Loan Underwriting Process Quiz
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Questions and Answers

What does the loan underwriter primarily analyze to determine loan eligibility?

  • Assets, income, debt, credit history, and property (correct)
  • Assets, income, and insurance coverage
  • Credit score, collateral, and job stability
  • Income, credit history, and previous loan performance

What is the correct calculation for a 5% down payment on a home valued at $200,000?

  • $7,500
  • $10,000
  • $5,000
  • $8,000 (correct)

How is the Maximum Loan-To-Value (LTV) Ratio calculated?

  • Multiply the sales price by the minimum required down payment percentage
  • Divide the loan amount by the appraised value
  • Multiply the lower of sales price or appraised value by the LTV ratio expressed in decimals (correct)
  • Add the down payment and sales price, then divide by appraised value

What does the Combined Loan-To-Value (CLTV) Ratio include in its calculation?

<p>All mortgages associated with the property including subordinate loans (A)</p> Signup and view all the answers

What does the term 'assets' refer to in the context of borrower qualifications?

<p>Property or estate owned by a person with monetary value (B)</p> Signup and view all the answers

Which element is NOT part of the borrower's qualification analysis?

<p>Review of investment performance (A)</p> Signup and view all the answers

To calculate the LTV based on a down payment, what is the first step?

<p>Subtract the down payment from the sales price to find the loan amount (C)</p> Signup and view all the answers

What aspect of loan processing is ongoing even before an application takes place?

<p>Analysis of borrower qualifications (B)</p> Signup and view all the answers

How should a borrower's monthly income be calculated if they receive payment bi-weekly?

<p>Divide the total annual income by 12 (D)</p> Signup and view all the answers

When assessing a self-employed borrower's income, what method is typically used?

<p>Average the last two years of net income (A)</p> Signup and view all the answers

What is needed to qualify cash income reported on an application for a mortgage?

<p>Reporting of income on tax returns for the previous two years (C)</p> Signup and view all the answers

How is non-taxable income adjusted for mortgage qualification purposes?

<p>It is grossed-up by 25% (C)</p> Signup and view all the answers

What must be done if a borrower reports gaps in employment when qualifying for a mortgage?

<p>Consider if there is an adequate explanation for the gaps (C)</p> Signup and view all the answers

What qualifies as acceptable income for mortgage qualification from asset income?

<p>Income generated by cash deposits or dividend-paying stocks (B)</p> Signup and view all the answers

Which of the following income types is typically not used for mortgage qualification?

<p>Capital Gains Income (B)</p> Signup and view all the answers

If a borrower owns 25% or more of a business that employs them, how is their income categorized?

<p>Self-employment income (C)</p> Signup and view all the answers

What may be added back to a self-employed borrower's income when calculating for mortgage qualification?

<p>Proven non-recurring expenses (D)</p> Signup and view all the answers

How should seasonal work income be calculated for mortgage qualification?

<p>Average income over 24 months (D)</p> Signup and view all the answers

What is the purpose of asset verification in a mortgage transaction?

<p>To ensure the borrower has sufficient funds for down payment and closing costs (D)</p> Signup and view all the answers

Which type of assets are typically verified by a Verification of Deposit form?

<p>Cash and cash equivalents like checking accounts (B)</p> Signup and view all the answers

Why is physical cash on hand not considered for mortgage qualification?

<p>It cannot be easily verified (B)</p> Signup and view all the answers

Which statement about nonphysical assets is true?

<p>They cannot be physically evaluated (D)</p> Signup and view all the answers

What must be verified for equity assets to be acceptable as cash to close?

<p>The value and ownership must be verifiable (D)</p> Signup and view all the answers

Under which condition can overtime income be considered for loan qualification?

<p>If the employer confirms overtime will continue (B)</p> Signup and view all the answers

What is a critical consideration when documenting recent increases in average balances of assets?

<p>It must explain the source of the funds (B)</p> Signup and view all the answers

Which of the following assets typically requires appraisal verification if sold to meet cash requirements?

