Loan Origination and Underwriting Flashcards
How is a borrower’s net worth determined?
A borrower’s net worth is determined by subtracting liabilities from assets.
What are assets?
Assets are the items of value owned by the borrower, such as cash on hand, checking and savings accounts, stocks, insurance, etc.
What are liabilities?
Liabilities are financial obligations or debts owed by a borrower.
What are debts?
Debts are considered any reoccurring monetary obligations that cannot be canceled.
What does an underwritier want to confirm in regards to borrows making a down payment and paying closing costs?
Underwriters want to confirm that the borrowers have sufficient assets and personal money to make a down payment on the property and pay closing cost, without having to borrow.
What does an underwriter want to confirm for payment for two months after down payment and closing costs?
Underwriters want to confirm that the borrower will have adequate reserves, usually two months of PITI, after making the down payment and closing cost.
What are reserves?
Reserves are cash on deposit or other highly liquid assets a borrower will have available after the loan funds.
Lenders would like to see two months of what?
Lenders would like to see at least enough to cover two months’ PITI mortgage payments of principal, interest, taxes, and insurance (and assessments such as condominium association fees, if applicable) after the borrower makes the down payment and pays all closing costs; however, in most cases, this is not required.
For investment properties how many months of PITI payments must be verified for loans on non-owner-occupied property?
For investment properties, six months’ PITI payments must be verified for loans on non-owner-occupied property
Consumer debts that have less than ___ months of payments remaining do not need to be included for the purpose of calculating debt ratios.
10
If the credit report does not show a required minimum payment amount, the lender should use an amount equal to ________________.
five percent of the outstanding balance.
What payments must always be considered a recurring monthly debt obligation, regardless of the number of months remaining?
Lease payments must always be considered a recurring monthly debt obligation, regardless of the number of months remaining on the lease.
How many months should borrower have after closing as reserves in a bank or brokerage account?
2 months minimum
Gross monthly income calculation=
Gross Monthly Income =
Annual Income ÷ 12
Weekly Income x 52 ÷ 12
Hourly rate x weekly hours worked x 52 ÷ 12
Bi-weekly rate x 26 weeks ÷ 12
Bi-monthly rate x 24 weeks ÷ 12
What does it mean to have a quality source of income?
A quality source of income is one that is reasonably reliable, such as income from an established employer, government agency, interest-yielding investment account, etc.
What does it mean to have a durable source of income?
A durable source of income can be expected to continue for a sustained period. Permanent disability, retirement earnings, and interest on established investments clearly are durable types of income. Temporary unemployment benefits are unlikely to be counted.
Bonus, commission, and part-time earning types of income must be shown to have been a consistent part of the borrowers earing to how many years to be considered durable?
Two years
What percentage of ownership in a business is required for an individual to be considered self-employed?
25%
What is required for verification of income for those who are self employed?
Verification of income requires 2 years of personal and business income tax returns. A year-to-date Profit and Loss Statement and a Balance Sheet may also be required.
What is a profit and loss statement?
A Profit and Loss Statement summarizes the company’s assets and liabilities over a range of time. A balance sheet depicts the company’s book value at a single moment in time. It is a snapshot of value.
Employment income must be verifiable for the past ____ years. Any source of income which is not verifiable is no acceptable to the lender.
two
Commission, Overtime, Bonus, Part-time, Interest and Dividend income must be ________________.
averaged over 2 years.
Retirement and pension income must continue for ___ years beyond the application date to be included as income.
3
Alimony, child support and/or maintenance may not be used as income if the borrower ______________, however, if these items are used as income, ___________________ states that the lender cannot refuse to consider them.
does not want to use them; Regulation B (ECOA)`
Receipt of alimony or child support payments must continue for ___ years beyond the application date to be included as income.
three
As it relates to rental income – the underwriter will only consider ___% of rental income collected. The other ___% is considered vacancy factor.
75% ; 25%
Public Assistance income is “grossed up” by ___% (increased by ___%) during underwriting.
1.25% ; 25%
What is considered public assistance income?
Public Assistance Income is “non-taxable” income and can be consider any of the following: child support, alimony, social security income, retirement income, pension, etc.
When can unemployment income be used as part of the qualifying income?
Unemployment Income – for applicants whose work is seasonal, unemployment income can be used as part of the qualifying income. Some trades such as fishing, construction, and teaching are seasonal work with regular downtime and during this down-time, they rely on unemployment income. If unemployment is a part of their natural annual work cycle, then it can be included in their qualifying income
if it has shown for the past two years on the borrower’s tax return (the average $$ amount is used).
