Qualifying the Borrower
Per Fannie Mae requirements and other GSE loans require that the debt to income ratio (that is, total PITI plus other debts) not exceed....
36%
How is an applicant's income verified?
All income reported by the applicant should be verified by the underwriter. Employers should be sent Verification of Employment (VOE) forms, which request the length of the applicant's employment, gross salary, additional income (such as overtime, bonuses, and royalties), and the likelihood of continued employment.
The underwriter making the loan decision will consider a borrower's: A. income, number of children, and age B. income, credit, and net worth C. age, income, and marital status D. source of income, location of their current property, and credit score
B
To gather the information needed to build a debt-to-income ratio requires the more rigorous investigation of pulling a credit report and gathering other verification documents. Consequently, you may also hear this ratio referred to as the...
Back-end ratio
The Fair Credit Reporting Act grants a number of rights to consumers. Please summarize those rights potentially affecting persons seeking a mortgage loan
Consumers must be told if information in their file has been used against them, and, if so, what credit reporting agency was used. Consumers have the right to know what is in their file. Consumers have the right to ask for a credit score. Consumers have the right to dispute incomplete or inaccurate information. Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information. Consumer reporting agencies may not report outdated negative information. Access to consumer files is limited. Consumers may seek damages from violators.
T/F- a lender is allowed to ask an applicant whether they receive alimony or child support
F - A lender may NOT ask an applicant whether they receive alimony or child support, although the applicant can choose to reveal this knowledge to qualify for the loan. We'll go over this in more detail when we talk more about the Equal Credit Opportunity Act later in the course.
Different companies employ different formulas and scoring models, so even if they were to use the same data at the same time, the end result could still be a different credit score. A couple of the larger credit scoring companies include _____ & ______
FICO & Vantage Score
What are the payment-to-income ratio requirements for a conventional loan?
For a conventional loan, monthly payments cannot exceed 28% of a borrower's monthly income. FHA loan payments generally cannot exceed 31% of a borrower's income. (These amounts can change from time to time, but the FHA always publishes the most up-to-date limits on their website.)
What is the formula to solve for payment to income ratio?
Monthly payment/monthly income = payment-to-income ratio
T/F - Lenders may ask an applicant if they are widowed or divorced
No - this is prohibited under the equal opportunity act
Name the major factors that influence credit scores
Payment history Current unpaid debt Length of credit history Percentage of available credit used Debt type/start date New applications for additional debt
T/F - A FICO score is a credit scoring system created by the Fair Isaac Corporation
T
T/F - All debt types are accounted for in an underwriter's evaluation of a borrower's net worth. Long-term debt and revolving debt are offset by assets like income or other ongoing revenue streams when net worth is being evaluated.
T
Those monthly payments I just mentioned? They are fondly known as PITI. What does PITI stand for?
principal, interest, taxes, insurance (All together, these costs equal a monthly (mortgage) payment)
What is a person's net worth?
the sum of a person's assets minus all of their debts (also known as their liabilities) i.e. assets-liabilities = net worth
Daniella has a stable monthly income of $2,000. She wants to take out an FHA loan (which cannot exceed 31% of her income). Using the payment-to-income ratio, how much PITI (monthly payment) will Daniella be approved for?
$620
What is the formula to solve for debt to income ratio?
(monthly payment+other debts)/monthly income = debt-to-income ratio
What are the high level items that are outlined in the Residential Mortgage Credit Report
1. Profile Identification & Shortcut Links to different parts of the credit report 2. potentially negative items (public records/judgement records, creditor names, accounts with past due and/or present payment issues, participating collection agencies) 3. accounts in good standing 4. request for your credit history (also called inquiries) - this outlines any time someone has asked to see the credit history of the individual involved) 4. personal information
What are the three different influences that account for the variance in credit score?
1. data 2. timing 3. scoring models & formulas
There are a number of rules, regulations, and laws in place to protect the consumer in their interactions with lenders and creditors. What are these regulations?
1. fair credit reporting act (FCRA) 2. equal credit opportunity act
In order to determine a buyer's financial qualifications, an underwriter will typically look at five aspects of the applicant's financial profile. What are they?
