CMPS Client Assessment & Loan Structuring 4 — Questions and Answers
Question 1: A client is deciding between a 20% down payment (avoiding PMI) and a 10% down payment (keeping cash for investments). What framework should a CMPS use to guide this decision?
- Always recommend 20% down to eliminate PMI costs
- Compare the after-tax cost of PMI against the expected return on retained invested capital (Correct answer)
- Recommend 10% down to preserve liquidity at all times
- Advise the client to split the difference at 15% down
Correct answer: Compare the after-tax cost of PMI against the expected return on retained invested capital
A CMPS analyzes the opportunity cost of capital, comparing PMI expense to potential investment returns to guide an optimal financial decision.
Question 2: What does a borrower's 'residual income' represent, and why is it relevant in mortgage planning?
- Income remaining after all taxes are withheld
- Monthly income left after all debt obligations, used by VA loans as a secondary qualification measure (Correct answer)
- The borrower's investment portfolio income
- Net income after subtracting the proposed mortgage payment only
Correct answer: Monthly income left after all debt obligations, used by VA loans as a secondary qualification measure
Residual income is income remaining after all major monthly obligations, and VA loans use it as an additional qualifier to ensure the borrower can meet living expenses.
Question 3: A client is purchasing a second home and plans to rent it out occasionally. Which loan program is appropriate if the property will be owner-occupied for part of the year?
- Investment property loan at higher rates
- Second home conventional mortgage (Correct answer)
- FHA primary residence loan
- Commercial real estate loan
Correct answer: Second home conventional mortgage
A property used part-time by the owner qualifies as a second home under conventional guidelines, provided the borrower has primary control and it is not managed as a rental.
Question 4: Which scenario requires the mortgage planner to complete a written Benefit to Borrower analysis?
- Any first-time homebuyer application
- A refinance transaction to ensure the new loan provides a tangible net benefit over the existing loan (Correct answer)
- All VA loan applications
- Purchase transactions with down payments below 10%
Correct answer: A refinance transaction to ensure the new loan provides a tangible net benefit over the existing loan
Most refinance guidelines, especially for VA and FHA streamlines, require documenting a net tangible benefit to justify replacing the existing loan.
Question 5: A client wants to pay off their mortgage in 20 years but cannot afford a 20-year loan payment. What strategy should the planner suggest?
- Lock in a 20-year fixed-rate loan regardless of payment
- Take a 30-year loan and make additional principal payments equivalent to a 20-year schedule (Correct answer)
- Choose a 15-year loan and use forbearance if payments become difficult
- Opt for a balloon mortgage due in 20 years
Correct answer: Take a 30-year loan and make additional principal payments equivalent to a 20-year schedule
A 30-year loan with voluntary extra principal payments provides payment flexibility while allowing the client to achieve their 20-year payoff goal.
Question 6: What is the effect of discount points on a mortgage, and when should a planner recommend them?
- Points increase the rate and should be avoided
- Points are prepaid interest that lower the rate, recommended when the break-even period falls within the client's planned ownership horizon (Correct answer)
- Points reduce the loan balance directly and always save money
- Points are fees paid to the real estate agent at closing
Correct answer: Points are prepaid interest that lower the rate, recommended when the break-even period falls within the client's planned ownership horizon
Discount points make financial sense only when the monthly savings from a lower rate recoup the upfront cost before the client moves or refinances.
Question 7: A borrower has a 580 credit score. Which loan program offers the lowest minimum down payment requirement at that score?
- Conventional 97 loan
- FHA loan (Correct answer)
- VA loan
- USDA loan
Correct answer: FHA loan
FHA loans allow a 3.5% down payment for borrowers with credit scores of 580 or above, making it the most accessible program at that score level.
CMPS Client Assessment & Loan Structuring 4
A client is deciding between a 20% down payment (avoiding PMI) and a 10% down payment (keeping cash for investments).
What framework should a CMPS use to guide this decision?