Module 2: Mortgage Lending Process

Question 1

Define Origination

Answer 1

Process of making or initiating a new loan.

Question 2

Define Loan Processor

Answer 2

Responsible for verification of the information contained in the file.

Question 3

Define Underwriting

Answer 3

Process of evaluating risk and deciding whether to make a new loan, and if so on what terms.
- Performed by funding source, never by a mortgage broker.

Question 4

Define Servicing

Answer 4

The continued maintenance of loan after loan transaction has closed.

Question 5

Define pre-qualified

Answer 5

If a borrow is not ready to make an offer on the house but wants to know how much money they qualify for they may be pre-qualified. If a credit decision is rendered then the pre-qualification becomes an application and required disclosures need to be delivered.

Question 6

What is a loan inquiry?

Answer 6

A borrower may make a loan inquiry by phone/internet to inquire about types of loans and corresponding interest rates available. the MLO must provide a corresponding annual percentage rate to the consumer at the same time a rate quote is delivered.

Question 7

What is pre-approval?

Answer 7

Process by which a lender determines if a potential borrower can receive financing through the lender and for what amount. The lender is rendering a credit decision. Only the lender who is going to fund the mortgage loan can provide a pre-approval.

Question 8

Define Basis point

Answer 8

basis point is 1/100th of a percentage point

• 325 basis points = 3.25%
• 515 basis points = 5.15%

Question 9

Define Par Rate

Answer 9

Describes the rate without discounts or points that lenders offer only to mortgage brokers, aka “wholesale rate”.

Question 10

Define Rate Lock (Lock-in Agreement)

Answer 10

guaranteed commitment by lender that an interest rate will not change on a specific loan for a specific period of time.

Question 11

Define Float

Answer 11

A borrower may choose to bet on interest rates decreasing by electing to float. Floating is essentially choosing not to lock the interest rate.

Question 12

What are POC loan fees?

Answer 12

Paid outside of closing (POC) costs are early expenses incurred that must be paid even if the loan doesn’t close.

Question 13

Define Lender’s return (lender’s yield)

Answer 13

Total amount of money the lender can make from a loan in relation to the amount invested.

Question 14

What is the origination fee?

Answer 14

Administrative costs of making and processing the loan.

- Can be expressed as a fraction, whole, or multiple origination points.

Question 15

What is a point?

Answer 15

Point is simply one percent of the loan amount.

Question 16

What is a discount point?

Answer 16

Represents a pre-payment of interest at the beginning of a loan.
- Borrower pays more out of pocket up front to reduce payments later.

Question 17

What is Yield Spread Premium?

Answer 17

(Lender Credits); tool to lower the upfront cash out-of-pocket expenses at closing for a borrower in exchange for higher monthly out-of-pocket payments

Question 18

What does PITI stand for?

Answer 18

Mortgage payment that is the sum of :

• Principal (monthly)
• Interest
• Taxes
• Insurance

Question 19

Define Housing Expense Ratio

Answer 19

(Front-end ratio) <28%

Total housing expense /gross monthly income = housing expense ratio %

Question 20

Define Total Debt-to-income ratio

Answer 20

(DTI) aka Back-end ratio <36%

PITI +Total debt / gross monthly income = DTI%

Question 21

How do you determine the maximum mortgage payment a borrower can qualify for?

Answer 21

Stable monthly income X 28% = max mortgage using housing expense ratio

(Monthly income X 36%) - Monthly Debt = max mortgage using DTI

Question 22

How do Compensating Factors weigh into mortgages?

Answer 22

Usually automated but factors such as significant cash reserves or a low LTV.

Question 23

What is the URLA

Answer 23

Uniform Residential Loan Application (URLA) is a form that a lender requires a potential borrower to complete

Question 24

What are the 4 C’s of Underwriting

Answer 24

• Credit History
• Capacity to repay the loan
• Cash assets
• Collateral

Question 25

What is a quality source of income

Answer 25

A reasonably reliable source such as income from an established employer, interest-yielding accounts, or government agency.

Question 26

What is a durable source of income

Answer 26

Income expected to continue for a sustained period of time such as permanent disability, retirement savings, etc.

Question 27

How many years for Bonuses, commisions, and part-time earnings to be considered durable?

Answer 27

2 years. Less than 2 years is considered unstable.

Question 28

How do you calculate inconsistent income?

Answer 28

• If recent year’s income is higher than previous year:
  recent higher income / 12
• If recent year’s income is lower than previous year:
  (former higher + recent lower) /24 **And an explanation of the declining income may be required by underwriter.

Question 29

How are Pensions and Retirement benefits considered

Answer 29

Usually considered stable income, but source may be investigated to determine solvency.

Question 30

What is Auto Allowance, and what is it considered in regards to income?

Answer 30

Allowance given by employer for the business use of their car. After expenses are deducted the remainder is considered taxable income and when averaged for the previous 2 years is considered income for loan qualification.

Question 31

Are Interest-Yielding Investments a form of income?

Answer 31

lenders will consider this a durable income if investments are sound and interest payments are consistent.

Question 32

How is unemployment and welfare counted as stable income?

Answer 32

Is it:

• verifiable (proven receipt of income?)
• Continuous (regular for 2 years?)
• Ongoing (likely to continue for 3 years?)

Question 33

Define Homeowner’s Hazard Insurance

Answer 33

Policy that covers loss or damage to the home/property in the event of fire or other disasters:

• Sufficient policy amount to cover mortgage amount with lender on policy.
• Require borrowers to pay first year’s insurance premium in full prior to closing.

Question 34

What is the NFIP?

Answer 34

National Flood Insurance Program provides flood insurance for the life of a loan.

Question 35

Define PMI

Answer 35

Private Mortgage Insurance is offered by private companies to insure a lender against default on a loan by borrower where there is a loss of collateral value. Typically 20-25% of the loan amount.