20.1 - Mortgage Underwriting & Institutions Flashcards
(21 cards)
What are the Four Cs of mortgage underwriting?
Capacity, Capital, Collateral, Credit
Capacity – definition
Lender’s assessment of a borrower’s ability to repay by comparing income (inflows) with existing debts (outflows) and the proposed mortgage payment.
Two key ratios used to evaluate Capacity
- Housing-expense ratio = PITI / GMI
- Debt-to-income (DTI) ratio = (PITI + LTO) / GMI
What does PITI stand for?
Principal, Interest, Taxes, Insurance (monthly housing costs).
What does GMI stand for?
Gross Monthly Income (total pre-tax income).
What does LTO represent in the DTI formula?
Long-Term Obligations such as car payments, student loans, child support, etc.
Capital – definition
The borrower’s readily accessible financial assets and reserves that could be converted to cash quickly.
Examples of cash reserves counted as Capital
• Bank savings
• Liquid investments (stocks, money-market funds, bonds)
• IRAs
• 401(k)s
Other possible sources of Capital beyond personal assets
Government assistance programs, grants, or gifts from family members.
Collateral – definition
Appraised value of the property pledged as security for the loan.
Loan-to-Value (LTV) ratio formula
LTV = Mortgage Amount ÷ Appraised Property Value
Why is an LTV > 80 % a red flag?
Considered high-risk; usually requires mortgage insurance.
Under what circumstance might an appraiser trigger loan denial?
If they believe the borrower agreed to an excessively high purchase price relative to market value.
Credit – definition
Evaluation of a borrower’s past debt-repayment behavior, typically via an automated FICO score.
Five factors in the FICO scoring model
Payment history, Debt burden, Length of credit history, Types of credit used, Recent credit inquiries.
CFPB credit score bands (5 levels)
- Super-prime (720+)
- Prime (660-719)
- Near-prime (620-659)
- Subprime (580-619)
- Deep subprime (< 580)
Three mortgage risk categories
Prime, Alternative-A (Alt-A), Subprime
Characteristics of Prime mortgages
Conforming loans, high credit scores, easily insurable.
Characteristics of Alt-A mortgages
Non-conforming, average credit scores, may be jumbo, limited documentation.
Characteristics of Subprime mortgages
Non-conforming, poor credit scores, insufficient documentation, highest default risk.