<p>Fixed assets like furniture (A)</p> Signup and view all the answers

What is an example of a fixed-income asset?

<p>Government bonds and CDs (A)</p> Signup and view all the answers

Which of the following statements is true regarding fixed assets and their verification?

<p>They are typically verified unless proceeds are needed for cash closing (A)</p> Signup and view all the answers

What is the main reason for verifying liquid assets?

<p>To ensure they can be quickly converted to cash if needed (C)</p> Signup and view all the answers

If a borrower provides a bi-weekly salary, how is annual income calculated?

<p>By multiplying the salary by 26 (C)</p> Signup and view all the answers

What is a common requirement when using a loan secured by an asset for qualification?

<p>The terms of the loan must be documented (A)</p> Signup and view all the answers

Flashcards

Borrower Qualification Analysis

The process of evaluating a borrower's financial situation to determine their ability to repay a loan.

Down Payment Requirement

The percentage of the property's value that a borrower needs to pay upfront, typically expressed as a decimal.

Loan-To-Value (LTV) Ratio

The maximum amount of loan a borrower can take out, calculated as a percentage of the property's value, often expressed as a decimal and is the inverse of the down payment requirement.

Combined Loan-To-Value (CLTV) Ratio

Similar to LTV, but includes the sum of all mortgages on a property, considering both existing and new loans.

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Assets

The property or estate a person owns that has monetary value and can be converted into cash or used to generate income.

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Verification Process

Verifying the borrower's information provided in the loan application through sources like bank statements, pay stubs, and credit reports.

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Automated Underwriting System

A system that automatically analyzes borrower information and provides a preliminary recommendation for loan approval.

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ATR/QM Rule (Ability to Repay/Qualified Mortgage Rule)

Minimum standards for loan origination that ensure responsible lending practices, focusing on ensuring a borrower's ability to repay.

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Cash and Cash Equivalents

Funds held by the borrower in checking, savings, money market accounts, or certificates of deposit.

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Physical Assets

Tangible assets that can be touched, like cars, houses, or jewelry.

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Nonphysical Assets

Assets that are not physically tangible, like trademarks, patents, or goodwill.

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Liquid Assets

Nonphysical assets easily converted into cash, such as publicly traded stocks or bonds.

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Fixed Assets

Tangible goods that are not easily converted to cash, like furniture, real estate, or artwork.

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Equity Assets

Ownership interest in businesses, non-publicly traded stocks or bonds, and the cash value of life insurance.

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Fixed-Income Assets

Investment funds that pay interest, like government bonds or CDs.

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Asset Verification

Verifying that the borrower has enough funds to cover the down payment and closing costs.

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Verification of Deposit (VOD)

Documents provided by the borrower to confirm the balance in their accounts.

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Income Verification

The process of determining a borrower's monthly income for mortgage qualification.

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Overtime Income

Additional income earned beyond the regular hourly rate.

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Bi-weekly Income

Income received every two weeks.

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Twice per Month Income

Income received twice a month.

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Monthly Income Calculation

Monthly income calculation for loan qualification.

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Source of Funds Verification

The process of verifying the source of funds used for the down payment and closing costs.

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Periodically Paid Income

Income earned from sources like commissions, bonuses, or supplemental income that are paid periodically. To calculate, average these incomes over the past two years.

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Seasonal Work Income

Income earned from seasonal work, like working at a summer camp. Calculate this income by averaging the earnings over the past 24 months.

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Gaps in Employment

When a borrower has gaps in employment, their income may need to be adjusted downward. This is based on the explanation for the gap and how it impacts future income stability.

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Self-Employed Income

Self-employed income is determined based on the past two years of federal income tax returns. Non-cash expenses are added back to income, and proven non-recurring expenses may also be added back.

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Ownership Threshold

If a borrower owns 25% or more of the business that employs them, their income is treated as self-employment income, even if they receive a W2.

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Cash Income

Cash income such as tips or unreported self-employment income can only be included if it has been reported on income tax returns for the past two years. Undocumented income is not acceptable.

