Underwriting Process and QM Loans

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the significance of the '4 C's' in underwriting?

They provide a framework for evaluating a borrower's ability to repay a loan, focusing on their financial stability and creditworthiness. (correct)

They are legal requirements under the ATR/QM rule and must be assessed for every loan application.

They represent the primary risk factors that underwriters must consider when making lending decisions.

They are the primary determinants of loan terms, including interest rates and loan duration.

What is the primary difference between a 'General' QM loan and a 'Small Creditor' QM loan?

General QM loans are guaranteed by the GSEs, while Small Creditor QM loans are not eligible for this guarantee.

Small Creditor QM loans are designed for borrowers with limited borrowing history, while General QM loans are for those with established credit profiles.

Small Creditor QM loans allow for higher APRs and different loan terms than General QM loans. (correct)

General QM loans are only available to borrowers with a specific credit score, while Small Creditor QM loans have less stringent credit requirements.

Why are QM loan classifications important?

They establish guidelines for lenders, ensuring they meet legal requirements and can sell loans to secondary market investors.

They help underwriters assess a borrower's creditworthiness, determining their loan eligibility and loan payments.

They ensure loans meet specific risk criteria, ensuring their suitability for resale in the secondary market and increasing investors' confidence. (correct)

They define the criteria for eligibility for government-backed loans, determining their interest rates and terms.

The statement 'Loans must be Qualified Mortgages to be eligible for sale to the GSEs or to be included in securities guaranteed by the GSEs or Ginnie Mae.' suggests that:

GSEs provide guarantees only for loans that meet predetermined eligibility requirements, ensuring investor confidence in the market. (D) Signup and view all the answers

What is the maximum allowable term for a Qualified Mortgage (QM) loan?

30 years (A) Signup and view all the answers

Which of the following fees are excluded from the maximum allowable fee calculation for a Qualified Mortgage loan?

PMI less than or equal to the cost of government mortgage insurance (C), Government mortgage insurance premium (D) Signup and view all the answers

What is the maximum APR threshold for a Qualified Mortgage loan with a loan amount greater than or equal to $68,908 but less than $114,847?

$3,445 (D) Signup and view all the answers

When does a Safe Harbor QM loan occur?

When the APR exceeds the APOR for a comparable transaction by less than 1.5% at the time the interest rate is set. (B) Signup and view all the answers

What is the maximum time a lender has to respond to a completed loan application?

30 days (B) Signup and view all the answers

Which of the following is NOT a type of lender response to a loan application?

Modification (B) Signup and view all the answers

What is the primary reason why underwriters must know and apply underwriting guidelines of a loan’s prospective secondary market purchaser?

To ensure the loan can be sold in the secondary market. (A) Signup and view all the answers

What is the purpose of the 'Statement of Denial' (Notice of Adverse Action)?

To inform the borrower of the reasons for the loan's denial. (B) Signup and view all the answers

What is the difference between a 'Conditional Approval' and a 'Final Approval'?

Conditional Approval requires additional documentation, while Final Approval does not. (C) Signup and view all the answers

What is a 'counteroffer' in the context of loan applications?

A change to the loan terms that the borrower can accept or reject. (C) Signup and view all the answers

Study Notes

Underwriting Process

Underwriting evaluates loan application risk to determine lending decisions.
Loan applications are evaluated using the "4 C's": capacity, credit, capital, and collateral.
Determining borrower repayment ability is a legal requirement (ATR/QM rule).

Ability to Repay Factors (ATR/QM)

Underwriters consider current and expected income, employment status, total loan payments, debts, debt-to-income ratio, residual income, credit history, and loan-related payments (e.g., insurance).
Underwriters verify a Qualified Mortgage (QM) status. QM loans meet lower-risk criteria under the Ability to Repay/Qualified Mortgage Rule.

Qualified Mortgage (QM) Types

Conventional and government loans can be QMs.
QMs must meet updated 2022 requirements to be eligible for sale to GSEs (Government Sponsored Enterprises).

Categories of QM Loans:

Small Creditor: Small depository institutions with low origination volumes have different APR and loan term limits than larger lenders. Balloon QMs can only be originated by small creditors.
General: The most common category; loans underwritten using maximum first five-year rate, no negative amortization, interest-only or balloon features, no terms over 30 years.
Safe Harbor (Conclusive) QM: Loan APR is 1.5% or lower than a comparable transaction APR. If the interest rate can change in the first five years, the maximum possible rate is used to calculate the threshold.

QM Loan Fees

Finance charges (included in APR calculation), PMI exceeding FHA premium, mortgage broker compensation, lender charges, affiliate charges—all included in the maximum fee calculation.
Third-party charges, government mortgage insurance premium (PMI less than/equal to cost of government insurance), reasonable real estate fees not paid to the lender or affiliate, and up to two verifiable discount points are excluded.

QM Loan Parameters

For loan amounts between $68,908 and $114,847, points and fees can't exceed $3,445.
APR cannot exceed thresholds specific to loan types and markets, and the applicable APR-APOR threshold is the maximum first-five year rate for loans with variable rates.

Rebuttable Presumption QM

APR greater than APOR by 1.5% or more, but less than 2.25% with all other QM requirements met.

Subordinate Liens

Subordinate liens have higher APR thresholds compared to primary liens

QM Verification

Underwriters verify assets, income, and liabilities with GSE (e.g., FHA, VA, USDA) approval or the loan's secondary market purchaser's guidelines (Fannie Mae, Freddie Mac) standards.

Lender Response

Completed applications must be responded to within 30 days.
- Denial: Issuance of a Denial Statement (Notice of Adverse Action).
- Approval: May be Conditional (additional documentation needed), Final (with or without conditions), or Counteroffer (alternative terms).

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers the underwriting process for assessing loan applications, focusing on the key factors of the Ability to Repay (ATR) and Qualified Mortgage (QM) guidelines. Understand the 4 C's and familiarize yourself with QM loan types and their requirements as set in 2022. Test your knowledge on evaluating borrower risk and lending decisions.