Chapter 4: Processing & Underwriting Flashcards
Learning Objectives for Chapter 4 • Describe the different types of income and how to calculate them • Explain how to analyze a borrower's liabilities, qualifying ratios and credit reports • Restate the requirements under FCRA and FACTA related to credit reports • Outline the requirements under RESPA and the US Patriot Act • Understand what constitutes net tangible benefit • Describe how title, appraisals and insurance play a part in the origination process
1
Q
Liquid financial reserves are those liquid or near liquid assets that are available to the borrower after the mortgage closes, including:
A
- Money in a checking or savings account.
- Investments in stocks, bonds, mutual funds, certificates of deposit, money market funds, and trust accounts.
- Amounts vested in a retirement savings account; and
- The cash value of a vested life insurance policy.
2
Q
Things that are not considered acceptable sources of reserves are:
A
- Funds are not vested.
- Funds that cannot be withdrawn under any circumstances other than the account owner’s retirement, employment termination or death.
- Stock held in an unlisted corporation.
- Non-vested stock options and non-vested restricted stock.
- Personal unsecured loans.
3
Q
The underwriter is likely going to require a Verification of Deposit this is
A
a form filled out by the borrower’s depository institution that will verify the borrower has those funds available to them.
4
Q
For a reserve to be considered seasoned and acceptable the funds must be in the borrower’s possession for at least
A
60 days. This means that the funds are seasoned.
5
Q
Examples of Stable Income are:
A
- Base Salary.
- Consistent hourly wages.
- Social Security; and
- Payments for retirement or long-term disability
6
Q
Examples of Variable income are:
A
- Commission.
- Bonuses.
- Overtime.
- Self-Employed income.
- Fluctuating hourly wages; and
- Second job income.
7
Q
Most of the time the borrower is going to have to show 2 years of income, most underwriters want to see ________?
A
that income be from the same employer or at least in the same line of work.
8
Q
There are some types of income that do have a defined expiration date and will require proof of at least a 3-year continuance from the time the loan is originated. Examples of those types of income include:
A
- Alimony or child support.
- Distributions from a retirement amount.
- Mortgage differential payments.
- Notes receivable.
- Public assistance.
- Royalty payment income.
- Social Security (not including retirement or long-term disability).
- Trust income; and
- VA benefits (not including retirement or long-term disability).
9
Q
Once the underwriter has determining that the income is non-taxable the underwriter can do what we call gross up the income by adding _______?
A
25 percent of the nontaxable income to the borrower’s income.
10
Q
If a borrower has a second job, that income can be used to qualify for a mortgage but again, there must be at least
A
2 years of history of that income.
11
Q
If a borrower has rental properties, the income from those properties is an acceptable source of stable income if it can be established that the income is likely to continue The rental income can be verified in two ways, through the _______?
A
borrower’s tax returns as it should appear as income there or by using a fully-executed current lease agreement.
Any individual who has a 25 percent or greater ownership interest in a business is self- employed.
12
Q
The following factors must be analyzed before approving a mortgage for a self- employed borrower:
A
- The stability of the borrower’s income.
- The location and nature of the borrower’s business.
- The demand for the product or service offered by the business.
- The financial strength of the business; and
- The ability of the borrower to continue generating and distributing sufficient
income to enable the borrower to make the payments on the requested mortgage.
13
Q
Things that are considered a borrower’s liabilities include:
A
- The housing expense on the borrower’s principal residence (mortgage payment, taxes and insurance on their home); and
- All revolving charge accounts (credit cards).
- Installment loan debts with a remaining payment term greater than ten (10) months
(For example, if the borrower’s car loan has less than ten (10) months left on it then the underwriter does not have to consider it in the borrower’s debt-to-income ratio); - Lease payments (must be counted no matter the number of payments left).
- Real estate loans (other properties mortgages).
- HELOCs.
- Alimony and child support (the payment of these things, not receiving them).
- Maintenance payments.
- All other debts of a recurring nature.
14
Q
Things that are not considered liabilities:
A
- Utilities.
- Cell phone payments.
- Insurance payments (except homeowners’ insurance).
- Tax payments.
- Union dues; and
- Voluntary deductions on the paystub (like 401K contributions).
15
Q
Qualifying Ratios
& Debt-to-Income Qualifications :
Conventional
A
28 percent/ 36 percent
16
Q
Qualifying Ratios
& Debt-to-Income Qualifications :
FHA
A
31 percent/ 43 percent
17
Q
Qualifying Ratios
& Debt-to-Income Qualifications :
VA
A
Back end DTI of 41 percent with residual income calculation
18
Q
Qualifying Ratios
& Debt-to-Income Qualifications :
USDA
A
29 percent/ 41 percent
19
Q
The maximum LTV & Loan to Value Qualifications:
Conventional
A
97 percent (3 percent down payment)
20
Q
The maximum LTV & Loan to Value Qualifications:
FHA
A
96.5 percent ( 3.5 percent down payment)
21
Q
The maximum LTV & Loan to Value Qualifications:
VA
A
100 percent (0 percent down payment required)
22
Q
The maximum LTV & Loan to Value Qualifications:
USDA
A
100 percent (0 down payment required)
23
Q
There are three bureaus that a credit score can be pulled from:
A
Experian, Equifax & Transunion
24
Q
Those scores can range from
A
300 - 850
25
The things that are included in the credit score are:
* Payment history.
