CHAPTER 4: PROCESSING AND UNDERWRITING

Question 1

Assets are divided into two types

Answer 1

liquid assets used for down payment and closing costs
and long-term assets that can be used to cover the two months payments required for
reserves

Question 2

To verify the assets the borrower has, you can use

Answer 2

bank statements, investment

statements, Verification of Deposits.

Question 3

____________ cannot be used unless it is deposited into an account and has at least 60-day
seasoning

Answer 3

Cash

Question 4

Additional down payment options are

Answer 4

Gift letter from a blood relative or significant other

and shows no requirement for repayment

Question 5

a down payment assistance program

Answer 5

that assists first time homebuyers. The

assistance could come from, city, county or state programs.

Question 6

Two types of income:

Answer 6

o stable income; and

o variable income

Question 7

The income is verified with

Answer 7

1099’s, W-2’s, Paystubs, tax returns with a 4506T and a

Verification of Employment

Question 8

__________ is required to provide continuity of income.

Answer 8

2-year history

Question 9

Non-taxable income can be grossed up

Answer 9

25%, an example of non-taxable income is social

security benefits

Question 10

There are six income calculations that are essential to know when we are talking about
calculating income.

Answer 10

o If the borrower is paid annually, the calculation is annual gross income/12
months.
o If the borrower is paid monthly, there is no calculation, use the annual gross
payment amount divided by 12 months.
o If the borrower is paid twice monthly, (an example would be they are paid on the
5th and the 20th of the month) the calculation is: the amount of each paycheck x 2
pay periods
o If the borrower is paid bi-weekly, then the calculation is (biweekly gross pay x 26
pay periods in a year)/12 months.
o If the borrower is paid weekly, then the calculation is (weekly gross pay x 52 pay
periods)/12 months
o If the borrower is paid hourly, the calculation is (hourly gross pay x average # of
hours worked per week x 52 weeks)/12 months

Question 11

A borrower is considered self-employed if

Answer 11

they own 25% or more of a company. There is

a lot of additional analysis for self-employed borrowers to ensure continuity of income.

Question 12

______________ must be disclosed by the borrower if they are not on the credit report

Answer 12

All liabilities

Question 13

Any payment on liabilities that has less than ____ payments left do not have to be included
in the ______. The exception is a leased vehicle.

Answer 13

1. 10

2. ratios

Question 14

Things that are not considered liabilities include things like

Answer 14

utilities and cell phone

payments.

Question 15

When calculating ratios, you have the front-end or housing ratio and back-end or overall
ratio. Each of the agency products all have different ratios to qualify for the loan.

Answer 15

o Conventional- 28 percent/36 percent
o FHA-31 percent/43 percent
o VA- Back end DTI of 41 percent with residual income calculation
o USDA - 29 percent/41 percent

Question 16

• There is also loan to value which is considered a qualifying ratio. The maximum LTV on
the programs we discussed are:

Answer 16

o Conventional -97 percent (3 percent down payment)
o FHA- 96.5 percent (3.5 percent down payment)
o VA- 100 percent (0 down payment required)
o USDA-100 percent (0 down payment required)

Question 17

The credit report that is pulled for underwriting a loan, is called _______, the merging
of the three credit agencies, ____________________.

Answer 17

1. Tri-Merge

2. Experian, TransUnion and Equifax.

Question 18

The underwriter will use the ______ credit score when underwriting.

Answer 18

Middle

Question 19

What is the credit score range?

Answer 19

300-850

Question 20

• Bankruptcies show on the credit report for

Answer 20

seven (7) years on Chapter 11 or 13 and ten

(10) year on a Chapter 7.

Question 21

For a conventional loan, if a borrower’s credit report shows that a borrower has been
______ or more days late within _________months, the underwriter will deny
the loan, unless there are extenuating circumstances.

Answer 21

1. sixty (60)

2. the past 12 Months

Question 22

For a conventional loan, a borrower is prohibited from obtaining a loan

Answer 22

if they have had a

foreclosure reported on their credit within the previous seven (7) years

Question 23

If there is a short sale and not a foreclosure, then the borrower must wait ______ years
from the short sale to obtain a new mortgage

Answer 23

four

Question 24

Inquiries remain on a borrower’s credit for _____ years, but most of the time, the score
only takes it into account for _________.

