Chapter 4 Flashcards
What is the URLA form 1003 used for?
It is the official application form for all residential loans, used to collect crucial information about the borrower for credit evaluation.
Chapter 4, p. 128
How can RMLOs accept loan applications?
Through face-to-face interviews, telephone, mail, or the Internet.
Chapter 4, p. 128
When must the borrower sign the Initial 1003 application?
At the time of completion, with exceptions for military personnel and incapacitated borrowers using a power of attorney.
Chapter 4, p. 128
What is the purpose of the Final 1003 application?
Prepared at loan closing, it verifies and finalizes the information provided in the Initial 1003.
Chapter 4, p. 129
What information is collected in Section 1 of the URLA?
Borrower’s personal information, income, and employment details.
Chapter 4, p. 129
What does Section 4 of the URLA focus on?
Loan and property information, including loan purpose and details about the property.
Chapter 4, p. 129
What is documented in Section 9 of the URLA?
Loan originator organization name and information about the loan originator.
Chapter 4, p. 129
What does the Uniform Residential Loan Application-Continuation Sheet do?
Provides additional space for completing the URLA when needed.
Chapter 4, p. 130
What is the Dodd-Frank Act’s suitability standard for loans?
Ensures borrowers are financially capable of handling loans and understand the risks and benefits.
Chapter 4, p. 131
What does ‘net tangible benefit’ mean in mortgage lending?
A consumer protection standard requiring that refinanced loans provide clear financial benefits to the borrower.
Chapter 4, p. 131
What are examples of liquid assets?
Cash, checking and savings accounts, money market accounts, mutual funds, and stocks.
Chapter 4, p. 132
What are examples of non-liquid assets?
Real estate, automobiles, furniture, and other tangible personal property.
Chapter 4, p. 132
What documentation can verify assets for mortgage approval?
Bank statements, investment portfolio statements, and retirement account statements.
Chapter 4, p. 133
What are financial reserves in mortgage lending?
Liquid or near-liquid assets available to borrowers after mortgage closing to cover housing expenses.
Chapter 4, p. 134
What is considered an unacceptable source of reserves?
Unsecured borrowed funds, IPCs, and cash proceeds from cash-out refinances.
Chapter 4, p. 135
What are liabilities in mortgage underwriting?
Obligations such as housing expenses, revolving accounts, installment loans, and child support payments.
Chapter 4, p. 135
What is excluded from liabilities for DTI calculations?
Taxes, retirement contributions, commuting costs, union dues, and voluntary deductions.
Chapter 4, p. 136
What employment history is required for mortgage approval?
A minimum two-year history for both wage earners and self-employed borrowers.
Chapter 4, p. 136
What is the purpose of IRS Form 4506-C?
Allows lenders to order tax transcripts electronically to verify borrower income.
Chapter 4, p. 137
How is variable income assessed?
Based on history of receipt, payment frequency, and income trending over 12-24 months.
Chapter 4, p. 138
What is required for self-employed borrower income verification?
Two years of personal and business tax returns with all schedules attached.
Chapter 4, p. 140
What is the role of nontaxable income in underwriting?
It can be grossed up by 25% if verified as nontaxable and likely to continue.
Chapter 4, p. 141
What is a tri-merged credit report?
A comprehensive credit report combining information from Equifax, TransUnion, and Experian.
Chapter 4, p. 141
What are the ‘Three Cs’ of mortgage underwriting?
Credit reputation, capacity, and collateral.
Chapter 4, p. 144
What is the standard front-end ratio for conventional loans?
28% of gross monthly income allocated to PITIA.
Chapter 4, p. 146
What is the standard back-end ratio for FHA loans?
43% of gross monthly income for PITIA and recurring debt.
Chapter 4, p. 147
What is PMI, and when is it required?
Private mortgage insurance is required when the LTV exceeds 80%.
Chapter 4, p. 149
What is a basis point?
One-hundredth of a percentage point, often used for interest rate discussions.
Chapter 4, p. 147
What is the cost approach in appraisals?
Determines property value based on replacement cost minus depreciation.
Chapter 4, p. 152
What does the principle of substitution in appraisal state?
