If a borrower exercises a conversion right on an adjustable-rate mortgage (ARM), when are they most likely required to requalify for the loan?

The correct answer to this question revolves around the circumstances under which a borrower exercises a conversion right on an adjustable-rate mortgage (ARM). When a borrower opts to convert their ARM to a fixed-rate mortgage, the requirement to requalify is often linked to the standards and policies related to the loan's status, particularly if it has been sold in the secondary market.

When a loan is sold in the secondary market, it typically enters a different set of rules and regulations governed by secondary market investors, which may stipulate the need for requalification due to changes in the loan's terms and structure. Lenders want to ensure that the borrower remains financially viable given the new loan conditions, which may differ from the original ARM terms.

Other scenarios, such as the specific characteristics of the loan—like whether it is interest-only, a hybrid, or has a payment cap—do not directly influence the need to requalify when exercising a conversion right in the same way that the loan's secondary market status does. Therefore, the likelihood of being required to requalify is heightened when the loan has been sold in the secondary market, making this the most suitable answer.