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Mortgage Loan Originator Exam > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

What is the URLA form 1003 used for?

A

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

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2
Q

How can RMLOs accept loan applications?

A

Through face-to-face interviews, telephone, mail, or the Internet.

Chapter 4, p. 128

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3
Q

When must the borrower sign the Initial 1003 application?

A

At the time of completion, with exceptions for military personnel and incapacitated borrowers using a power of attorney.

Chapter 4, p. 128

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4
Q

What is the purpose of the Final 1003 application?

A

Prepared at loan closing, it verifies and finalizes the information provided in the Initial 1003.

Chapter 4, p. 129

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5
Q

What information is collected in Section 1 of the URLA?

A

Borrower’s personal information, income, and employment details.

Chapter 4, p. 129

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6
Q

What does Section 4 of the URLA focus on?

A

Loan and property information, including loan purpose and details about the property.

Chapter 4, p. 129

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7
Q

What is documented in Section 9 of the URLA?

A

Loan originator organization name and information about the loan originator.

Chapter 4, p. 129

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8
Q

What does the Uniform Residential Loan Application-Continuation Sheet do?

A

Provides additional space for completing the URLA when needed.

Chapter 4, p. 130

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9
Q

What is the Dodd-Frank Act’s suitability standard for loans?

A

Ensures borrowers are financially capable of handling loans and understand the risks and benefits.

Chapter 4, p. 131

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10
Q

What does ‘net tangible benefit’ mean in mortgage lending?

A

A consumer protection standard requiring that refinanced loans provide clear financial benefits to the borrower.

Chapter 4, p. 131

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11
Q

What are examples of liquid assets?

A

Cash, checking and savings accounts, money market accounts, mutual funds, and stocks.

Chapter 4, p. 132

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12
Q

What are examples of non-liquid assets?

A

Real estate, automobiles, furniture, and other tangible personal property.

Chapter 4, p. 132

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13
Q

What documentation can verify assets for mortgage approval?

A

Bank statements, investment portfolio statements, and retirement account statements.

Chapter 4, p. 133

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14
Q

What are financial reserves in mortgage lending?

A

Liquid or near-liquid assets available to borrowers after mortgage closing to cover housing expenses.

Chapter 4, p. 134

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15
Q

What is considered an unacceptable source of reserves?

A

Unsecured borrowed funds, IPCs, and cash proceeds from cash-out refinances.

Chapter 4, p. 135

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16
Q

What are liabilities in mortgage underwriting?

A

Obligations such as housing expenses, revolving accounts, installment loans, and child support payments.

Chapter 4, p. 135

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17
Q

What is excluded from liabilities for DTI calculations?

A

Taxes, retirement contributions, commuting costs, union dues, and voluntary deductions.

Chapter 4, p. 136

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18
Q

What employment history is required for mortgage approval?

A

A minimum two-year history for both wage earners and self-employed borrowers.

Chapter 4, p. 136

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19
Q

What is the purpose of IRS Form 4506-C?

A

Allows lenders to order tax transcripts electronically to verify borrower income.

Chapter 4, p. 137

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20
Q

How is variable income assessed?

A

Based on history of receipt, payment frequency, and income trending over 12-24 months.

Chapter 4, p. 138

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21
Q

What is required for self-employed borrower income verification?

A

Two years of personal and business tax returns with all schedules attached.

Chapter 4, p. 140

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22
Q

What is the role of nontaxable income in underwriting?

A

It can be grossed up by 25% if verified as nontaxable and likely to continue.

Chapter 4, p. 141

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23
Q

What is a tri-merged credit report?

A

A comprehensive credit report combining information from Equifax, TransUnion, and Experian.

Chapter 4, p. 141

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24
Q

What are the ‘Three Cs’ of mortgage underwriting?

A

Credit reputation, capacity, and collateral.

Chapter 4, p. 144

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25
Q

What is the standard front-end ratio for conventional loans?

A

28% of gross monthly income allocated to PITIA.

Chapter 4, p. 146

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26
Q

What is the standard back-end ratio for FHA loans?

A

43% of gross monthly income for PITIA and recurring debt.

Chapter 4, p. 147

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27
Q

What is PMI, and when is it required?

A

Private mortgage insurance is required when the LTV exceeds 80%.

Chapter 4, p. 149

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28
Q

What is a basis point?

A

One-hundredth of a percentage point, often used for interest rate discussions.

Chapter 4, p. 147

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29
Q

What is the cost approach in appraisals?

A

Determines property value based on replacement cost minus depreciation.

Chapter 4, p. 152

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30
Q

What does the principle of substitution in appraisal state?

A

A property’s value is no more than the cost of acquiring an equally desirable substitute.

