CMP Conventional Loan Programs and Secondary Market 1 — Questions and Answers
Question 1: What is the primary function of the secondary mortgage market?
- To originate new home loans directly to borrowers
- To purchase existing mortgage loans from lenders, freeing up capital for new loans (Correct answer)
- To set interest rates on conforming mortgage loans
- To insure mortgage loans against borrower default
Correct answer: To purchase existing mortgage loans from lenders, freeing up capital for new loans
The secondary market purchases loans from originators, enabling lenders to replenish funds and continue making new loans to borrowers.
Question 2: Which automated underwriting system (AUS) is operated by Fannie Mae?
- Loan Product Advisor (LPA)
- GUS (Guaranteed Underwriting System)
- Desktop Underwriter (DU) (Correct answer)
- Total Mortgage Scorecard
Correct answer: Desktop Underwriter (DU)
Fannie Mae's automated underwriting system is Desktop Underwriter (DU), which evaluates loan eligibility and risk for conventional conforming loans.
Question 3: A conventional loan is classified as 'conforming' when it:
- Is insured by the FHA or guaranteed by the VA
- Meets the guidelines and loan limits set by Fannie Mae and Freddie Mac (Correct answer)
- Has a fixed interest rate for the entire loan term
- Is used exclusively to purchase a primary residence
Correct answer: Meets the guidelines and loan limits set by Fannie Mae and Freddie Mac
Conforming loans adhere to the purchase standards set by Fannie Mae and Freddie Mac, including loan limits, making them eligible for sale in the secondary market.
Question 4: Which federal agency is responsible for setting the annual conforming loan limits for conventional mortgages?
- Consumer Financial Protection Bureau (CFPB)
- Department of Housing and Urban Development (HUD)
- Federal Housing Finance Agency (FHFA) (Correct answer)
- Federal Deposit Insurance Corporation (FDIC)
Correct answer: Federal Housing Finance Agency (FHFA)
The FHFA sets conforming loan limits annually based on changes in average home prices, as mandated by the Housing and Economic Recovery Act.
Question 5: What is the minimum down payment allowed on a conventional loan for a primary residence under Fannie Mae's HomeReady program?
- 3% (Correct answer)
- 5%
- 10%
- 20%
Correct answer: 3%
Fannie Mae's HomeReady program allows qualified low-to-moderate income borrowers to purchase a primary residence with as little as 3% down.
Question 6: Private Mortgage Insurance (PMI) is required on a conventional loan when the loan-to-value (LTV) ratio exceeds which threshold?
- 75%
- 80% (Correct answer)
- 90%
- 95%
Correct answer: 80%
When the LTV on a conventional loan exceeds 80%, the lender requires PMI to protect against the increased risk of default.
Question 7: A conventional loan that exceeds the FHFA conforming loan limits is commonly referred to as a:
- Portfolio loan
- Government loan
- Jumbo loan (Correct answer)
- Bridge loan
Correct answer: Jumbo loan
Loans exceeding FHFA conforming limits are called jumbo loans; they cannot be sold to Fannie Mae or Freddie Mac and typically carry stricter underwriting requirements.
CMP Conventional Loan Programs and Secondary Market 1
What is the primary function of the secondary mortgage market?