1. income 2. credit 3. assets 4. debts 5. net worth
What are the two qualifying rations lender underwriters use to determine whether or not that candidate can make the monthly mortgage payment and service all of their other debts over the term of the loan?
1. payment-to-income ratio (also known as housing expense ratio or housing expense-to-income ratio) 2. Debt to income ratio (also known as debt service ratio or total debt service to income ratio)
What are the different types of debts?
1. short-term debts 2. long term debts 3. revolving debts
Calculating the payment-to-income ratio and the debt-to-income ratio will most likely give you two different numbers. That being the case, there are two things to know. What are they
1. the borrower needs ot qualify under both ratios 2. whichever ratio produced the smallest PITI amount will be the one that is used
Inquiries on your credit report fall into two categories. What are they?
1. those resulting from a transaction initiated by the applicant (applications for credit, housing, insurance, other loans - or a transfer of an account to collections agency) 2. Those that may not have been initiated by the applicant's actions, but are still allowed under the fair credit reporting act (including pre-approved offers, employment, investment reviews, account monitoring)
Any employment gaps of more than ____ days must be documented by the lender.
60
Requests for credit history can also be referred to as: A. inquiries B. prequalifying checks C. underwritings D. a credit scan
A
A report that contains information regarding an individuals credit history (loan payment's, etc) as well as the present credti status of all open credit accounts.
A credit report
How is NOI (net operating income) considered when applying for a mortgage?
A loan applicant may also receive income from investment properties that they hold. These real estate investments can come in many different forms, including malls, strip malls, offices, apartments, hotels, golf courses, ski lodges, residential rental property, and warehouses. Income from these investments comes primarily in the form of rent. The NOI of each investment property held by the applicant should be considered as income (or as long-term debts, if negative cash flow) for the purposes of the loan.
Jeremy has a monthly income of $2,000. His payment-to-income ratio is 1/4. How much is his monthly payment?
A payment-to-income ratio of 1/4 is equal to 0.25. So, 2,000 multiplied by 0.25 = $500.
People have the right to know what's going on with their credit scores, and lenders and businesses have the duty to be honest and transparent with their reporting. What was put into place to protect this right?
Fair Credit Reporting Act (FCRA)
When a borrower has a higher credit score, they will likely be awarded a lower interest rate. Why is this?
Higher scores reflect a better loan repayment history and, therefore, will result in lenders offering better rates to those perceived as lower risk
T/F - FCRA was enacted with the intention of protecting consumers from willful and negligent inclusion of inaccurate information in their credit reports
T
T/F - The way a person uses credit and manages debt has a direct bearing on their credit score. Timely payments and staying well beneath one's credit limit is key to a good credit score.
T
T/F - a credit report and a credit score are two separate but related things
T
T/F - the equal credit opportunity act mandates that loan companies may not ask about marital status beyond inquiring if the borrower is married or single.
T
T/F - the payment-to-income ratio (or front-end ratio) is used to determine whether or not the applicant's income is sufficient and reliable enough to repay the mortgage amount
T
t/f - FHA loans limit the debt-to-income ratio to 43%
T
T/F - Beneath the Personal Information section is a place for the individual profiled to provide a personal statement
T - Beneath the Personal Information section is a place for the individual profiled to provide a personal statement. Your personal statement lives on in your credit report for two years, so anyone who elects to write a statement should choose their words carefully!
T/F - An applicant's alimony or child support can also be considered a source of income
T - provided that it has been court-ordered and has a history of payment that can be verified
the payment-to-income ratio is also referred to as the front-end ratio. Why is that?
The reason for calling it the front-end ratio is that the lender can choose to establish the payment-to-income ratio based solely on the borrower's statement regarding their income without having gone to the expense of pulling credit reports or gathering other verification documentation. In other words, the applicant is taken at their word regarding their income, and, for that reason, this front-end ratio is primarily used to pre-qualify the applicant for possible loan amounts.