Chapter 4, p. 153

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31
Q

What are the three approaches to property valuation?

A

Cost approach, sales comparison approach, and income approach.

Chapter 4, p. 153

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32
Q

What is external obsolescence in property appraisal?

A

Loss of property value due to external factors like changing traffic patterns or nearby industrial facilities.

Chapter 4, p. 153

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33
Q

What is Regulation Z’s Appraiser Independence Rule?

A

Ensures appraisers can provide independent property valuations without undue influence.

Chapter 4, p. 154

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34
Q

What is the role of an Appraisal Management Company (AMC)?

A

Acts as an intermediary between lenders and appraisers to ensure independence.

Chapter 4, p. 155

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35
Q

What does flood insurance cover in mortgage lending?

A

Protects properties in Special Flood Hazard Areas (SFHAs) from flood-related damage.

Chapter 4, p. 156

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36
Q

What is the minimum flood insurance coverage required?

A

The lesser of 100% of the replacement cost or the maximum NFIP insurance available, typically $250,000 for residential properties.

Chapter 4, p. 156

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37
Q

What document determines if a property is in a Special Flood Hazard Area (SFHA)?

A

A Flood Certification or Standard Flood Hazard Determination form.

Chapter 4, p. 156

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38
Q

What is the maximum allowable DTI for conventional loans?

A

36%, though some loans may allow up to 45% with strong compensating factors.

Chapter 4, p. 147

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39
Q

What is the Housing Payment History in credit evaluation?

A

A review of borrower rent or mortgage payment history for the past 12 months.

Chapter 4, p. 141

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40
Q

What is the purpose of a gift letter in mortgage lending?

A

To verify that funds provided by a third party are a gift and not a loan requiring repayment.

Chapter 4, p. 137

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41
Q

What is the purpose of the Debt-to-Income (DTI) ratio?

A

To measure a borrower’s ability to manage monthly payments and debts.

Chapter 4, p. 135

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42
Q

What is the difference between gross and net income?

A

Gross income is before taxes and deductions, while net income is after taxes and deductions.

Chapter 4, p. 136

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43
Q

What is the role of overlays in mortgage underwriting?

A

Additional lender-specific requirements on top of existing guidelines from agencies like FHA or Fannie Mae.

Chapter 4, p. 133

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44
Q

What is the purpose of the sales comparison approach in appraisals?

A

It evaluates property value based on recent sales of similar properties in the area.

Chapter 4, p. 153

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45
Q

What is the residual income calculation in VA loans?

A

The amount left after all monthly expenses, including PITIA and debts, are deducted from gross income.

Chapter 4, p. 147

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46
Q

What is the purpose of the Loan Estimate (LE)?

A

To provide borrowers with an estimate of loan costs and terms at the start of the application process.

Chapter 4, p. 130

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47
Q

What are compensating factors in underwriting?

A

Positive elements like additional income or reserves that can offset higher DTIs or weaker credit scores.

Chapter 4, p. 138

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48
Q

What is the purpose of the income approach in property appraisal?

A

To determine value based on the income a property can generate, primarily used for investment properties.

Chapter 4, p. 153

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49
Q

What is the maximum IPC (Interested Party Contributions) allowed on conventional loans?

A

3% for loans with LTVs above 90%, 6% for LTVs between 75%-90%, and 9% for LTVs below 75%.

Chapter 4, p. 132

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50
Q

What is an escrow holdback?

A

Funds set aside at closing for incomplete repairs or improvements, released upon project completion.

Chapter 4, p. 137

51
Q

What is the purpose of hazard insurance?

A

To protect the property against damage from natural disasters, fire, or vandalism.

Chapter 4, p. 156

52
Q

What is an asset depletion calculation?

A

A method of converting liquid assets into income for underwriting purposes.

Chapter 4, p. 133

53
Q

What is an employment verification (VOE)?

A

A process to confirm a borrower’s current employment status and income.

Chapter 4, p. 136

54
Q

What is the role of a co-borrower in mortgage applications?

A

To provide additional income or credit strength for qualifying, both are equally responsible for repayment.

Chapter 4, p. 128

55
Q

What is the minimum credit score for FHA loans with 3.5% down?

A

Chapter 4, p. 147

56
Q

What is the definition of earnest money in real estate?

A

A deposit made to demonstrate a buyer’s serious intent to purchase a property.

Chapter 4, p. 134

57
Q

What is the purpose of Fannie Mae’s DU and Freddie Mac’s LPA systems?

A

To automate the underwriting process and determine loan eligibility.

Chapter 4, p. 133

58
Q

What is the purpose of homeowner’s association (HOA) dues in underwriting?

