Chapter 20: Loan Underwriting

How are funds distributed in a foreclosure sale?

The sale proceeds from a foreclosure are first applied to the cost of the sale, including attorney fees and the selling expenses, and the debt owed to the foreclosing mortgage company. Next, any surplus is distributed to junior lien holders in order of priority, and, finally, any excess is given to the original debtor.

What is the purpose of private mortgage insurance?

When a borrower wants a lower down payment.

Which of the following definitions best defines a non-judicial foreclosure?

When a lender does not have to go to court in order to foreclose on a delinquent mortgage.

When does the initiation of a mortgage loan application start?

When the lender receives the completed application package from the applicant.

On a mortgage loan application, which of the following information would NOT be classified as a supporting document?

Borrower's monthly income & expenses

Why is information about net worth important?

It gives an indication of the borrower's ability to keep up the payments on the loan in the event that the borrower would lose his or her job.

Why do some lenders require that applicants have a reserve of cash after the purchase is complete?

It raises the lender's comfort level to know that the chances of a default during an emergency are greatly reduced with cash reserves.

Proof of property ownership is also known as

evidence of title.

Define the term predatory lender

literally preys on the customers who may fall into the below "A paper" lending categories, particularly those who do not speak English, are poorly educated, or are elderly.

According to the TRID rule, what booklet must be given to each loan applicant?

"Your home loan toolkit"

What must an underwriter decide when evaluating an applicant's income?

- How much of the applicant's income is stable - Income that is not stable will not be used in the calculations for ability to repay the loan. - If the applicant has enough stable income to make the monthly payment.

What are the four options a lender has upon receiving a short sale package?

- Ignore the offer. - Refuse the offer. - Request that the seller cover some or all of the deficiency - Approve the offer.

What disclosures are lenders required to provide borrowers?

- Lenders must give a copy of the booklet, "Your home loan toolkit" to every person at the time of application for a loan. - Lenders must provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application. - Lenders must deliver a Closing Disclosure form to the borrower at least three days before closing

What kinds of income are considered stable income?

- Permanent employment - Self-employment under certain conditions - Employment that has generated a regular income for at least one to two years, such as bonuses or commissions - Some income from secondary sources, such as rental income or investments

Loan origination fees are typically

1% of the loan amount.

Which fixed rate loans build equity the fastest?

15 year

VA loans are only calculated with one debt to income ratio of

41%

FHA guidelines state the debt ratio may not be greater than

43%.

Which of the following statements best defines a high-priced loan?

A first-lien mortgage loan that exceeds the average prime offer rate of 1.5 percent or more.

How does a lender determine if the buyer's income is enough to pay the loan?

A lender determines if a buyer's income is enough to pay the loan by establishing an income ratio and a debt ratio.

How are mortgage loans classified?

A,B,C,D

What type of loan has one large final payment due when the loan matures?

Balloon

What are the three most common types of loans?

Conventional, FHA and VA loans

Which of the following statements is TRUE?

Creditors are required to provide applicants with free copies of all appraisals in connection with an application for a loan to be secured by a first lien.

Which type of action allows a defaulting borrower who faces foreclosure to avoid court actions by voluntarily deeding the property to the lender?

Deed in lieu of foreclosure

What is it called when some other party has some rights or claim to the property?

Encumbrance

Which type of loan is the most popular?

Fixed Rate

What document may be required when part of the down payment comes as a gift from a relative or friend?

Gift letter

From an underwriting standard, which income source would be rated more stable?

Government employee

Which type of mortgage foreclosure is supervised and controlled by the courts?

Judicial Foreclosure

Under what foreclosure system, does the lender begins the foreclosure by filing a lawsuit against the borrower?

Judicial foreclosure

What is the primary reason why lenders avoid foreclosures, if possible?

Lenders wish to avoid foreclosure because it results in the bank owning the asset.

