CHAPTER 4: PROCESSING AND UNDERWRITING Flashcards
Assets are divided into two types
liquid assets used for down payment and closing costs
and long-term assets that can be used to cover the two months payments required for
reserves
To verify the assets the borrower has, you can use
bank statements, investment
statements, Verification of Deposits.
____________ cannot be used unless it is deposited into an account and has at least 60-day
seasoning
Cash
Additional down payment options are
Gift letter from a blood relative or significant other
and shows no requirement for repayment
a down payment assistance program
that assists first time homebuyers. The
assistance could come from, city, county or state programs.
Two types of income:
o stable income; and
o variable income
The income is verified with
1099’s, W-2’s, Paystubs, tax returns with a 4506T and a
Verification of Employment
__________ is required to provide continuity of income.
2-year history
Non-taxable income can be grossed up
25%, an example of non-taxable income is social
security benefits
There are six income calculations that are essential to know when we are talking about
calculating income.
o If the borrower is paid annually, the calculation is annual gross income/12
months.
o If the borrower is paid monthly, there is no calculation, use the annual gross
payment amount divided by 12 months.
o If the borrower is paid twice monthly, (an example would be they are paid on the
5th and the 20th of the month) the calculation is: the amount of each paycheck x 2
pay periods
o If the borrower is paid bi-weekly, then the calculation is (biweekly gross pay x 26
pay periods in a year)/12 months.
o If the borrower is paid weekly, then the calculation is (weekly gross pay x 52 pay
periods)/12 months
o If the borrower is paid hourly, the calculation is (hourly gross pay x average # of
hours worked per week x 52 weeks)/12 months
A borrower is considered self-employed if
they own 25% or more of a company. There is
a lot of additional analysis for self-employed borrowers to ensure continuity of income.
______________ must be disclosed by the borrower if they are not on the credit report
All liabilities
Any payment on liabilities that has less than ____ payments left do not have to be included
in the ______. The exception is a leased vehicle.
- 10
2. ratios
Things that are not considered liabilities include things like
utilities and cell phone
payments.
When calculating ratios, you have the front-end or housing ratio and back-end or overall
ratio. Each of the agency products all have different ratios to qualify for the loan.
o Conventional- 28 percent/36 percent
o FHA-31 percent/43 percent
o VA- Back end DTI of 41 percent with residual income calculation
o USDA - 29 percent/41 percent
• There is also loan to value which is considered a qualifying ratio. The maximum LTV on
the programs we discussed are:
o Conventional -97 percent (3 percent down payment)
o FHA- 96.5 percent (3.5 percent down payment)
o VA- 100 percent (0 down payment required)
o USDA-100 percent (0 down payment required)
The credit report that is pulled for underwriting a loan, is called _______, the merging
of the three credit agencies, ____________________.
- Tri-Merge
2. Experian, TransUnion and Equifax.
The underwriter will use the ______ credit score when underwriting.
Middle
What is the credit score range?
300-850
• Bankruptcies show on the credit report for
seven (7) years on Chapter 11 or 13 and ten
(10) year on a Chapter 7.
For a conventional loan, if a borrower’s credit report shows that a borrower has been
______ or more days late within _________months, the underwriter will deny
the loan, unless there are extenuating circumstances.
- sixty (60)
2. the past 12 Months
For a conventional loan, a borrower is prohibited from obtaining a loan
if they have had a
foreclosure reported on their credit within the previous seven (7) years
If there is a short sale and not a foreclosure, then the borrower must wait ______ years
from the short sale to obtain a new mortgage
four
Inquiries remain on a borrower’s credit for _____ years, but most of the time, the score
only takes it into account for _________.
- two (2)
2. twelve (12) months
FCRA (Regulation V)
is a federal law that regulates how consumer credit reporting
agencies (CRAs) use consumer’s information
How many credit reports can you have for free each year?
1.
All credit pulls must have a
permissible purpose – just because an MLO can pull a credit
report doesn’t mean it’s legal under FCRA
FCRA requires most things are removed within
seven (7) years, ten (10) years on
bankruptcies
FCRA requires an______________ disclosure. This disclosure must be given within ___
days of a credit decision.
- adverse action
2. 30
FACTA (amendment to FCRA) adds provisions
to improve the accuracy of consumers’
credit-related records
FACTA requires the provision
of risk-based pricing notices and credit scores to
consumers whose applications are denied or who receive less favorable offers of credit
Safeguard Rules requires
all files to be kept confidential and stored in a locked cabinet or
draw, when not in use. All files have to be kept for a period of at least three years before
being destroyed. The CD must be kept for at least five (5) years.
_____________ Loan Applicant required under FACTA
Notice to Home
Economic Growth, Regulatory Relief and Consumer Protection Act requires
nationwide
consumer reporting agencies to provide national security freezes free to consumers.
As well as security/credit freezes, the amendment extended the time that a borrower can have a fraud alert on their credit report from _____ days to _____ year.
- 90 day
2. 1 year
Red Flags rules was established to
prevent identity theft. The Red Flags Rule applies to
financial institutions and creditors
The Disposal Rule is
part of FACTA and dictates how institutions should dispose of
consumer information
All files can be destroyed after
three (3) years and five (5) years for the CD. Hard copy can be destroyed if the files are digitized.