Answer 24

1. two (2)

2. twelve (12) months

Question 25

FCRA (Regulation V)

Answer 25

is a federal law that regulates how consumer credit reporting agencies (CRAs) use consumer’s information

Question 26

How many credit reports can you have for free each year?

Answer 26

1.

Question 27

All credit pulls must have a

Answer 27

permissible purpose – just because an MLO can pull a credit | report doesn't mean it's legal under FCRA

Question 28

FCRA requires most things are removed within

Answer 28

seven (7) years, ten (10) years on | bankruptcies

Question 29

FCRA requires an______________ disclosure. This disclosure must be given within ___ days of a credit decision.

Answer 29

1. adverse action | 2. 30

Question 30

FACTA (amendment to FCRA) adds provisions

Answer 30

to improve the accuracy of consumers’ | credit-related records

Question 31

FACTA requires the provision

Answer 31

of risk-based pricing notices and credit scores to | consumers whose applications are denied or who receive less favorable offers of credit

Question 32

Safeguard Rules requires

Answer 32

all files to be kept confidential and stored in a locked cabinet or draw, when not in use. All files have to be kept for a period of at least three years before being destroyed. The CD must be kept for at least five (5) years.

Question 33

_____________ Loan Applicant required under FACTA

Answer 33

Notice to Home

Question 34

Economic Growth, Regulatory Relief and Consumer Protection Act requires

Answer 34

nationwide | consumer reporting agencies to provide national security freezes free to consumers.

Question 35

As well as security/credit freezes, the amendment extended the time that a borrower can have a fraud alert on their credit report from _____ days to _____ year.

Answer 35

1. 90 day | 2. 1 year

Question 36

Red Flags rules was established to

Answer 36

prevent identity theft. The Red Flags Rule applies to | financial institutions and creditors

Question 37

The Disposal Rule is

Answer 37

part of FACTA and dictates how institutions should dispose of consumer information

Question 38

All files can be destroyed after

Answer 38

three (3) years and five (5) years for the CD. Hard copy can be destroyed if the files are digitized.

Question 39

Tangible Net Benefit

Answer 39

• When analyzing a borrower if they should get the loan is to determine the Ability to Repay and is a Tangible Net Benefit. • As a professional it is an MLOs responsibility to discuss options and determine if it is the best decision to compete a loan transaction.

Question 40

RESPA

Answer 40

* Real Estate Settlement Procedures Act (RESPA, Regulation X). * Covers: kickbacks, referral fees, escrow requirements, transfer of servicing, also TRID

Question 41

RESPA does not cover:

Answer 41

o Vacant Land o Large Tracts of Land (25 acres or more – even if there is a dwelling on it) o Commercial or business loans o The government, its agencies or instrumentalities o Temporary financing (bridge loans or swing loans)

Question 42

RESPA Section 8 prevents

Answer 42

anything of value being exchanged for referrals or kickbacks.

Question 43

RESPA - Also, an ________________ Disclosure if the MLO or company have an interest in third party companies or if you are requiring a borrower to use any of your referral companies.

Answer 43

Affiliated Business Arrangement (AfBA)

Question 44

The USA Patriot Act was created in response to

Answer 44

attacks of September11, 2001.

Question 45

The Treasury Department through its Financial Crimes Enforcement Network (FinCEN) became responsible for implementing __________.

Answer 45

the Patriot Act

Question 46

As part of compliance with the Patriot Act, financial institutions are required

Answer 46

to check | two (2) forms of identification for each borrower.

Question 47

US Patriot Acts requires MLOs to obtain identification of borrowers through

Answer 47

Social Security Card, Passport or Driver's License and then run the borrower through the OFAC database, to see if your borrowers are on the governments watch list.

Question 48

An appraisal

Answer 48

is an evaluation of the borrower's home determined by the appraiser and substantiated by an appraisal report

Question 49

All appraisers must conform with

Answer 49

USPAP and be licensed in their states to perform | appraisals

Question 50

• The use of Appraisal Management Companies (AMCs)

Answer 50

is required by Fannie Mae and | Freddie Mac. They are a neutral third party.