* Amounts owed/credit utilization (how much credit do you have access to and how much are you using of it).
* Credit mix: (how many different types of accounts do you have)
* New credit: (the age of your credit, have you recently opened new credit, etc.)
* Credit inquiries.
* Derogatory marks (Bankruptcy, foreclosures, repossessions, collections, &
judgments).
26
For a conventional loan, if a borrower’s credit report shows that a borrower has been ___60__________ or more days late within the past ________?
12 months then that could cause the borrower to be declined.
27
For conventional loans, a borrower cannot have had a Chapter 13 bankruptcy discharged within the past ______?
2 years, dismissed within the last 4 years, or filed but neither dismissed nor discharged within the last 4 years.
28
For non-chapter 13 bankruptcies, the borrower cannot have filed, discharged or dismissed a bankruptcy within the last
4 years to be eligible for a mortgage loan.
29
For a conventional loan, a borrower is prohibited from obtaining a loan if they have had a foreclosure reported on their credit within the previous
7 years. If there is a short sale and not a foreclosure, then the borrower must wait 4 years from the short sale to obtain a new mortgage.
30
Inquiries remain on a borrower’s credit for
2 years but most of the time the score only takes it into account for 12 months.
31
Federal Mortgage Law Quick Facts: Fair Credit Reporting Act
Regulation:
Acronym:
Year Created:
Main Purpose:
Other Laws that are Complimentary:
Federal Mortgage Law Quick Facts: Fair Credit Reporting Act
Regulation: Regulation V
Acronym: FCRA
Year Created: 1970
Main Purpose: Restricts the use of credit reports and requires accuracy on credit reports
Other Laws that are Complimentary: FACTA
32
The Fair Credit Reporting Act or Regulation V is
a federal law that regulates how consumer credit reporting agencies use consumer’s information.
Credit reports are a cornerstone of determining a borrower’s creditworthiness when obtaining a loan.
Access to credit reports and the information contained on them is regulated by FCRA. FCRA aims to make sure that the use of the information on credit reports is used for permissible purposes.
33
FCRA allows a consumer credit reporting agency to furnish consumer credit reports for certain acceptable circumstances and with written permission from the consumer or within the government agency’s statutory authority. Give examples of acceptable circumstances.
* He intends to use the information for a credit transaction involving the consumer’s request for extension of credit, or review or collection of an account;
* Intends to use the information for employment purposes
*Intention to use the information for the underwriting of insurance for the consumer
34
Along with the definition of permissible use, FCRA requires credit-reporting agencies to delete obsolete information and make sure that the information that they have is accurate in how they report it. Most things must be removed within
7 years, 10 years on bankruptcies. FCRA also allows consumers to dispute erroneous items on their credit report.
35
FCRA requires an adverse action disclosure be provided to the borrower if their credit is the reasoning for all or part of the decision to deny the loan application. The disclosure must disclose from what credit reporting agency the credit information was obtained, disclosure that the credit reporting agency is not responsible for the denial of the loan, disclose that the credit reporting agency will provide a free copy of the exact report used (you as an MLO cannot do this as you are not a credit reporting agency), and this disclosure must be given within
30 a decision must be made on an application within 30 days of application).
36
Federal Mortgage Law Quick Facts: Fair and Accurate Credit Transaction Act
Regulation:
Acronym:
Year Created:
Main Purpose:
Disclosures/Notice Required:
Entity Responsible for Enforcement:
Other Laws that are Complimentary:
Federal Mortgage Law Quick Facts: Fair and Accurate Credit Transaction Act
Regulation: Not applicable
Acronym: FACTA
Year Created: 2003
Main Purpose: Improves consumer access to credit information, avenues for disputes, and helps prevent and detect identity theft
Disclosures/Notice Required: Notice to Home Loan Applicant
Entity Responsible for Enforcement: CFPB
Other Laws that are Complimentary: FACTA
37
Explain the purpose of FACTA:
The Fair and Accurate Credit Transaction Act or FACTA is an amendment to FCRA and adds provisions to improve the accuracy of consumers’ credit related records.
It gives consumers their right to one free credit report each year from each credit reporting agency. It also allows consumers to purchase, for a reasonable fee, a credit score along with the information about how the credit score is calculated. FACTA also requires the provision of “risk-based pricing” notices and credit scores to consumers whose applications are denied or who receive less favorable offers of credit.
The FACTA also adds provisions designed to prevent and mitigate identity theft, including a section that enables consumers to place fraud alerts in their credit files.
38
MLO’s must disclose the following information to the consumer as soon as is reasonably practicable:
● The consumer’s credit score or the most recent credit score that was provided by the credit reporting agency;
● The range of possible credit scores under the model used;
● Any factors that adversely affect the score, up to 4 key factors, including excessive
inquiries;
● The date the credit score was created; and
● The name of the company that provided the credit report.
