Qualification: Processing and Underwriting Flashcards
A borrower obtains a first mortgage for $160,000 and a second mortgage HELOC for $40,000. However, the lender only allows the borrower to draw $30,000 from the HELOC at the time of closing. If the purchase price and appraised value are $200,000, what is the HLTV (aka HCLTV or HTLTV)?
A.90%
B.100%
C.95%
D.80%
The answer is 100%.
In calculating the high combined loan-to-value ratio (HCLTV), the underwriter must:
divide the sale price by the loan balance plus the total credit line limit (160K + 40K) / 200K = 100%.
Sale Price / Loan Balance + Total Credit Line
Which of the following terms would be associated with the income approach to appraisals?
A.Comparable sales
B.Capitalization rate
C.Neighborhood analysis
D.Construction costs
The answer is capitalization rate.
The income approach is used to appraise properties that produce rental income. It bases the value of the property on the net income the owner will receive and a rate of return (i.e., the capitalization rate) the owner should find acceptable.
A buyer is purchasing a property for $200,000 and is approved for an FHA loan amount of $190,000. What is the maximum amount the seller will be allowed to contribute towards closing costs?
A.6% of the purchase price
B.3% of the purchase price
C.3% of the loan amount
D.6% of the loan amount
The answer is 6% of the purchase price.
The FHA will allow the seller to contribute up to 6% of the purchase price toward the buyer’s actual closing costs, prepaid taxes and insurance, discount points, buydown fees, and/or mortgage insurance premiums.
An underwriter may require _____ in order to document the income of a commissioned borrower.
A.Two years’ tax returns and the employment contract
B.1099s from the previous year
C.Profit and loss statement and two years’ tax returns
D.Two years’ tax returns and all schedules
The answer is two years’ tax returns and all schedules. Commissioned borrowers may be required to show two years’ tax returns. Exact documentation requirements may vary based on loan type, but this is a common standard.
Which of the following would not be an acceptable source of down payment for a conventional loan?
A.The borrower’s checking account
B.A loan on another piece of property
C.A loan which is unsecured
D.Funds from a loan against the borrower’s 401(k)
The answer is a loan which is unsecured.
The down payment for a conventional mortgage loan may come from the borrower’s checking or savings account, a gift from relatives, the sale of another piece of property, a contribution by the seller, the cash value of a life insurance policy, or subordinate financing secured by real or personal property. Funds resulting from an unsecured loan would not be an acceptable source for a down payment.
Which of the following approaches to appraisals is most likely to include an adjustment for depreciation to the improvements on the subject property?
A.Cost approach
B.Market approach
C.Comparable approach
D.Income approach
The answer is cost approach.
The cost approach can be used for any property, but because of the knowledge of construction costs that is required, it is most often used to appraise value for new buildings, where costs are easy to obtain, and for properties such as churches and public service buildings, which cannot be compared to others that have sold or that produce income.
The appraiser estimates the value of the land and the depreciated value of the improvements on the land separately, and then adds the two values together to arrive at an estimate of the property’s total value. The depreciated value is equal to the cost to replace or reproduce the improvements, less depreciation. Replacement cost is the present cost of constructing a new substitute structure equal to the existing structure in quality and utility, but by using current construction methods, materials, design, and layout.
Which of the following would not be an acceptable source for a down payment?
A.Undocumented cash on hand
B.Gift from borrower’s uncle
C.Loan from borrower’s 401K
D.Gift from domestic partner
The answer is undocumented cash on hand. Acceptable sources for a down payment include funds from a checking or savings account, gifts from relatives, the cash value from a life insurance policy, the sale of another property, or a seller contribution. Undocumented cash on hand is not an acceptance source.
If a borrower has an $80,000 first mortgage, a $20,000 second HELOC on which they have $5,000 in remaining credit, and the property appraises for $100,000, what is the CLTV?
A.80%
B.95%
C.100%
D.75%
The answer is 95%.
The loan-to-value ratio is the loan amount divided by the property value or sales price, whichever is less.
Since there are two loans on the property in this example, however, the calculation is for the combined loan-to-value ratio (CLTV). The formula for this is as follows: (balance on first lien + balance on second lien)/appraised value.
The balance on this HELOC is $15,000 ($20,000 limit - $5,000 remaining available credit). Therefore, the solution is ($80,000 + $15,000)/$100,000 = .95 (95% CLTV).
Which of the following best describes factors which determine the minimum hazard insurance requirements as required by the lender on a residential property?
A.The loan amount and insurable value
B.Replacement cost of the property and the appraised value
C.Appraised value and LTV
D.Mortgage insurance and replacement cost
The answer is the loan amount and insurable value. A lender may require a borrower of a first lien mortgage to maintain minimum hazard insurance coverage in an amount that is the lesser of 100% of the insurable value of the improvements, as established by the property insurer, or the unpaid principal balance of the mortgage.