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Grossed-Up Non-Taxable Income

Non-taxable income can be adjusted to reflect its potential after taxes by multiplying it by 1.25. This helps to ensure that the income being used for qualification is accurate.

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Asset Income

Income generated from investments like cash deposits, stocks, bonds, annuities, or retirement funds. This income must be verifiable and demonstrate a consistent stream of income for at least three years.

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Down Payment vs. Income

If an asset used for income qualification is also needed for a down payment, it cannot be used for both purposes. Funds for the down payment must come from a separate source.

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Study Notes

Loan Underwriting Process - Borrower Qualifications

  • Loan underwriters assess risk by reviewing borrower's assets, income, debt, credit history, and property.
  • Verification process and documents confirm ability to repay according to ATR/QM rules.
  • Automated Underwriting System (AUS) findings are reviewed and confirmed.
  • Analysis begins before application is taken and continues throughout processing.
  • Calculations are part of application process and reconfirmed with verification.

Down Payment and Loan-To-Value (LTV) Ratio

  • Loan programs have minimum down payment requirements (some have zero).
  • Calculate down payment by multiplying lower of sales price or appraised value by required down payment percentage.
  • Example: 5% down payment on $150,000 sale = $7,500.
  • Down payment ≠ closing costs; some costs included in loan amount.
  • LTV ratio is minimum down payment in reverse.
  • Calculate LTV by multiplying lower of sales price/appraised value by LTV ratio percentage.
  • Example: 95% LTV on $150,000 sale = $142,500.
  • LTV can also be calculated based on anticipated down payment.
  • Combined LTV (CLTV) considers all mortgages, including purchase money and existing mortgages.

Asset Verification

  • Assets are owned property with monetary value (cash/income).
  • Asset verification ensures sufficient funds for down payment and closing costs.
  • Fund source verification assures no undisclosed loans used.
  • Cash reserves after closing are a risk consideration.
  • Types of assets:
    • Cash & Cash Equivalents: Checking, savings, money markets, CDs; verified by VOD or statements.
    • Physical Assets: Tangible, valuable items; usually not verified unless sold for closing cash.
    • Nonphysical/Intangible Assets: Trademarks, patents; generally not used for closing.
    • Liquid Assets: Quickly convertible to cash (stocks, bonds); verified by statements.
    • Fixed Assets: Furniture, real estate; not usually verified.
    • Equity Assets: Ownership interest (businesses, securities, life insurance); can be closing cash if verifiable.
    • Fixed-Income Assets: Government bonds, securities, CDs; liquid but may have penalties; acceptable as closing funds.

Income Verification

  • Borrowers provide two years of employment and income history.
  • Income calculation varies based on payment frequency:
    • Hourly: Calculate weekly income (base + overtime), then annual, then monthly.
    • Bi-weekly: Multiply bi-weekly salary by 26 and then divide by 12.
    • Twice per month: Multiply monthly salary by 24 and then divide by 12.
    • Annual: Divide annual income by 12 to get monthly income.
  • Overtime is considered if consistent history.
  • Vacation time is deducted from income calculation.
  • Commissions, bonuses, and seasonal work can be averaged.
  • Lower income due to gaps in employment may require adjustments.
  • Self-employed income is verified using two years of tax returns, adding back non-cash expenses.
  • Cash income must be reported on tax returns to be utilized.
  • Non-taxable income may be grossed-up (typically 25%).
  • Capital gains are usually not used in income calculations.

Additional Considerations

  • Borrowers may need to demonstrate ownership of additional assets for future loan payments.
  • Asset income (dividends, interest, retirement funds) is considered income.
  • Unemployed borrowers can qualify with investment income.
  • Income from retirement accounts should be verifiable for three years.

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Description

Test your knowledge on the loan underwriting process, focusing on borrower qualifications and the calculation of down payments and loan-to-value ratios. This quiz covers essential concepts such as asset verification, credit history, and the importance of Automated Underwriting Systems in evaluating risk. Get ready to enhance your understanding of these critical financial principles.

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