A property’s value is no more than the cost of acquiring an equally desirable substitute.
Chapter 4, p. 153
What are the three approaches to property valuation?
Cost approach, sales comparison approach, and income approach.
Chapter 4, p. 153
What is external obsolescence in property appraisal?
Loss of property value due to external factors like changing traffic patterns or nearby industrial facilities.
Chapter 4, p. 153
What is Regulation Z’s Appraiser Independence Rule?
Ensures appraisers can provide independent property valuations without undue influence.
Chapter 4, p. 154
What is the role of an Appraisal Management Company (AMC)?
Acts as an intermediary between lenders and appraisers to ensure independence.
Chapter 4, p. 155
What does flood insurance cover in mortgage lending?
Protects properties in Special Flood Hazard Areas (SFHAs) from flood-related damage.
Chapter 4, p. 156
What is the minimum flood insurance coverage required?
The lesser of 100% of the replacement cost or the maximum NFIP insurance available, typically $250,000 for residential properties.
Chapter 4, p. 156
What document determines if a property is in a Special Flood Hazard Area (SFHA)?
A Flood Certification or Standard Flood Hazard Determination form.
Chapter 4, p. 156
What is the maximum allowable DTI for conventional loans?
36%, though some loans may allow up to 45% with strong compensating factors.
Chapter 4, p. 147
What is the Housing Payment History in credit evaluation?
A review of borrower rent or mortgage payment history for the past 12 months.
Chapter 4, p. 141
What is the purpose of a gift letter in mortgage lending?
To verify that funds provided by a third party are a gift and not a loan requiring repayment.
Chapter 4, p. 137
What is the purpose of the Debt-to-Income (DTI) ratio?
To measure a borrower’s ability to manage monthly payments and debts.
Chapter 4, p. 135
What is the difference between gross and net income?
Gross income is before taxes and deductions, while net income is after taxes and deductions.
Chapter 4, p. 136
What is the role of overlays in mortgage underwriting?
Additional lender-specific requirements on top of existing guidelines from agencies like FHA or Fannie Mae.
Chapter 4, p. 133
What is the purpose of the sales comparison approach in appraisals?
It evaluates property value based on recent sales of similar properties in the area.
Chapter 4, p. 153
What is the residual income calculation in VA loans?
The amount left after all monthly expenses, including PITIA and debts, are deducted from gross income.
Chapter 4, p. 147
What is the purpose of the Loan Estimate (LE)?
To provide borrowers with an estimate of loan costs and terms at the start of the application process.
Chapter 4, p. 130
What are compensating factors in underwriting?
Positive elements like additional income or reserves that can offset higher DTIs or weaker credit scores.
Chapter 4, p. 138
What is the purpose of the income approach in property appraisal?
To determine value based on the income a property can generate, primarily used for investment properties.
Chapter 4, p. 153
What is the maximum IPC (Interested Party Contributions) allowed on conventional loans?
3% for loans with LTVs above 90%, 6% for LTVs between 75%-90%, and 9% for LTVs below 75%.
Chapter 4, p. 132
What is an escrow holdback?
Funds set aside at closing for incomplete repairs or improvements, released upon project completion.
Chapter 4, p. 137
What is the purpose of hazard insurance?
To protect the property against damage from natural disasters, fire, or vandalism.
Chapter 4, p. 156
What is an asset depletion calculation?
A method of converting liquid assets into income for underwriting purposes.
Chapter 4, p. 133
What is an employment verification (VOE)?
A process to confirm a borrower’s current employment status and income.
Chapter 4, p. 136
What is the role of a co-borrower in mortgage applications?
To provide additional income or credit strength for qualifying, both are equally responsible for repayment.
Chapter 4, p. 128
What is the minimum credit score for FHA loans with 3.5% down?
Chapter 4, p. 147
What is the definition of earnest money in real estate?
A deposit made to demonstrate a buyer’s serious intent to purchase a property.
Chapter 4, p. 134
What is the purpose of Fannie Mae’s DU and Freddie Mac’s LPA systems?
To automate the underwriting process and determine loan eligibility.
Chapter 4, p. 133
What is the purpose of homeowner’s association (HOA) dues in underwriting?
