Debt and Cash Flow Management Flashcards

A self-employed borrower reports $120,000 in gross business revenue and $80,000 in business expenses on Schedule C. What income is used for mortgage qualifying?

Answer: $40,000

Net self-employment income ($120,000 - $80,000 = $40,000) is used for qualifying, subject to a 2-year average.

A borrower's monthly housing expense is $2,100 and gross monthly income is $7,000. What is their front-end DTI ratio?

Answer: 30%

$2,100 / $7,000 = 0.30, or 30% front-end DTI.

Which type of debt is typically weighted most heavily in a CMPS cash flow optimization analysis because of its high average interest rate?

Answer: Revolving credit card debt

Revolving credit card debt typically carries the highest interest rates (18–29%+), making it the priority target in cash flow optimization.

A client earns $5,000/month and has a $400 car payment, $200 student loan payment, and a proposed mortgage PITI of $1,500. What is the back-end DTI?

Answer: 42%

($400 + $200 + $1,500) / $5,000 = $2,100 / $5,000 = 42% back-end DTI.

What is the primary financial risk of using a HELOC to manage revolving consumer debt?

Answer: Variable interest rates and home equity as collateral create foreclosure risk

HELOCs are secured by the home and often have variable rates, meaning a rate spike could jeopardize homeownership.

In the context of mortgage planning, what does 'net discretionary income' represent?

Answer: Income remaining after all fixed obligations and living expenses are paid

Net discretionary income is what remains after taxes, housing, debt payments, and living expenses—available for savings or extra debt payoff.

A client has $15,000 in liquid savings and $8,000 in credit card debt at 20%. A CMPS recommends paying off the credit card with savings. What concern should be addressed?

Answer: The client's emergency reserve must be sufficient after payoff

Using savings to eliminate high-rate debt is sound, but maintaining an adequate emergency fund is critical to financial stability.