The statement you’ve provided relates to the requirements a lender may impose on a borrower regarding hazard insurance coverage for a property with a first lien mortgage. Here’s a breakdown to clarify what it means:
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Loan Amount and Insurable Value: These are the two critical values considered when determining the minimum required hazard insurance coverage.
- Loan Amount: This refers to the unpaid principal balance of the mortgage.
- Insurable Value: This is the estimated cost to replace the home and other structures (improvements) insured under the policy. It’s determined by the property insurer and reflects the cost to rebuild the home in case of total loss due to hazards like fires, storms, etc.
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Minimum Hazard Insurance Coverage Requirement: The lender requires that the borrower maintain hazard insurance to protect the property against losses from specified hazards. The coverage amount must be sufficient to either:
- Cover 100% of the insurable value of the improvements, as determined by the property insurer, or
- Match the unpaid principal balance of the mortgage.
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The Lesser of Two Values: The required insurance coverage must be the lesser of either the 100% insurable value of the improvements or the unpaid principal balance of the mortgage.
- If the insurable value is higher than the unpaid mortgage principal, the insurance coverage should at least equal the mortgage balance. This ensures that, in case of a total loss, there is enough insurance payout to cover the remaining mortgage amount.
- If the insurable value is less than the unpaid mortgage principal, then the coverage should equal the insurable value. This scenario is less common as typically, the cost to rebuild (insurable value) tends to be higher than the mortgage balance, especially in the initial years of the loan.
This requirement is a risk management strategy to ensure that, in the event of significant damage or destruction to the property, there will be sufficient funds from the insurance claim to rebuild the property or pay off the mortgage, thereby protecting both the borrower’s and the lender’s investments in the property.
If required, flood insurance must remain on the property until:
A.The loan is repaid in full
B.15 years have passed
C.Half of the loan term has passed
D.Ten years have passed
The answer is the loan is repaid in full. If it is required, flood insurance must remain on the subject property for the entire term of the loan.
Which of the following approaches to appraisal would be appropriate for a duplex being used as an investment property?
A.Cost approach
B.Comparable approach
C.Income approach
D.Market approach
The answer is income approach.
In appraising a duplex to be used as an investment property, the income approach would be used. The income approach bases the value of the property on the net income the owner will receive and a rate of return (i.e., capitalization rate) the owner should find acceptable.
If required, the amount of flood insurance must be the lower of:
A.80% of the replacement cost or the unpaid principal balance of the loan
B.The insurable value or the unpaid balance of the loan
C.The insurable value or the appraised value
D.100% of the replacement cost or the unpaid balance of the loan
The answer is 100% of the replacement cost or the unpaid balance of the loan.
A lender may not make, increase, extend, or renew a loan that is secured by improved real estate or a mobile home located in an area designated by the government as a Special Flood Hazard Area (SFHA), unless the building or mobile home and any personal property securing the loan are covered by flood insurance for the entire loan term with a limit of the lesser of the outstanding principal loan balance or 100% of the replacement cost of the property, less the value of the land.
Which of the following would most likely be filed by a self-employed borrower who files taxes as a sole proprietor?
A.Schedule F
B.Schedule E
C.Form 4506
D.Schedule C
The answer is schedule C.
An individual who owns a business as a sole proprietor, when applying for a mortgage loan, would submit IRS Schedule C. The individual’s income is the net income shown on the Schedule C plus any recurring capital gains or non-cash expenses (e.g., depletion, depreciation) that were deducted in arriving at the adjusted income.
Question
If a portion of a loan applicant’s income consists of commissions:
A.The adjusted gross income on IRS Form 1040 may be used as proof of income
B.An average of the applicant’s commission income for the prior two years may be used in underwriting
C.That commission income may not be included in determining ability to repay
D.Evidence of receipt of continuing commission income must be provided
The answer is an average of the applicant’s commission income for the prior two years may be used in underwriting.
Stable monthly income may include secondary sources of income that may vary in terms of quantity, quality, and durability. Commission income may be included by averaging the applicant’s commissions over a two-year period. Additionally, when commission income is at least 25% of the borrower’s income, the most recent two years’ personal tax returns may be required.
Which of the following would be the most influential factor in determining the hazard insurance premium on a home?
A.Value of the lot
B.Flood zone determination
C.Replacement cost of the home
D.Appraised value of the home
The answer is replacement cost of the home. With regards to hazard insurance, a lender may require the borrower maintain hazard insurance on real property securing a mortgage loan in an amount equal to the replacement value of the property. Fannie Mae provides that, for any first lien mortgage, the minimum hazard insurance coverage required is the lesser of 100% of the insurable value of the improvements, as established by the property insurer, or the unpaid principal balance of the mortgage, as long as it equals the minimum amount required to compensate for damage or loss on a replacement cost basis.