What is it called when a lender encourages a borrower to refinance a loan so that the lender can charge high points and fees for the new loan?

Loan Flipping

What do lenders use to qualify home buyer's?

Loan underwriting standards.

Which of the following statements best describe Market Value?

Market Value of a property is the highest price a buyer is willing to pay and the lowest price the seller will accept.

What is the debt-ration based on?

On all the monthly obligations of the borrower.

What is the most important part of a credit report?

Payment history

What is it called when a lender takes unscrupulous actions to entice a borrower in to taking a mortgage that benefits the lender?

Predatory Lending Practices

What are prime and sub-prime borrowers?

Prime borrowers are approved for loans that are referred to as "A" papers. Less qualified borrowers, perhaps with credit problems, who have to take a loan at a much higher interest rate than a prime borrower are referred to as sub-prime borrowers. They could have "B," "C," or even "D" papers

What is the time period called that occurs after a loan default and before a foreclosure sale?

Redemption period

What is the form most often used to verify employment information?

Request for Verification of Employment

What type of loans are given to those borrowers who have poor credit and whose ability to repay the loan is risky?

Sub-prime Loans

What are the two main considerations when underwriting a mortgage loan?

The investment quality of the property and the borrower's ability to repay the loan.

In a foreclosure situations, who actually owners the property?

The lender

What, if any advantage is there for the lender to agree to a short sale?

The lender avoids going through the process of a foreclosure.

How can a lender verify alimony or child support income?

The lender can request copies of court orders and bank statement deposits.

Generally speaking, mortgage loans amounts are based on what factors?

The lender will base the loan amount on either the amount of the appraisal or the sales price, whichever is less.

Jake and Myra Smith are purchasing a $150,000 home. They are making a $15,000 down payment and getting a loan for the balance. What's the loan-to-value ratio?

The loan-to-value ratio is 90%. They are making a 10% down payment and getting a 90% loan.

Which entity is last to see any sale proceeds from a foreclosure?

The original debtor

In a deed in lieu of foreclosure transaction, how is a legal title transferred to the lender?

The title is usually transferred with a warranty or quitclaim deed.

What action reveals any outstanding liens or encumbrances on a property?

Title Search

What is the evaluation process called that is used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral?

Underwriting

What is a promissory note and what does it do?

a document that describes the amount of money borrowed, the terms under which it will be repaid, and any conditions that relate to either the borrowing of the money, or the consequences in event of default. it establishes legal evidence of the debt incurred.

A short sale is the sale of

a secured real property that produces less money than what is owed to the lender.

An adjustable rate mortgage

allows a homeowner to qualify for a more valuable home at the start of the loan

What is the average down payment for a conventional loan?

between 10% and 25%

What is the non-judicial foreclosure process?

involves the lender giving the borrower a notice of default (NOD) and expressing the intent to sell the property in a form prescribed by that state's statute. If the borrower fails to cure the default or use other legal means to stop the sale, the lender may conduct a public auction

Lenders have

more stringent standards for the self-employed.

Typically, overtime is

not considered to be stable income.

Another term for a non-judicial foreclosure is known as a (an)

power of sale.

Federal law

requires the lender to accept all applications and to give applicants notice concerning the disposition of the application.

Why is a balloon loan a particularly bad idea for a low-income borrower?

the borrower has to come up with a large sum of money at the end of the term. In some cases, the lender requires an even higher interest rate to give an extension. If the borrower doesn't have the income to meet the higher payment, he or she will be in trouble and possibly face foreclosure.

What is required to be eligible for a VA loan?

the borrower has to have approved credit, sufficient income, and plan to live in the property. Additionally, the borrower must have a valid Certificate of Eligibility (COE)

Define underwriting.

the evaluation process used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral

A lender may not accept a deed in lieu of foreclosure from borrowers

the lender deems financially capable of making their mortgage payments.

Define the term short sale.

the sale of a secured real property that produces less money than what is owed to the lender