For unemployment income to be verified what one or two forms will they most likely be required to sign?
The applicant will most likely be required to sign one or two IRS forms: an IRS 4506-C (Request for Transcript of Tax Return) and/or an IRS 8821 (Tax Information Authorization) so that the lender can verify the income.
What is the loan to value Ratio (LTV)?
The Loan-to-Value Ratio (LTV) = loan amount ÷ appraisal value or purchase price, whichever is less.
What is the combined Loan-to-Value Ratio (CLTV)?
The Combined Loan-to-Value Ratio (CLTV) = 1st Mortgage + 2nd Mortgage ÷ the sales price or appraised value (whichever is lower).
What is HCLTV and how do you calculate it?
HCLTV means “home equity line of credit (HELOC) combined loan-to-value ratio.” The formula to calculate HLTV is as follows: HLTV = 1st Loan Amount + the maximum available balance of the HELOC ÷ Lesser of the Property Value or Purchase Price.
What is the acquisition cost?
The acquisition cost is defined as the total amount needed to purchase property, including down payment, loan amount, and any allowable buyer paid closing costs.
How do you calculate the Housing Expense Ratio?
The Housing Expense Ratio = PITI ÷ Gross Monthly Income. Fannie Mae requires a maximum of 28% and FHA is 31%. The VA does not consider it.
How do you calculate the total Debt to Income Ratio?
The Total Debt to Income Ratio = PITI + other monthly debt ÷ Gross Monthly Income.
What is Per-Diem (or daily interest) mean?
Per-diem (or daily interest) means the amount of daily interest payable under a loan. A borrower’s first monthly payment is typically due on the first day of the second month after closing. For example, if a loan closes on January 15, then the first monthly payment will be due on March 1.
What is a “par interest rate”?
A par interest rate is the “break-even” rate for the lender. If a borrower wants a rate lower than par, the lender may offer discount points.
What are points used for?
Points - are used to lower interest rates and each point will lower the rate by 0.25%.
Who are discount points paid to?
Paid to the lender upfront for lowering the interest rate.
Who are origination points pard to?
origination points are paid to the loan originator as a fee for service
How much does each point cost?
Each discount point and each loan origination point cost 1% of the loan amount.
All origination points must be lumped together as the _______ on the ________ while discount points used to buy down the rate must be indicated as a _______________ for the interest rate selected.
origination fee; Loan Estimate; charge the borrower incurs
Discount points can be either temporary or fixed, and the cost of the point is a ____________, which is usually paid by the borrower, who also pays the origination point.
closing cost
Who can pay the discount point/buydown?
A discount point/buydown can be paid by the borrower, seller, builder, etc.
What is an origination fee?
Origination Fee - charged on loans that close. Covers administrative costs to close/service loan. Usually based on percent of loan amount (1% = 1 point = 100 basis points or bps).
A point is __% of the loan amount?
1%
What type of discount points give a borrower a lower interest rate for the life of the loan?
Fixed discount
What are Buy down points (temporary points)?
Buy down points (temporary points) – for example, shown as FHA 2-1, buy down allows a purchaser to reduce the interest rate on a mortgage by 2% for the first year, 1% for the next year, and 0% every year thereafter.
What is a lender’s return?
Lender’s return is the total amount a lender or broker makes on a loan’s discount points, such as from loan fees.
What is a tool MLOs can use to reduce a borrower’s settlement costs?
Yield spread premium (or lender credits) is a tool MLOs can use to reduce a borrower’s settlement costs.
How is the Annual interest rate calculated?
Annual interest rate is calculated as follows: loan amount x interest rate.
How is the Monthly Interest Rate calculated?
Monthly interest rate is calculated as follows: loan amount x interest rate ÷ 12.
How is the Daily Interest Rate calculated?
Daily interest rate is calculated as follows: loan amount x interest rate ÷ 365.
Mortgage interest in paid in _____?
Mortgage interest is paid in arrears. This use of arrears accounting indicates that payment will be made at the end of a certain period, rather than in advance.
When is the first mortgage payment due?
The first mortgage payment due date always skips one calendar month.
When are late fees due?
Late fees are due after the 15th of the month.
How is the prorated mortgage interest calculated and when is it paid?
Prorated mortgage interest paid by the borrower at closing (loan amount x interest rate)/365 days) x number of days left in month including closing day.
