Real Estate Underwriting Process

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Questions and Answers

Underwriting is the process of evaluating a proposed loan.

True

Credit scores are examined during the underwriting process to determine credit worthiness.

True

The quantity, quality, and durability of income are not usually analyzed when evaluating a buyer's application.

False

Net worth is calculated by subtracting a person's liabilities from their assets.

True Signup and view all the answers

Automated underwriting has completely replaced manual underwriting.

False Signup and view all the answers

What is the primary purpose of qualifying standards in lending?

To establish what a lender considers acceptable and unacceptable loan risks. Signup and view all the answers

Which entities are most likely to set the underwriting standards used by most lenders?

Fannie Mae, Freddie Mac, the FHA, or the VA. Signup and view all the answers

What is the purpose of automated underwriting programs?

To generate a preliminary analysis of information provided on the loan application. Signup and view all the answers

What are the three main categories that determine creditworthiness?

Credit reputation, income, and net worth. Signup and view all the answers

How should weekly income payments be considered when qualifying a buyer?

They must be converted to a monthly equivalent. Signup and view all the answers

What does a credit history primarily refer to?

How long an individual has been borrowing money and paying it back. Signup and view all the answers

What is the purpose of 'grossing up' non-taxable income during buyer qualification?

To make an allowance since taxable income is considered in qualifying standards Signup and view all the answers

What is the debt-to-income ratio?

The relationship between the overall monthly debt burden and pre-tax monthly income. Signup and view all the answers

Why might an underwriter be suspicious of recently opened accounts or higher-than-normal balances?

These could be an indication that funds for the downpayment were borrowed. Signup and view all the answers

The dependability of a borrower's income sources is best described as its:

Quality Signup and view all the answers

If Theo receives $3,000 every two weeks, what is his approximate monthly income?

$6,500 Signup and view all the answers

What does a credit score primarily predict?

The likelihood an individual will default on a loan. Signup and view all the answers

What is the primary function of automated underwriting software?

To provide a preliminary risk analysis based on established loan performance data Signup and view all the answers

What does an 'Accept' classification from an automated underwriting program typically signify?

The loan application meets the minimum guidelines for approval. Signup and view all the answers

What does a credit report include for an individual?

Details of loans and credit purchases spanning the previous seven years Signup and view all the answers

Study Notes

Learning Objectives

Students should be able to describe the basic steps in the underwriting process.
Understand the goal of underwriting (qualifying) standards.
Define different classifications in an automated underwriting report.
Discuss an underwriter's considerations: credit reputation, income, and net worth.
Define quantity, quality, and durability of income.
List types of income that qualify as stable monthly income.
Explain how to use income ratios to measure income adequacy.
Calculate net worth using assets and liabilities.
Understand credit history and credit scores.
Explain other underwriting considerations, such as LTV, repayment period, and property type.

Suggested Lesson Plan

Students should review the previous chapter, "The Financing Process," using Exercise 8.1.
Provide an overview of Chapter 8, "Qualifying the Buyer," and review the learning objectives for the chapter.

The Underwriting Process

The process of evaluating a proposed loan to ensure the buyer and property meet the lender's minimum standards.
Qualifying standards are used to identify acceptable and unacceptable loan risks with secondary market considerations from Fannie Mae, Freddie Mac, FHA, or VA.
Automation is used to analyze loan applications based on the performance of millions of existing mortgages to identify which factors increase or decrease the likelihood of default.
Applications are classified as "Accept" to approve, or "Refer" for further review by an underwriter.
The report also indicates the documentation required for further scrutiny or if an on-site appraisal isn't needed.
Automated underwriting reports categorize risk, document required, and property appraisal needs.
There are three main categories in underwriting recommendations: risk, documentation, and appraisal.
Loan type affects risk assessment (e.g., an ARM is riskier than a fixed-rate loan).
Owner-occupancy vs. Investor status: higher risk associated with an investor loan.
Property type: certain properties may present higher risk due to factors like appreciation rate.

Evaluating Creditworthiness

Creditworthiness is evaluated based on credit reputation, income, and net worth.
Creditworthiness can be offset by strength in other factors.
Credit reports: contain loans, purchases, and payment history for the past 7 years.
Credit history refers to the length of time an individual has borrowed and repaid money.
Credit scores: predict default risk based on past credit history, often based on FICO score.
Major derogatory incidents (charge-offs, collections, repossessions, foreclosures, and bankruptcies) influence creditworthiness negatively.
Credit reports may include information from three major credit reporting agencies: Equifax, Experian, and TransUnion.

Income Analysis

Income is evaluated for quantity, quality (dependability), and durability (likelihood of continuation).
Stable monthly income: income meeting quality and durability tests.
Income sources: self-employment income, commissions, overtime, bonuses, retirement income (pension/social security), alimony/child support are generally considered dependable; temporary employment, unemployment benefits, and income from family members without obligation are not.
Income ratios: measure the proposed monthly mortgage payment and installment debt against pre-tax income.
Housing expense ratio: measures proposed monthly mortgage payment against pre-tax income.
Child support, if paid consistently is accounted for in determining income.
Non-taxable income may be "grossed up" because it is assumed the income will be taxed, increasing the likelihood of payment.

Net Worth

Funds required to cover down payment, closing costs, and other related expenses.
Liquidity is necessary after down payment, for up to 3 months' worth of monthly expenses.
Assets: include funds for closing, savings accounts, retirement accounts, and other property such as automobiles, furniture, and real estate.
Liabilities: include debts like credit cards, student loans, car loans, unpaid taxes.
Gift funds can be used, if given and not obligated to be repaid.
Delayed financing: financing may be obtained after closing.
Net equity refers to the difference between the market value of a property and the total liens against the property.

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Description

This quiz covers the essential steps in the underwriting process, including the evaluation of credit reputation, income, and net worth. Students will also learn about different classifications in automated underwriting reports and various underwriting considerations. Understanding income ratios and stable monthly income types will be key areas of focus.