Question 51

There are three types of appraisals:

Answer 51

o Sales Comparison o Cost Approach o Income Approach

Question 52

Appraisals | The Sales Comparison approach

Answer 52

is the most common and uses comparable properties to | determine a value of the subject property.

Question 53

Comparables must be within _____ mile(s) of the subject property and have been sold in the past _____ months

Answer 53

1. 1 | 2. 6

Question 54

Gross adjustments cannot exceed _____ percent of the comparable value or a ______ percent net of the comparable.

Answer 54

1. 50% | 2. 30%

Question 55

Appraisals | Cost Approach appraisals

Answer 55

are determined by how much it would cost to reproduce the | improvement (home) on the property

Question 56

Appraisals | Income Approach

Answer 56

used mostly for investment or multi-unit properties. The amount of income the property can produce through renting it is used to determine the value.

Question 57

• The term title is

Answer 57

a collective term for all a borrower’s legal rights to own, use, and dispose of land.

Question 58

The title report

Answer 58

is a generated report that shows the chain of title.

Question 59

The chain of title

Answer 59

is the chain of the sales and transfers of ownership of the title

Question 60

• Title Insurance protects

Answer 60

the borrower and the lender from any flaws in the title from the date of the closing and before

Question 61

There are two types of Title Insurance:

Answer 61

o Owner's title insurance (protects the owners, usually not a requirement but a recommendation) o Lender's title insurance (always required on a transaction – protects the lender)

Question 62

An easement

Answer 62

is a legal right to use another’s land for a specific limited purpose

Question 63

A restrictive covenant

Answer 63

is a clause in a deed or a lease to real property that limits what the owner of the land or lease can do with the property

Question 64

An encroachment

Answer 64

s where a property owner violates the property rights of his neighbor by building something on the neighbor’s land or by allowing something to hand over on the neighbor’s property

Question 65

A deed

Answer 65

is an instrument that conveys a grantors interest, if any, in real property

Question 66

Ownership in severalty

Answer 66

is the simplest form of ownership. It is ownership in a sole form, meaning only one person owns it.

Question 67

Co-ownership

Answer 67

is also known as concurrent ownership and is the ownership of a property by two or more persons who share title to real property

Question 68

Tenancy in common

Answer 68

is a form of co-ownership with two or more persons having an | undivided interest in the entire line, but no right to survivorship.

Question 69

Right to survivorship

Answer 69

means that the property passes automatically to other co-owners when one co-owner dies

Question 70

Joint Tenancy exists

Answer 70

when each co-owner has an equal undivided interest in the land with the right of survivorship

Question 71

Tenancy by the Entirety

Answer 71

is a form of co-ownership that involves only owners who are | husband and wife, with each having an equal and undivided share of the property

Question 72

A lien is not only a ________ interest in the property, but it is also a financial _________.

Answer 72

1. financial | 2. encumbrance.

Question 73

A lien can be

Answer 73

voluntary or involuntary

Question 74

A note or promissory note

Answer 74

is a written, legally binding promise to repay a debt.

Question 75

Default

Answer 75

is the failure to fulfill an obligation, duty, or promise, as when a borrower fails to make payments on a mortgage.

Question 76

Generally, liens are paid in the order they were attached to the land. The important exception is _________ liens; these types of liens are ______ to all other liens.

Answer 76

1. property tax | 2. superior

Question 77

Insurance requirements

Answer 77

Homeowners insurance/Hazard Insurance and Flood insurance. Borrowers must have both if required at closing and paid up for the next 12 months.

Question 78

When a property is in a flood zone, most lenders are going to require that that borrower

Answer 78

obtain flood insurance

Question 79

The Federal Emergency Management Agency (FEMA)

Answer 79

is responsible for creating 100- year flood plain maps and provide flood insurance to homeowners in identified flood zones

Question 80

Maximum flood insurance is _______ for the property and ______ for personal property.

Answer 80

1. $250,000 | 2. $100,000

Question 81

The 1973 Flood Disaster Protection Act

Answer 81

regulated and required insured lenders and federal agencies to require flood insurance for loans for properties in Special Flood Hazard Areas (SFHA).