Credit Report and Liability Analysis

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Questions and Answers

What is the primary purpose of the Credit Score?

To provide a comprehensive report card on the borrower's past credit behavior.

To determine the amount of debt a borrower has.

To evaluate the borrower's ability to manage different types of credit accounts.

To predict the likelihood of a borrower defaulting on a loan. (correct)

Which of the following factors has a negative impact on a borrower's credit score?

Having a mix of different types of credit accounts.

High balances compared to credit limits. (correct)

A low number of recent credit inquiries.

A long history of on-time payments.

Why is it important for lenders to consider liabilities that do not appear on the borrower's credit report?

Because these liabilities can impact the borrower's ability to repay the loan. (correct)

Because these liabilities may not be legally binding.

Because these liabilities are not considered in the AUS (Automated Underwriting System).

Because lenders are legally required to include all liabilities in the qualification analysis.

How can the Credit Score affect the borrower's loan?

All of the above. (D) Signup and view all the answers

Which of the following is NOT typically included in a credit report?

A list of the borrower's assets and investments. (C) Signup and view all the answers

What is the definition of the housing expense ratio?

Total monthly housing expense divided by gross monthly income, expressed as a percentage (A) Signup and view all the answers

Which of the following is NOT included in the calculation of the total debt ratio?

Mortgage payments on all properties owned by the borrower (A) Signup and view all the answers

What is the maximum allowed total debt ratio at consummation?

50% (A) Signup and view all the answers

If the subject loan is a second home or investment property, what is used to calculate the housing expense ratio?

The mortgage payment on the borrower's principal residence (B) Signup and view all the answers

Which of the following is NOT a factor that can affect loan eligibility or underwriting requirements?

Outstanding student loans (A) Signup and view all the answers

Why are co-signer or guarantor obligations considered even if they don't appear on the borrower's credit report?

All of the above (D) Signup and view all the answers

What is the difference between the housing expense ratio and the total debt ratio?

The housing expense ratio includes only housing expenses while the total debt ratio includes all debts. (A) Signup and view all the answers

What is the purpose of qualifying ratios in the mortgage lending process?

All of the above (D) Signup and view all the answers

Study Notes

Credit Report Analysis

Borrower's credit report, including personal info (name, address, etc.), credit score, credit types, payment history (open/closed accounts, collections), credit inquiries, and public records (bankruptcies), are crucial for loan applications.
Credit score predicts default probability with higher scores indicating a lower default risk.
Key credit score factors include payment history (late payments, delinquencies, etc.), amounts owed (high balances), length of credit history, and credit mix.
New accounts and credit bureau inquiries tend to lower scores.
Credit score significantly affects loan availability and costs.

Liability Transfer and Analysis

Liabilities/debt from the borrower's credit report are transferred to loan applications.
Lenders analyze unpaid balances, repayment terms, and payment history for each liability.
Analysis also considers liabilities that may not appear on the credit report, such as: foreclosure history, bankruptcies, judgments, federal debt delinquencies, pending lawsuits, or undisclosed co-signer/guarantor obligations.
Co-signer/guarantor obligations, even if not on the credit report, factor into qualifications, particularly for recent debts.
Federal debt delinquency renders some programs ineligible.
Previous bankruptcies/foreclosures impact loan eligibility and underwriting.

Qualifying Ratios

Qualifying ratios (lending/debt-to-income ratios) determine borrower qualifications.
Housing expense ratio is calculated as projected total monthly housing expense (PITI) divided by gross monthly income as a percentage. Different considerations exist when dealing with a non-occupying borrower or second homes/investments.
Total debt ratio (the "back" ratio) is total monthly debt, including housing expense, divided by gross monthly income. This includes: housing expenses, minimum revolving account payments, installment loans (>10 payments remaining), lease payments (equipment, auto, ect), and other real estate debt. Additionally, alimony/child support/separate maintenance is included.
Total debt ratio is considered more critical than housing expense ratio in eligibility checks.
Qualifying ratio thresholds vary by program, and are analyzed as part of the overall appraisal process, rather than strict cut-offs.

Loan Consummation Standards

Total debt ratio generally cannot exceed 50% at consummation.
Ratio calculations are essential for prequalification/pre-approval processes.

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Description

Explore the intricacies of credit reports and their impact on loan applications. This quiz delves into how personal information, credit scores, and liabilities influence lending decisions. Understanding these elements is crucial for navigating the financial landscape effectively.