A

To ensure borrowers can afford additional housing expenses beyond the mortgage.

Chapter 4, p. 135

59
Q

What is the significance of credit inquiries in underwriting?

A

Excessive inquiries may indicate financial distress or increased borrowing risk.

Chapter 4, p. 141

60
Q

What is the purpose of a closing disclosure (CD)?

A

To provide final loan terms and detailed costs to borrowers at least three business days before closing.

Chapter 4, p. 130

61
Q

What is the FHA’s Maximum Mortgage Calculation?

A

The lesser of the property’s sales price or appraised value multiplied by the LTV limit.

Chapter 4, p. 147

62
Q

What is the role of the Fair Credit Reporting Act (FCRA) in lending?

A

To regulate the collection, use, and sharing of credit information.

Chapter 4, p. 141

63
Q

What is a payment shock in mortgage lending?

A

A significant increase in a borrower’s monthly mortgage payment compared to prior housing expenses.

Chapter 4, p. 145

64
Q

What is the purpose of the Homeowner’s Insurance Binder?

A

To provide proof of hazard insurance coverage before closing.

Chapter 4, p. 156

65
Q

What is the maximum LTV for conventional loans?

A

95% for primary residences; higher LTVs may require additional PMI.

Chapter 4, p. 147

66
Q

What are non-permanent resident alien requirements for FHA loans?

A

Valid SSN, employment authorization, and intention to occupy the home as a primary residence.

Chapter 4, p. 132

67
Q

What are key elements of title insurance?

A

Protects against ownership disputes, liens, and title defects not found during the title search.

Chapter 4, p. 157

68
Q

What is the Sales Comparison Adjustment in appraisals?

A

Adjustments made to comparable properties to reflect differences in features, size, or condition.

Chapter 4, p. 153

69
Q

What is the back-end ratio for VA loans?

A

41%, though exceptions may apply based on residual income.

Chapter 4, p. 147

70
Q

What is seasoning in mortgage lending?

A

The minimum time funds or payments must be held or documented before being considered valid.

Chapter 4, p. 134

71
Q

What is the purpose of a gift of equity?

A

A seller gives part of their equity in the property to the buyer, often used in family transactions.

72
Q

What is the back-end ratio for VA loans?

A

41%, though exceptions may apply based on residual income.

73
Q

What is seasoning in mortgage lending?

A

The minimum time funds or payments must be held or documented before being considered valid.

74
Q

What is the purpose of a gift of equity?

A

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.

75
Q

What is the minimum property standard for FHA loans?

A

The property must meet HUD’s minimum property requirements and be safe, sound, and secure.

76
Q

What is the Loan-to-Value (LTV) ratio?

A

The ratio of the loan amount to the appraised value or purchase price of the property, whichever is less.

77
Q

What is the role of a title search in real estate transactions?

A

To confirm the seller’s legal right to sell the property and uncover any liens or encumbrances.

78
Q

What is the definition of collateral in mortgage lending?

A

The property securing the loan that can be seized if the borrower defaults.

79
Q

What is the purpose of the Equal Credit Opportunity Act (ECOA)?

A

To prevent discrimination in lending based on race, color, religion, national origin, sex, marital status, or age.

80
Q

What are examples of compensating factors for higher DTI ratios?

A

High credit scores, significant cash reserves, low housing expense increases, or substantial down payments.

81
Q

What is the maximum LTV for USDA loans?

A

100% of the appraised value, allowing for no down payment.

82
Q

What is a prepayment penalty?

A

A fee charged for paying off a loan early, prohibited on Qualified Mortgages.

83
Q

What are allowable seller contributions for VA loans?

A

Up to 4% of the property’s purchase price for buyer concessions like closing costs or prepaid expenses.

84
Q

What is the income requirement for USDA loans?

A

Household income must not exceed 115% of the area median income.

85
Q

What is the cost approach in appraisals?

A

A method determining property value by adding the cost of land and construction minus depreciation.

86
Q

What is required in a Verification of Rent (VOR)?

A

Documentation of the borrower’s rental payment history for the past 12 months.

87
Q

What is the purpose of the appraisal process in mortgage lending?

A

To determine the fair market value of the property being used as collateral for the loan.

88
Q

What is the difference between front-end and back-end DTI ratios?

A

The front-end ratio considers only housing costs (PITIA), while the back-end ratio includes all recurring debt.

89
Q

What is a balloon mortgage?

A

A loan with smaller monthly payments and a large lump sum payment due at the end of the term.

90
Q

What is the purpose of escrow accounts in mortgage lending?

A

To hold funds for property taxes, homeowner’s insurance, and sometimes mortgage insurance premiums.

91
Q

What is an Automated Underwriting System (AUS)?