Tangible Net Benefit
• When analyzing a borrower if they should get the loan is to determine the Ability to
Repay and is a Tangible Net Benefit.
• As a professional it is an MLOs responsibility to discuss options and determine if it is the
best decision to compete a loan transaction.
RESPA
- Real Estate Settlement Procedures Act (RESPA, Regulation X).
- Covers: kickbacks, referral fees, escrow requirements, transfer of servicing, also TRID
RESPA does not cover:
o Vacant Land
o Large Tracts of Land (25 acres or more – even if there is a dwelling on it)
o Commercial or business loans
o The government, its agencies or instrumentalities
o Temporary financing (bridge loans or swing loans)
RESPA Section 8 prevents
anything of value being exchanged for referrals or kickbacks.
RESPA - Also, an ________________ Disclosure if the MLO or company
have an interest in third party companies or if you are requiring a borrower to use any of
your referral companies.
Affiliated Business Arrangement (AfBA)
The USA Patriot Act was created in response to
attacks of September11, 2001.
The Treasury Department through its Financial Crimes Enforcement Network (FinCEN)
became responsible for implementing __________.
the Patriot Act
As part of compliance with the Patriot Act, financial institutions are required
to check
two (2) forms of identification for each borrower.
US Patriot Acts requires MLOs to obtain identification of borrowers through
Social
Security Card, Passport or Driver’s License and then run the borrower through the OFAC
database, to see if your borrowers are on the governments watch list.
An appraisal
is an evaluation of the borrower’s home determined by the appraiser and
substantiated by an appraisal report
All appraisers must conform with
USPAP and be licensed in their states to perform
appraisals
• The use of Appraisal Management Companies (AMCs)
is required by Fannie Mae and
Freddie Mac. They are a neutral third party.
There are three types of appraisals:
o Sales Comparison
o Cost Approach
o Income Approach
Appraisals
The Sales Comparison approach
is the most common and uses comparable properties to
determine a value of the subject property.
Comparables must be within _____ mile(s) of the subject property and have been
sold in the past _____ months
- 1
2. 6
Gross adjustments cannot exceed _____ percent of the comparable value or a
______ percent net of the comparable.
- 50%
2. 30%
Appraisals
Cost Approach appraisals
are determined by how much it would cost to reproduce the
improvement (home) on the property
Appraisals
Income Approach
used mostly for investment or multi-unit properties. The amount of
income the property can produce through renting it is used to determine the value.
• The term title is
a collective term for all a borrower’s legal rights to own, use, and
dispose of land.
The title report
is a generated report that shows the chain of title.
The chain of title
is the chain of the sales and transfers of ownership of the title
• Title Insurance protects
the borrower and the lender from any flaws in the title from the
date of the closing and before
There are two types of Title Insurance:
o Owner’s title insurance (protects the owners, usually not a requirement but a
recommendation)
o Lender’s title insurance (always required on a transaction – protects the lender)
An easement
is a legal right to use another’s land for a specific limited purpose
A restrictive covenant
is a clause in a deed or a lease to real property that limits what the
owner of the land or lease can do with the property
An encroachment
s where a property owner violates the property rights of his neighbor
by building something on the neighbor’s land or by allowing something to hand over on the neighbor’s property
A deed
is an instrument that conveys a grantors interest, if any, in real property
Ownership in severalty
is the simplest form of ownership. It is ownership in a sole form,
meaning only one person owns it.
Co-ownership
is also known as concurrent ownership and is the ownership of a property
by two or more persons who share title to real property
Tenancy in common
is a form of co-ownership with two or more persons having an
undivided interest in the entire line, but no right to survivorship.
Right to survivorship
means that the property passes automatically to other co-owners
when one co-owner dies
Joint Tenancy exists
when each co-owner has an equal undivided interest in the land with
the right of survivorship
Tenancy by the Entirety
is a form of co-ownership that involves only owners who are
husband and wife, with each having an equal and undivided share of the property
A lien is not only a ________ interest in the property, but it is also a financial
_________.
- financial
2. encumbrance.
A lien can be
voluntary or involuntary
A note or promissory note
is a written, legally binding promise to repay a debt.
Default
is the failure to fulfill an obligation, duty, or promise, as when a borrower fails to
make payments on a mortgage.
Generally, liens are paid in the order they were attached to the land. The important
exception is _________ liens; these types of liens are ______ to all other liens.
- property tax
2. superior
Insurance requirements
Homeowners insurance/Hazard Insurance and Flood
insurance.
Borrowers must have both if required at closing and paid up for the next 12 months.
When a property is in a flood zone, most lenders are going to require that that borrower
obtain flood insurance
The Federal Emergency Management Agency (FEMA)
is responsible for creating 100-
year flood plain maps and provide flood insurance to homeowners in identified flood
zones
Maximum flood insurance is _______ for the property and ______ for personal
property.
- $250,000
2. $100,000
The 1973 Flood Disaster Protection Act
regulated and required insured lenders and
federal agencies to require flood insurance for loans for properties in Special Flood
Hazard Areas (SFHA).