To ensure borrowers can afford additional housing expenses beyond the mortgage.
Chapter 4, p. 135
What is the significance of credit inquiries in underwriting?
Excessive inquiries may indicate financial distress or increased borrowing risk.
Chapter 4, p. 141
What is the purpose of a closing disclosure (CD)?
To provide final loan terms and detailed costs to borrowers at least three business days before closing.
Chapter 4, p. 130
What is the FHA’s Maximum Mortgage Calculation?
The lesser of the property’s sales price or appraised value multiplied by the LTV limit.
Chapter 4, p. 147
What is the role of the Fair Credit Reporting Act (FCRA) in lending?
To regulate the collection, use, and sharing of credit information.
Chapter 4, p. 141
What is a payment shock in mortgage lending?
A significant increase in a borrower’s monthly mortgage payment compared to prior housing expenses.
Chapter 4, p. 145
What is the purpose of the Homeowner’s Insurance Binder?
To provide proof of hazard insurance coverage before closing.
Chapter 4, p. 156
What is the maximum LTV for conventional loans?
95% for primary residences; higher LTVs may require additional PMI.
Chapter 4, p. 147
What are non-permanent resident alien requirements for FHA loans?
Valid SSN, employment authorization, and intention to occupy the home as a primary residence.
Chapter 4, p. 132
What are key elements of title insurance?
Protects against ownership disputes, liens, and title defects not found during the title search.
Chapter 4, p. 157
What is the Sales Comparison Adjustment in appraisals?
Adjustments made to comparable properties to reflect differences in features, size, or condition.
Chapter 4, p. 153
What is the back-end ratio for VA loans?
41%, though exceptions may apply based on residual income.
Chapter 4, p. 147
What is seasoning in mortgage lending?
The minimum time funds or payments must be held or documented before being considered valid.
Chapter 4, p. 134
What is the purpose of a gift of equity?
A seller gives part of their equity in the property to the buyer, often used in family transactions.
What is the back-end ratio for VA loans?
41%, though exceptions may apply based on residual income.
What is seasoning in mortgage lending?
The minimum time funds or payments must be held or documented before being considered valid.
What is the purpose of a gift of equity?
A seller gives part of their home’s equity as a gift to the buyer, often a family member, to reduce the down payment amount.
What is the minimum property standard for FHA loans?
The property must meet HUD’s minimum property requirements and be safe, sound, and secure.
What is the Loan-to-Value (LTV) ratio?
The ratio of the loan amount to the appraised value or purchase price of the property, whichever is less.
What is the role of a title search in real estate transactions?
To confirm the seller’s legal right to sell the property and uncover any liens or encumbrances.
What is the definition of collateral in mortgage lending?
The property securing the loan that can be seized if the borrower defaults.
What is the purpose of the Equal Credit Opportunity Act (ECOA)?
To prevent discrimination in lending based on race, color, religion, national origin, sex, marital status, or age.
What are examples of compensating factors for higher DTI ratios?
High credit scores, significant cash reserves, low housing expense increases, or substantial down payments.
What is the maximum LTV for USDA loans?
100% of the appraised value, allowing for no down payment.
What is a prepayment penalty?
A fee charged for paying off a loan early, prohibited on Qualified Mortgages.
What are allowable seller contributions for VA loans?
Up to 4% of the property’s purchase price for buyer concessions like closing costs or prepaid expenses.
What is the income requirement for USDA loans?
Household income must not exceed 115% of the area median income.
What is the cost approach in appraisals?
A method determining property value by adding the cost of land and construction minus depreciation.
What is required in a Verification of Rent (VOR)?
Documentation of the borrower’s rental payment history for the past 12 months.
What is the purpose of the appraisal process in mortgage lending?
To determine the fair market value of the property being used as collateral for the loan.
What is the difference between front-end and back-end DTI ratios?
The front-end ratio considers only housing costs (PITIA), while the back-end ratio includes all recurring debt.
What is a balloon mortgage?
A loan with smaller monthly payments and a large lump sum payment due at the end of the term.
What is the purpose of escrow accounts in mortgage lending?
To hold funds for property taxes, homeowner’s insurance, and sometimes mortgage insurance premiums.