Summarize what is covered under the ECOA (equal credit opportunity act)
The right to know whether their application was accepted or rejected within 30 days of filing a complete application. The right to know why their application was rejected: The creditor must tell the applicant the specific reason for the rejection or that the applicant is entitled to learn the reason if they ask within 60 days.An acceptable reason might be: "Your income is too low," or "You haven't been employed long enough."An unacceptable reason might be "You didn't meet our minimum standards." That information isn't specific enough. The right to learn the specific reason they were offered less favorable terms than applied for, but only if they reject these terms. For example, if the lender offers a smaller loan or a higher interest rate, and the applicant doesn't accept the offer, they have the right to know why those terms were offered. The right to know why their account was closed or why the terms of the account were made less favorable, unless the account was inactive or they failed to make payments as agreed.
To meet the specific needs of residential mortgage lenders, credit reporting agencies have developed the residential mortgage credit report (RMCR), which provides a comprehensive overview of an individual's credit history and current status. How do they accomplish this?
They accomplish this by merging the information contained in the separate reports of the three major credit reporting agencies (Equifax, Experian, and TransUnion) into a single report. The individual FICO® scores as calculated by each of the three agencies are given in the RMCR, with lenders typically basing their approvals off the middle of the three scores. This report generally includes detailed information about credit account activity in the past two years, including late payments, the date(s) on which an account was delinquent, the number of times each account has been past due, the duration of the past-due status (30-59, 60-89 or 90+ days), and the type and balance of each account.
A monthly payment includes: a. principal, interest, taxes, and insurance B. principal, insurance, taxes, escrow C. principal, taxes, insurance, and prorations D. Principal, interest, fees, and insurance
a
The debt to income ratio (or back end ratio) is needed for a lender to be comfortable enough to issue what?
a pre-authorization letter on behalf of the borrower
Loan companies may not inquire about: A. the net worth of the borrower B. employment verification C. martial status beyond asking if a borrower is married or single D. the debts and credit score of the borrower
c
a calculation using a formula that takes into consideration the information contained in a credit report
credit score
a ratio used in the underwriting process that measure's a borrower's creditworthiness and ability to take on the responsibility of a mortgage loan
debt to income ratio
What are the three primary credit reporting companies?
equifax, transunion, & experian
an act from the U.S. Federal Government to promote the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies.
fair credit reporting act (FCRA)
Assets that can be quickly converted to cash without losing their value are said to be liquid assets.
liquid assets
a type of debt that is often paid as installments over a predetermined timeframe, which can extend for years
long term debt
The debt-to-income formulas are just a bit more complicated than the ones we use with payment-to-income ratio because there are three pieces of information needed to solve for with debt-to-income ratio. What are they?
monthly income, monthly payment, other debts
A lending underwriter must use the applicant's financial information they have gathered to determine whether or not that candidate can make the monthly mortgage payment and service all of their other debts over the term of the loan. To do this, the underwriter examines what are known as...
qualifying ratios
To meet the specific needs of residential mortgage lenders, credit reporting agencies have developed the __________________, which provides a comprehensive overview of an individual's credit history and current status
residential mortgage credit report
a type of debt that is an ongoing line of credit, as with a credit card, where the amount of debt can fluctuate as the borrower uses it to manage cash flow issues
revolving debt
A type of debt that is usually taken care of with one payment, or perhaps, a few, but is not considered an ongoing obligation
short-term debt
The ____ section of the report list accounts that will likely be viewed more positively by lenders
the accounts in good standing section
What is the difference between the debt to income ratio & the payment to income ratio?
the debt to income ratio includes other ongoing debts beyond the PITI (house payment) that the borrower has
Act in which makes it unlawful for a creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of demographic information such as race, color, religion, national origin, sex, marital status, or age.
the equal credit opportunity act
What is the goal of the underwriter when researching an applicant's income?
they are trying to determine whether or not it is sufficient and reliable enough to meet the responsibility of the desired mortgage loan, along with the applicant's other recurring debts
payment-to-income ratio, housing expense ratio, and housing expense-to-income ratio are all names for the same thing. What is their purpose?
they compare the monthly house payment (PITI) to the borrower's monthly income