Processing and Underwriting

Which of the following forms would allow a lender to receive a copy of a borrower's tax returns from the IRS? a. 4506 b. 1040 c. 2392 d. 2106

a. The answer is 4506. IRS Form 4506, Request for Copy of Tax Return, authorizes the IRS to deliver a copy of a borrower's tax return to the mortgage licensee, for a fee.

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

a. 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. ^^^ the key point here is the SELLERS contribution. Not about the borrower, this is about the seller!

According to the Homeowners Protection Act, what is the earliest point at which PMI can be terminated? a. When the loan reaches 80% loan-to-value, the borrower is in good standing, and submits a written cancellation request b. After at least two years, if the borrower is in good standing and submits a written cancellation request c. When the loan reaches 78% loan-to-value or at least five years after closing, whichever occurs first d. When the loan reaches 80% loan-to-value, PMI is automatically terminated

a. The answer is When the loan reaches 80% loan-to-value, the borrower is in good standing, and submits a written cancellation request. According to the Homeowners Protection Act, the earliest point at which PMI can be terminated is when the loan reaches 80% loan-to-value, if the borrower is in good standing and submits a written cancellation request. If the borrower does not request cancellation or is not in good standing, PMI may stay in place until 78% LTV is reached.

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

a. 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 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 co

a. 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.

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

a. 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. ^^ Don't over think it, if you need any natural disaster insurance it will be on there until loan is fully paid off and the property is yours. Until then the lender will need the insurance to cover their risk.

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

a. 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.

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%

b. 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 ($200,000 ÷ [160,000 + $40,000] = 100%).

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

b. 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). ^^ key point here is that you need the BALANCE of the 2nd mortgage. It tries to trick you by saying there is $5,000 remaining, meaning that the balance and what you used is actually $15,000!

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

b. 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 terms would be associated with the income approach to appraisals? a. Comparable sales b. Capitalization rate c. Neighborhood analysis d. Construction costs

b. 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 borrower is claiming capital gain income on their tax returns. Which of the following is most accurate with regard to using the income to qualify for a mortgage loan? a. The income can be used, as long as the borrower provides an explanation for the income b. The income can be used, as long as the borrower can show a history of receiving the income and document that the income will continue c. Capital gain income can never be used in qualifying a borrower d. The income can be used, as long as the borrower has reported capital gain income for the last two years on their tax returns

b. The answer is the income can be used, as long as the borrower can show a history of receiving the income and document that the income will continue. To qualify a borrower for a conforming loan, stable monthly income can include secondary sources of income that may vary in terms of quantity, quality, and durability. The average of capital gains income can be counted as a source of income if the applicant has consistently turned over assets over a sustained period of time (e.g., two years) and owns additional property or assets that can be sold to make future mortgage payments.

Each of the following is a responsibility of a loan servicer, except: a. Handling escrow account funds b. Collecting late payment penalties c. Recording the note and trust deed with the county recorder d. Collecting periodic payments on behalf of a lender

c. The answer is recording the note and trust deed with the county recorder. Loan servicing includes all activities performed to ensure the loan is repaid in a timely manner and to preserve the lender's legal claim to repayment. Such activities include sending statements to and collecting payments from borrowers, attempting to collect late payments, foreclosing, if necessary, and handling escrow account funds.

Which of the following best describes a lender's obligation under the Ability-to-Repay Rule? a. Lenders may not close loans with a debt-to-income ratio above 43% b. Lenders must always require two years of tax returns in order to assess income c. Lenders must make a reasonable determination regarding the borrower's ability to repay the loan d. Lenders must guarantee the borrower's payments for the first 24 months of the loan

c. The answer is Lenders must make a reasonable determination regarding the borrower's ability to repay the loan. Under the Ability-to-Repay Rule, a creditor must make a good faith determination that the borrower will be able to repay the mortgage loan according to its terms. Such a determination must be made based on a periodic payment amount, calculated at the fully-indexed rate and a schedule that fully amortizes the loan. ^^^ Remember the type of calculation and info that goes into determining a "reasonable determination" of ATR.

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)

c. 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 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

c. 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.

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

c. 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.

If a borrower makes $60,000 per year, what is the most a housing payment could be for the borrower under conventional manual underwriting guidelines? a. $1,800 b. $1,200 c. $1,500 d. $1,400

d. The answer is $1,400. Without considering any compensating factors, a borrower's housing ratio should not exceed 28%. In this example: $60,000 ÷ 12 = $5,000/month; $5,000 × 28% = $1,400

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

d. 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

d. 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. ^^^ You just have to memorize this fact.

An underwriter may require _____ in order to document the income of a commissioned borrower. a. Two years' tax returns if the borrower's commissions represent 20% of his/her income b. 1099s from the previous year c. Profit and loss statement and two years' tax returns d. Two years' tax returns and all schedules if the commission income is more than 25% of income

d. The answer is two years' tax returns and all schedules if the commission income is more than 25% of income. Commissioned borrowers may be required to show two years' tax returns if their commission income is more than 25% of their total income.