permanent loan), the creditor has the flexibility to provide the disclosures as either a single, combined transaction or as two or more separate transactions. If they choose to treat it as one transaction, a single Loan Estimate and Closing Disclosure will cover both phases. If treated as separate transactions, each phase will receive its own set of disclosures.
Free CMC Mortgage Products and Practices Questions and Answers 1
A 65-year-old borrower is selling their current home and using the proceeds to purchase a new primary residence.
They want to minimize their monthly housing payment in retirement.
They are considering a HECM for Purchase loan.
Which of the following is a key structural feature of this specific mortgage product?