Chapter 5 — Quiz

Twenty-eight questions. Answer key at the bottom.

1. "Conventional" means the loan is:

A. Under the conforming loan limit B. Not insured or guaranteed by a government agency C. A 30-year fixed D. Made with at least 20% down

2. A \$1,400,000 loan on a primary residence, held by a bank, is:

A. Conforming B. A government loan C. Conventional D. Non-QM by definition

3. The conforming loan limit is set by:

A. The CFPB B. HUD C. The FHFA D. Ginnie Mae

4. The high-cost area conforming limit may be as high as what percentage of the baseline?

A. 110% B. 125% C. 150% D. 200%

5. Government loans (FHA, VA, USDA) are securitized through:

A. Fannie Mae B. Freddie Mac C. Ginnie Mae D. The FHLB System

6. The FHA minimum down payment for a borrower with a 620 representative score is:

A. 0% B. 3.0% C. 3.5% D. 10%

7. FHA's upfront mortgage insurance premium is:

A. Always paid in cash at closing B. Commonly 1.75% of the base loan and may be financed C. Waived for first-time buyers D. Equal to the annual premium

8. For an FHA loan with a term over 15 years and an LTV above 90%, annual MIP generally lasts:

A. 11 years B. Until 78% LTV C. The life of the loan D. 5 years

9. For an FHA loan with a term over 15 years and an LTV of 90% or less, annual MIP generally lasts:

A. 11 years B. The life of the loan C. Until 80% LTV D. 2 years

10. A VA loan requires:

A. A 5% down payment B. Monthly mortgage insurance C. No down payment and no monthly mortgage insurance D. A 640 minimum credit score set by the VA

11. The VA funding fee is waived for:

A. All first-time buyers B. Veterans receiving compensation for a service-connected disability C. Any borrower putting 10% down D. Nobody

12. In addition to ratio guidance, VA underwriting uses a test the other programs do not:

A. Payment shock B. Residual income C. Reserve months D. Total Interest Percentage

13. USDA's household income limit is commonly stated as what percentage of area median income?

A. 80% B. 100% C. 115% D. 140%

14. USDA's annual fee:

A. Terminates at 78% LTV B. Terminates after 11 years C. Continues for the life of the loan D. Is waived after the first year

15. USDA guaranteed loans are available for:

A. Primary residences only B. Primary residences and second homes C. Any occupancy D. Investment property only

16. In an adjustable-rate mortgage, the component that is set at origination and never changes is the:

A. Index B. Margin C. Fully indexed rate D. Note rate

17. The fully indexed rate is:

A. The initial rate plus the lifetime cap B. The index plus the margin C. The highest rate permitted by the caps D. The APR

18. Under the Ability-to-Repay rule, an ARM borrower must be qualified at:

A. The initial rate B. The fully indexed rate or the initial rate, whichever is higher C. The lifetime cap D. The index alone

19. "5/6 ARM with 2/1/5 caps" means the rate is fixed for five years, then adjusts:

A. Every 6 years, with caps of 2% first, 1% subsequent, 5% lifetime B. Every 6 months, with caps of 2% first, 1% subsequent, 5% lifetime C. Every 6 months, with caps of 2% first, 1% subsequent, 5% annual D. Six times total

20. Under the Homeowners Protection Act, conventional borrower-paid PMI terminates automatically at:

A. 80% of original value B. 78% of original value C. 78% of current appraised value D. 80% of current appraised value

21. The Homeowners Protection Act's cancellation and termination rules apply to:

A. FHA MIP B. Conventional borrower-paid PMI C. The VA funding fee D. USDA's annual fee

22. Lender-paid mortgage insurance (LPMI):

A. Is cancellable at 78% LTV B. Involves a permanently higher note rate and no cancellation C. Is paid by the borrower monthly D. Is only available on FHA loans