What is an Automated Underwriting System (AUS)?
A computerized system that evaluates loan applications against lender guidelines and risk criteria.
What is a piggyback loan?
A second mortgage used to avoid PMI by splitting the loan into two smaller loans.
What is a cash-out refinance?
A refinancing option where the borrower takes out a new loan for more than the existing mortgage balance and receives the difference in cash.
What are closing costs?
Fees and expenses paid at loan closing, including lender fees, title fees, and prepaid items like taxes and insurance.
What is a HELOC?
A Home Equity Line of Credit, a revolving line of credit secured by the borrower’s home equity.
What is the purpose of earnest money in real estate transactions?
To demonstrate the buyer’s serious intent to purchase the property, credited toward closing costs or the down payment.
What is considered ‘seasoned funds’ in underwriting?
Funds that have been in the borrower’s account for at least 60 days to verify legitimate sourcing.
What is a payoff statement?
A document detailing the total amount needed to pay off an existing loan, including principal, interest, and fees.
What is considered a ‘gift’ in mortgage lending?
Funds provided by a relative or close associate for the borrower’s down payment or closing costs without repayment obligations.
What is the role of PITI in mortgage payments?
It represents the total monthly housing expense: Principal, Interest, Taxes, and Insurance.
What is a rate lock?
A guarantee that the interest rate quoted to the borrower will remain unchanged for a specified period.
What is the role of the Truth in Lending Act (TILA) in mortgage lending?
To ensure borrowers are informed of loan terms and costs through disclosures like the APR.
What is the primary purpose of the Homeowners Protection Act (HPA)?
To regulate the cancellation of private mortgage insurance (PMI) when certain LTV thresholds are met.
What is the standard appraisal report used in mortgage lending?
The Uniform Residential Appraisal Report (URAR) provides an expert opinion on a property’s value for mortgage purposes.
What are the three approaches to estimating a property’s value in appraisal?
The cost approach, sales comparison approach, and income approach.
What is functional obsolescence in property appraisal?
Loss in property desirability due to outdated style, layout, or function, such as one bathroom in a market expecting two.
What is external obsolescence in property appraisal?
Value loss caused by factors outside the property, such as proximity to a sewage plant or changing traffic patterns.
What does the income approach focus on in appraisals?
Evaluates the property value based on income it generates, typically used for investment properties.
What is the purpose of the Appraiser Independence Rule (AIR)?
Ensures appraisers can provide unbiased, independent property valuations without influence from interested parties.
What is a wet funding state?
In wet funding states, funds are disbursed at the closing table once all documents are signed.
What is a dry funding state?
In dry funding states, funds are disbursed only after a post-closing review, which may take several days.
What is included in a lender’s title insurance policy?
Protects the lender against title defects up to the loan amount; coverage declines as the loan is paid off.
What are the main components of the housing expense-to-income (front-end) ratio?
Includes Principal, Interest, Taxes, Insurance (PITI), and any HOA dues.
What does the Dodd-Frank Act’s suitability standard require?
Lenders must ensure the mortgage terms are appropriate for the borrower’s financial situation and understanding.
What are the three Cs of mortgage underwriting?
Credit reputation, capacity, and collateral.
What is the principle of substitution in property valuation?
A buyer will not pay more for a property than for an equivalent substitute.
What is the maximum CLTV allowed on conventional loans?
Depends on program and lender guidelines but generally around 95% for owner-occupied properties.
What is a deed?
A legal instrument transferring property ownership, containing property description, party names, and signatures.
What is depreciation in appraisals?
A reduction in property value due to wear and tear, functional obsolescence, or external factors.
What is the difference between net and gross adjustments in appraisals?
Net adjustments total changes after offsets; gross adjustments total absolute changes without offsets.
What are the eligibility criteria for a VA loan?
Includes meeting residual income thresholds, using the property as a primary residence, and adhering to VA property requirements.
What is the purpose of private mortgage insurance (PMI)?
Protects lenders against losses when the borrower defaults on loans with high LTVs.
What is a lender’s flat fee on VA loans?
Limited to 1% of the loan amount to cover lender costs.