The loan originator collects all the information and sends the package to an _________.
underwriter
How can applications be taken?
Applications can be taken face-to-face, over the phone, through the mail or over the Internet.
An applicant’s interest rates can ____ or be _______.
float; locked in
What is a rate lock?
A rate lock is a lender promise to hold a certain interest rate and a certain number of points for the borrower, usually for a specified period, while the loan application is processed.
What must each lock in agreement have?
Each lock-in agreement must be in writing and contain expiration date of the lock, the interest rate, any discount points, any commitment fee and lock-in fee if these exist.
When can a borrower rescind a lock in agreement?
The borrower may rescind any lock-in agreement until a written confirmation of the agreement has been signed by the lender and mailed to the borrower.
What amount of the down payment must come from the borrowers own funds?
5%
What are way the down payment can be supplemented?
The borrower generally must use 5% of his or her own funds to make the required minimum cash down payment, although that down payment may be supplemented with a gift from a relative, domestic partner, fiancé, or fiancée.
What must a gift payment be accompanied by?
A gift must be accompanied by a gift letter that specifies the dollar amount of the gift, and the date the funds were transferred. The letter must also contain the donor’s statement that no repayment is expected and include the donor’s name, address, phone number and relationship to the borrower.
A borrower’s payment history on previous mortgages or rent must be verified for how long?
12 months
A borrower may charge $______ for an appraisal and up to __% of the loan amount to his/her credit card to pay for lock-in fees.
$500; 1%
Does the spouse always need to sign the note?
When a married applicant qualifies for a mortgage based on his or her own financial capacity (without any assets or income of his or her spouse being taken into consideration), the spouse does not need to sign the note.
What is the underwriter responsible for?
The underwriter is responsible for evaluating both the risk of the borrower and the property.
How can assessing and individual’s risk (underwriting) be done?
Assessing an individual’s risk (underwriting) may be done manually or by automatic underwriting systems (AUS).
Who makes the final decision to fund a loan?
The lender always makes the final decision to fund a loan. The lender issues the Clear-to-Close.
What does Homeowner’s Insurance Policy cover?
Homeowner’s insurance policy is insurance that covers the loss or damage to the home or property in the event of fire or other disaster such as tornado, snow, and hail damage.
What does Hazard insurance NOT cover?
Hazard insurance does not cover damages due to perils of flood.
What is required if a property is in a flood zone?
If a property is in a flood zone, the lender will require flood insurance (in addition to hazard insurance) for the life of the loan.
Where must flood insurance be purchased?
Flood insurance must be purchased from the National Flood Insurance Program (NFIP).
What is the minimum and max amount?
Minimum amount is $100,000 and max amount is $250,000.
What areas must require flood insurance?
Property located in areas Flood Zone A or V (areas that are designated as high flood zones) must have flood insurance required by lender for life of loan.
What are the maximum allowable seller contributions by sellers and/or lenders for investment properties?
maximum allowable contributions by sellers and/or lenders is 2% of the lesser of the appraised value or sales price for investment properties.
What are the maximum allowable contributions by sellers and/or lenders for a principle residence or second home if the LTV is between 76% and 90%?
maximum allowable contributions by sellers and/or lenders is 6% of the lesser of the appraised value or sales price for a principal residence or second home if the LTV is between 76% and 90%
What are the maximum allowable contributions by sellers and/or lenders for a principal residence or second home if the LTV is 75% or less?
Maximum allowable contributions by sellers and/or lenders is 9% of the lesser of the appraised value or sales price for a principal
residence or second home if the LTV is 75% or less
What is the maximum allowable contributions by sellers and/or lenders for a principal residence or second home if the LTV is greater than 90%?
maximum allowable contributions by sellers and/or lenders is 3% of the lesser of the appraised value or sales price for a principal residence or second home if the LTV is greater than 90%.
What does loan consummation refer to?
Loan consummation is the point and time that the consumer becomes contractually obligated on a credit transaction. Often referred to as “doc signing” or “closing” on the exam.
The closing agent (settlement agent/title agent) must __________ follow the instructions of the borrower and the seller in a sales transaction, as per the sales contract, escrow instructions, etc.
simultaneously
What are debits?
Debits are the sums of money owed (like debts).
What are credits?
Credit are the sums of money received.
What are pro-rations?
Pro-rations are the division of expenses between the borrower and seller in prorations to the actual usage of the item as of the day the loan is funded.
What are the two types of documents associated with a loan?
The two types of documents associated with a loan are the mortgage and the promissory note.