23. Which of the following is not insurance?

A. PMI B. FHA annual MIP C. The VA funding fee D. FHA UFMIP

24. Government loan programs (FHA, VA, USDA) are generally limited to which occupancy?

A. Investment property B. Second homes C. Primary residences D. Any occupancy

25. A perfectly qualified borrower is declined on a condominium purchase. The most likely reason is:

A. The borrower's credit score B. The project's eligibility — reserves, owner-occupancy ratio, litigation, or delinquent dues C. The appraisal form used D. The loan amount

26. In the §5.10 decision tree, the first question to ask is:

A. What is the credit score B. What is the loan amount C. Is there qualifying military service D. What is the property type

Short answer

27. A borrower's loan amount comes to \$817,000 in an area with a \$806,500 limit. State the problem and name three fixes.

28. On the Linden Street file, FHA is \$17.88 a month cheaper and requires \$5,775 less down, and costs \$38,155.54 more in mortgage insurance over the term. Explain in three sentences how all three can be true, and name the single feature responsible.

Answer key **1.** B. Conventional means not government-backed. It says nothing about loan size or down payment. **2.** C — conventional. It is not conforming (over the limit) and not government-backed. **3.** C — the FHFA, annually. **4.** C — 150% of the baseline, with special provisions for Alaska, Hawaii, Guam, and the U.S. Virgin Islands. **5.** C — Ginnie Mae. Fannie and Freddie securitize conventional conforming loans. A frequent trap. **6.** C — 3.5% at 580 or above. 10% applies at 500–579. **7.** B. **8.** C — the life of the loan. **This is the most consequential FHA fact in the chapter.** **9.** A — 11 years. Contrast with Q8; the exam likes this pair. **10.** C. **11.** B — veterans receiving compensation for a service-connected disability, and also certain Purple Heart recipients and certain surviving spouses. **12.** B — residual income, a minimum dollar amount remaining after all obligations, varying by region and family size. **13.** C — commonly 115% of area median income. Verify the current figure with USDA. **14.** C — for the life of the loan. Contrast with conventional PMI (Q20). **15.** A — primary residences only. **16.** B — the margin. The index moves; the margin does not. **17.** B — index plus margin. **18.** B — the **higher** of the fully indexed rate or the initial rate. This is the direct answer to the 2/28 teaser-rate failure described in Chapter 2. **19.** B. **20.** B — 78% of **original** value. (A is the *request* threshold, also measured against original value.) **21.** B — conventional borrower-paid PMI only. **Not FHA.** A loan officer who tells an FHA borrower their MIP comes off at 78% has made the most common substantive misstatement in the business. **22.** B — the lender pays the premium in exchange for a permanently higher note rate. There is no monthly MI line and no cancellation, so the rate does not drop when 78% is reached. **23.** C — the VA funding fee is a fee, not insurance, and there is no monthly charge at all. **24.** C — primary residences, with narrow exceptions. **25.** B — the project must be eligible independently of the borrower, and nothing about it is something the borrower can fix. **26.** C — military service. It is first because a VA answer changes everything downstream, and because eligible borrowers (including Guard and Reserve members and surviving spouses) frequently do not know they are eligible. **27.** The loan is **\$10,500 over** the limit, so it is not conforming and must go jumbo — where 95% LTV programs are scarce, tightly underwritten, and much more expensive. Three fixes: increase the down payment by \$10,500 (costs cash and reserves); renegotiate the purchase price (the seller may refuse); or split into a first at the limit plus a second lien (adds complexity and second-lien pricing). A fourth is simply to go jumbo and accept the tighter credit and reserve requirements. **28.** FHA has a lower minimum down payment (3.5% vs. 5%) and, in this comparison, a slightly better note rate and slightly smaller monthly MI factor — so both the cash and the monthly figure favor it. But FHA's annual MIP at this loan-to-value lasts **the life of the loan**, while conventional PMI terminates automatically at payment 137 under the Homeowners Protection Act. The single responsible feature is **MIP duration**: \$62,374.40 over 360 payments versus \$24,218.86 over 137.