Chapter 15 – Mortgage Underwriting and Borrower Qualification

Question 1

TRUE OR FALSE? The total debt service ratio is the ratio of the sum of annual mortgage payments and real property taxes to annual gross income.

Answer 1

False – this describes the gross debt service ratio. The total debt service ratio is the ratio of annual payment of all debts to annual gross income.

Question 2

In addition to repayment of the loan amount, list the three financial obligations of the borrower.

Answer 2

• Property taxes
• Property insurance
• Property maintenance

Question 3

The _______ ensures that the net operating income (NOI) can cover the mortgage payments by expressing the margin between the NOI and mortgage payments as a percentage of NOI.

Answer 3

safety margin

Question 4

What is the difference between a credit analysis and a credit report?

Answer 4

A credit analysis evaluates the applicant’s ability to meet the terms of a mortgage and the amount of income available for future payments - in other words, the applicant’s ability to pay.
A credit report is a record identifying an applicant’s habits regarding their financial commitments.

Question 5

What is the definition of market value?

Answer 5

Market value is an estimate of what a property is likely to sell for in an arm’s length transaction between a willing, informed, and rational average buyer and seller, if the property is on the market for a reasonable period of time when market conditions are unchanged.

Question 6

The _________ is the long-term, conservative estimate of the value of the property pledged as security for a loan.

Answer 6

lending value

Question 7

List the five Cs of credit.

Answer 7

The five Cs of credit are:
- Character
- Capital
- Capacity
- Credit
- Collateral

Question 8

TRUE OR FALSE? Without changing the gross debt service ratio, the amount borrowed can be decreased by extending the amortization period.

Answer 8

False. The amount borrowed is increased by extending the amortization period.

Question 9

What are the four basic elements used to structure a mortgage loan?

Answer 9

• Amount (face value) of the loan
• Amortization period
• Interest rate
• Monthly payments

Question 10

The __________ ratio is the percentage of lending value that determines the maximum loan amount.

Answer 10

loan-to-value