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.
