Certified Apartment Portfolio Supervisor (CAPS) Practice Exam - Module 2

What does Default Risk depend on?

1. Only on the property value

2. Borrower creditworthiness and property potential

3. The general economy's performance

4. Just the loan amount

The correct answer is: Borrower creditworthiness and property potential

Default risk is fundamentally linked to the likelihood that a borrower will fail to meet their loan obligations, which can arise from various factors. The most significant elements influencing default risk are the creditworthiness of the borrower and the potential of the property being financed. When assessing borrower creditworthiness, lenders evaluate factors such as the borrower’s credit score, income stability, debt-to-income ratio, and overall financial behavior. A borrower with a strong financial background, reliable income, and a history of timely payments presents a lower default risk. In addition to borrower-specific factors, the potential of the property plays a crucial role. This includes the property’s location, market demand, potential for appreciation, and overall attractiveness to renters or buyers. A property with strong potential for cash flow or appreciation can provide a buffer against default, as it is more likely to generate income that enables the borrower to meet their obligations. While the general economy's performance and property value are relevant, they are indirect influences. The overall economic environment can affect borrower income and property value fluctuates, but these factors alone do not capture the comprehensive assessment of risk. The loan amount also does not provide a complete picture since high loan amounts could still be manageable for a qualified borrower if they have strong credit. Therefore, the