A

A computerized system that evaluates loan applications against lender guidelines and risk criteria.

92
Q

What is a piggyback loan?

A

A second mortgage used to avoid PMI by splitting the loan into two smaller loans.

93
Q

What is a cash-out refinance?

A

A refinancing option where the borrower takes out a new loan for more than the existing mortgage balance and receives the difference in cash.

94
Q

What are closing costs?

A

Fees and expenses paid at loan closing, including lender fees, title fees, and prepaid items like taxes and insurance.

95
Q

What is a HELOC?

A

A Home Equity Line of Credit, a revolving line of credit secured by the borrower’s home equity.

96
Q

What is the purpose of earnest money in real estate transactions?

A

To demonstrate the buyer’s serious intent to purchase the property, credited toward closing costs or the down payment.

97
Q

What is considered ‘seasoned funds’ in underwriting?

A

Funds that have been in the borrower’s account for at least 60 days to verify legitimate sourcing.

98
Q

What is a payoff statement?

A

A document detailing the total amount needed to pay off an existing loan, including principal, interest, and fees.

99
Q

What is considered a ‘gift’ in mortgage lending?

A

Funds provided by a relative or close associate for the borrower’s down payment or closing costs without repayment obligations.

100
Q

What is the role of PITI in mortgage payments?

A

It represents the total monthly housing expense: Principal, Interest, Taxes, and Insurance.

101
Q

What is a rate lock?

A

A guarantee that the interest rate quoted to the borrower will remain unchanged for a specified period.

102
Q

What is the role of the Truth in Lending Act (TILA) in mortgage lending?

A

To ensure borrowers are informed of loan terms and costs through disclosures like the APR.

103
Q

What is the primary purpose of the Homeowners Protection Act (HPA)?

A

To regulate the cancellation of private mortgage insurance (PMI) when certain LTV thresholds are met.

104
Q

What is the standard appraisal report used in mortgage lending?

A

The Uniform Residential Appraisal Report (URAR) provides an expert opinion on a property’s value for mortgage purposes.

105
Q

What are the three approaches to estimating a property’s value in appraisal?

A

The cost approach, sales comparison approach, and income approach.

106
Q

What is functional obsolescence in property appraisal?

A

Loss in property desirability due to outdated style, layout, or function, such as one bathroom in a market expecting two.

107
Q

What is external obsolescence in property appraisal?

A

Value loss caused by factors outside the property, such as proximity to a sewage plant or changing traffic patterns.

108
Q

What does the income approach focus on in appraisals?

A

Evaluates the property value based on income it generates, typically used for investment properties.

109
Q

What is the purpose of the Appraiser Independence Rule (AIR)?

A

Ensures appraisers can provide unbiased, independent property valuations without influence from interested parties.

110
Q

What is a wet funding state?

A

In wet funding states, funds are disbursed at the closing table once all documents are signed.

111
Q

What is a dry funding state?

A

In dry funding states, funds are disbursed only after a post-closing review, which may take several days.

112
Q

What is included in a lender’s title insurance policy?

A

Protects the lender against title defects up to the loan amount; coverage declines as the loan is paid off.

113
Q

What are the main components of the housing expense-to-income (front-end) ratio?

A

Includes Principal, Interest, Taxes, Insurance (PITI), and any HOA dues.

114
Q

What does the Dodd-Frank Act’s suitability standard require?

A

Lenders must ensure the mortgage terms are appropriate for the borrower’s financial situation and understanding.

115
Q

What are the three Cs of mortgage underwriting?

A

Credit reputation, capacity, and collateral.

116
Q

What is the principle of substitution in property valuation?

A

A buyer will not pay more for a property than for an equivalent substitute.

117
Q

What is the maximum CLTV allowed on conventional loans?

A

Depends on program and lender guidelines but generally around 95% for owner-occupied properties.

118
Q

What is a deed?

A

A legal instrument transferring property ownership, containing property description, party names, and signatures.

119
Q

What is depreciation in appraisals?

A

A reduction in property value due to wear and tear, functional obsolescence, or external factors.

120
Q

What is the difference between net and gross adjustments in appraisals?

A

Net adjustments total changes after offsets; gross adjustments total absolute changes without offsets.

121
Q

What are the eligibility criteria for a VA loan?

A

Includes meeting residual income thresholds, using the property as a primary residence, and adhering to VA property requirements.

122
Q

What is the purpose of private mortgage insurance (PMI)?

A

Protects lenders against losses when the borrower defaults on loans with high LTVs.

123
Q

What is a lender’s flat fee on VA loans?

A

Limited to 1% of the loan amount to cover lender costs.

Mortgage Loan Originator Exam (5 decks)

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