Ch 31: Loan Qualifying and Underwriting

Question 1

How does the assumption of an existing mortgage work?

Answer 1

An assumption of the mortgage obligates the buyer to assume liability for the debt. Both buyer and seller are equally liable in the event of default.

Question 2

What is the Loan Estimate?

Answer 2

The Loan Estimate is a three-page form that tells the borrower important details about the loan he or she has requested.

Question 3

What are the four critical procedures for processing a loan?

Answer 3

Determine the ability of the borrower to repay the loan
Estimate the value of the property that is collateral for the loan
Research and analyze the marketability of the title.
Prepare the documents necessary to approve the loan and close the transaction

Question 4

Define underwriting.

Answer 4

The evaluation process used to determine the borrower’s ability to repay a loan and estimating the value of the property being used as collateral.

Question 5

What does the borrower provide in the borrower information section of the loan application?

Answer 5

The borrower provides his or her name, address, Social Security number, home phone, age and information about schooling.

Question 6

What is stable income?

Answer 6

Income is considered stable if it comes from a consistent and reliable source. Income is also judged on its permanence – in other words, how long it can be expected to continue.

Question 7

When is permanent employment judged to be stable?

Answer 7

If the applicant has been employed continuously for two years or more in the same field.

Question 8

What kind of income is typically judged as unstable?

Answer 8

Overtime is not considered to be stable income, unless the applicant can prove that it has been regular and consistent for some period of time.

Question 9

What is the Request for Verification of Deposit form?

Answer 9

A verification form that allows the bank to give the lender information about current balances in the borrower’s accounts

Question 10

What kinds of information does an employer provide on the Verification of Employment form?

Answer 10

The information includes the borrower’s wages and length of employment, an opinion of the borrower’s attitude on the job, the probability of continued employment and a prediction of what the borrower’s prospects are for pay increases or promotions.

Question 11

How does the lender determine if the borrower has enough monthly income to pay a loan?

Answer 11

The lender will do this by establishing an income ratio and a debt ratio.

Question 12

Why is information about net worth important?

Answer 12

It gives indication of the borrower’s ability to sustain payment of the debt in the event that the borrower would lose his or her job.

Question 13

What is the most important part of the credit report?

Answer 13

The borrower’s payment history.

Question 14

Name two red flags that might appear on a borrower’s credit report.

Answer 14

The employment or residence data on the credit report is different from the application.
There are several recent inquiries from credit card companies or other mortgage lenders

Question 15

What is the market value of a property?

Answer 15

The market value of a property is the highest price a buyer is willing to pay and the lowest price the seller will accept, under certain conditions.

Question 16

What is a loan-to-value ratio?

Answer 16

The ratio of the mortgage principal to the value of the property the borrowers are purchasing

Question 17

What does the loan commitment do?

Answer 17

It details the loan amount and the terms on which the lender is willing to lend.

Question 18

If lenders intend to sell mortgages in the secondary market, what must they do?

Answer 18

Use the standardized procedures – called uniform procedures – outlined in the Fannie Mae and Freddie Mac forms.

Question 19

What is a portfolio loan?

Answer 19

Loans that are kept ‘in house’, meaning that the lender does NOT sell them on the secondary market, but keeps the loans.

Question 20

John and Dee purchase a home for $150,000. They put 20% down and get a 30-year mortgage for the rest. If their interest rate is 5% and their monthly payment is $644.19, how will their first payment be allocated to principal and interest? What will be the principal balance after the first payment?

Answer 20

$150,000 x .20 = $30,000 (down payment)
$150,000 - $30,000 = $120,000 (mortgage amount)
$120,000 x .05 = $6,000 yearly interest
$6,000 ÷ 12 = $500 first month’s interest
$644.19 - $500 = $144.19 first month’s principal
$120,000 - $144.19 = $119,855.81 new principal balance

Question 21

In what section of the Uniform Residential Loan Application does the borrower provide the property address of the home?

Answer 21

Property Information and Purpose of Loan

Question 22

If some of the borrower’s cash for the down payment comes as a gift from a relative or friend, the lender will probably require:

Answer 22

a gift letter.

Question 23

Income is often judged on how long it can be expected to continue. This is called:

Answer 23

permanence.

Question 24

Besides principal, what else is included in a monthly payment that is the borrower’s responsibility?

Answer 24

Interest

Question 25

To approve loans, most lenders use an individual loan underwriter or:

Answer 25

a loan committee.

Question 26

When evaluating the borrower’s credit report a person’s bonus might be accepted as a source of income, but only if those bonuses are:

Answer 26

on a regular basis.

Question 27

If the borrower is receiving a portion of the down payment as a loan from another person, the lender will consider this:

Answer 27

a debt obligation.

Question 28

In the Employment Information section of the Uniform Residential Loan Application, the borrower provides the name and address of his or her current employer, the length of current employment, the number of years worked in the current line of work, job title and:

Answer 28

a phone number.

Question 29

If the loan processor decides the loan application is not acceptable, he or she will list all the reasons for rejection, inform the borrower and:

Answer 29

close the file.

Question 30

Most real estate transactions depend upon the buyer’s ability to:

Answer 30

obtain financing.

Question 31

Secondary market requirements are also known as:

Answer 31

Fannie Mae guidelines.

Question 32

Underwriting is usually performed by a loan officer at a financial institution and is based on information contained in the borrower’s loan application and:

Answer 32

property appraisal.

Question 33

Once the lender has verified the borrower’s employment with regard to income, the lender will try to estimate the applicant’s ability to:

Answer 33

fulfill the loan obligation.

Question 34

The form that the lender will use to collect the employment information is called the:

Answer 34

Verification of Employment.

Question 35

Depending on what type of loan the lender wants to issue and the current loan-to-value ratio, the lender will base the loan amount on either the amount of the appraisal or the:

Answer 35

sales price.