What is the note (promissory note)?
The note (promissory note) is the legal evidence of the debt and is not recorded.
The one promising to pay the money is called the _______.
maker
The one that will receive the money promised is called the ____.
payee.
The _____ and _____ of recording establish lien position of the mortgage.
date and time
The mortgagor is the __________.
Borrower
The mortgagee is the __________.
lender
Is the APR include din the note?
NO
___________ promise to repay the loan, pay property tax, pay hazard insurance, and keep the property in good repair. They are in default if they fail to do any one of these.
Mortgagors
A mortgage is a ______ lien.
voluntary
What is an involuntary lien?
special assessments and mechanic’s liens are involuntary liens.
What is a trust deed?
Trust Deeds - instruments placing specific financial interest in title to real property into hands of disinterested third party as security for payment of note.
The trustor is the __________.
Borrower
Who is the beneficiary who retains note and deed of trust?
Lender
Who holds legal title to security property described in deed of trust subject to terms of trust for lender benefit?
Trustee
Mortgages have “_______” foreclosure and require court action to foreclose on a property.
judicial
Trust Deeds are “__________” and do not require a court action to foreclose on a property.
non-judicial
What is the Fannie Mae appraisal form?
The Uniform Residential Appraisal Report (URAR) – form 1004
What does the Home Valuation Code of Conduct (HVCC) prevent?
The Home Valuation Code of Conduct (HVCC) prevents a mortgage broker from choosing the appraiser for loans that are sold to Fannie Mae. The Dodd-Frank Act extended the law to include all mortgages.
The appraiser must be paid a _____ fee, and not a fee based on the appraisal value.
flat
Property appraisers must be licensed and adhere to the ______________________________.
Uniform Standards of Professional Appraisal Practice (USPAP).
An appraisal is valid for __ months (updated 1/1/2020). It must be re-certified if the appraisal will be _________ old or more at closing.
6; 4 months (120 days)
What is the appraisal recertification form is called?
The appraisal recertification form is called a 442 recertification of value or recert.
_________ is the most probable price a property will bring in a fair and open market.
Market value
How does one determine the highest and best use of a property?
To determine the highest and best use of a property, the use must be legally permissible, physically possible, and financially feasible.
What are the three approaches to estimating property value?
Three approaches to estimating property value are: Sales Comparison Approach (Residential and vacant land), Cost Approach (new construction and special-use properties), and Income Capitalization Approach (income producing properties).
What is the Sales Comparison Approach Appraisal?
In the Sales Comparison Approach, the appraiser researches a minimum of three closed sales that are similar in characteristics to the subject property. Fannie Mae acceptable comp - no more than 15% net adjustments/25% gross adjustments.
How is Cost Approach Appraisal done?
In the Cost Approach, the appraiser estimates the cost to reproduce or replace the structures as if they were new, subtracts a value for depreciation because the structure is not new, and adds in the value of the land and any improvements. Reproduction or Depreciation + Site Value = Value of Subject Property Replacement Costs of Improvements. It calculates cost of land, site improvement, and
construction of structure. Most useful for unusual or non-income producing property.
How is the Income Approach Appraisal done?
Income Approach Appraisal - analyzes revenue, income property does or could generate. Sometimes called capitalization approach. Most useful for income-producing commercial and investment property.
What are the most important type of comparable in the Sales Comparison Approach?
Closed sales
What does the Principle of Substitution state?
The Principle of Substitution states that a knowledgeable consumer will pay no more for a property than the cost of acquiring an equally desirable alternative property.
What is depreciation?
Depreciation is the loss in property value.
What is appreciation?
Appreciation is an increase in property value.
What is functional obsolescence?
Functional obsolescence is caused by a change in buyer’s tastes.
What is Economic obsolescence?
Economic obsolescence is caused by a deteriorating neighborhood.
What is physical deterioration?
Physical deterioration is caused by aging or poor upkeep.
How does one determine ownership prior to the conveyance of property?
Title Search of public record
What is chain of title?
Chain of title is a clear unbroken chronological record of ownership of a specific piece of property.
What is color of title?
Color of title is the appearance of having title to personal or real property by some type of evidence, but in reality, there is either no title or it’s a defective title. This person is usually not the true titled owner.
What is a suit of quiet title?
A suit of quiet title (quiet title action) used to remove a cloud on title.
What does title insurance protect?
Title insurance protects lenders against loss due to disputes over the ownership of a property and defects in the title not found the search of public records.