39
This requirement can be met by simply providing the consumer with the
Notice to Home Loan Applicant disclosure.
40
In a situation where a creditor discloses to a consumer credit reporting agency negative information the creditor must disclose that information to the consumer. The disclosure must be made to the consumer no later than
30 days after the negative information was provided to the credit bureau(s).
If the borrower disputes the negative information, they can send a notice to the creditor that contains the identification of the specific information being disputed, explanation of the reason for the dispute, and all supporting documentation required as evidence of the dispute.
The dispute must be resolved within 30 days after the dispute was received.
41
In May of 2018, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection -Act which requires ________?
nationwide consumer reporting agencies to provide national security freezes free to consumers.
42
What are the two disclosures required under the Economic Growth Act?
The Summary of Consumer Rights is a summary of rights to obtain and dispute information in consumer reports and to obtain credit scores.
The Summary of Consumer Identity Theft Rights is a summary of the rights of identity theft victims.
43
As a part of FACTA, the Red Flags Rule
was established. It was established to prevent identity theft.
The Red Flags Rule applies to financial institutions and creditors.
The Rule also requires those organization conduct risk assessments to determine if it has “covered accounts” and are safeguarding those accounts properly.
44
A “_consumer account___” is
a deposit account or loan account where the owner may make payments or deposits or transfers to third parties.
It includes checking, savings and share draft accounts.
45
Creditor is
defined broadly as a business or organization that defers payments for goods or services or provides goods or services and bill consumers later
46
What are the four basic elements of an identity theft prevention policy are outlined in the Red Flags Rule?
1. The program must include reasonable policies and procedures to identify the red flags of identity theft that may occur in day-to-day operations.
2. The program must be designed to detect the red flags that have been identified. (example, if fake IDS have been identified as a red flag, then the program must have procedures to detect possible fake, forged or altered identification).
3. The program must spell out appropriate actions that need to be taken when a red flag is detected.
4. The program must detail how to keep the program current for new threats.
47
A red flag includes
patterns, practices, or specific activities that indicate the possibly of identity theft. These red flags may vary depending on the type of account or the specific situation.
48
Some common red flags are:
Alerts, notifications, and warnings from a credit reporting company; Suspicious documents; Personal Identifying Information that is inconsistent; and Suspicious account activity.
49
The Disposal Rule is
part of FACTA and dictates how institutions should dispose of consumer information.
It was designed to reduce the risk of consumer fraud and related harm, including identity theft, created by the disposal of consumer information.
50
Things that are considered tangible net benefit to the borrower include:
* Lower interest rates
* A reduction of monthly principal and interest payments
* Shortening of the loan term
* Converting an adjustable rate mortgage to a fixed rate mortgage
* Removing mortgage insurance by lowering the loan to value of the loan
* Consolidating a first and second mortgage
* Eliminating any negative amortization feature
* Avoiding short sale or foreclosure
* Debt consolidation (within reason)
* Home improvement (within reason)
* Cash out (within reason)
51
Federal Mortgage Law Quick Facts: Real Estate Settlement Procedures Act
Regulation:
Acronym:
Year Created:
Main Purpose:
Disclosures/Notice Required:
Important Terms Related to this Law:
Entity Responsible for Enforcement:
Federal Mortgage Law Quick Facts: Real Estate Settlement Procedures Act
Regulation: Regulation X
Acronym: RESPA
Year Created: 1974
Main Purpose: Educate borrowers on the cost of their loans
Disclosures/Notice Required: Escrow notices, notice of transfer of servicing, AfBA
Important Terms Related to this Law: Kickbacks, referral fees, escrow requirements, transfer of servicing
Entity Responsible for Enforcement: CFPB
51
RESPA does not cover:
● Vacant Land
● Large Tracts of Land (25 acres or more – even if there is a dwelling on it)
● Commercial or business loans
● The government, agencies or instrumentalities
● Temporary financing (bridge loans or swing loans)
51
Explain the purpose of RESPA.
RESPA was created to help educate borrowers about the costs associated with the loan, which would lead borrowers to understanding what questions they need to ask when shopping for a mortgage loan.
RESPA was also meant to eliminate kickbacks and referral fees that tend to inflate the cost of loans and limit deposits in escrow accounts to insure the payment of taxes and insurance.
52
Section 8 of RESPA was created to
eliminate the payment of referral fees and kickbacks between parties in a real estate transaction.
RESPA reconsidered legitimate business relationships and established the term and documentation required for Affiliated Business Arrangements (AfBA).
53
What is an AfBA?
* A person who may refer business to a settlement service of a federally related mortgage loan, or an associate of such person, and has either an affiliate relationship with or a direct beneficial ownership interest of more than 1 percent in the provider of the settlement service; and
* Either person directly or indirectly refers business to that provider or influences the selection of that provider.
54
The AfBA disclosure must be delivered to
the borrower at the time of referral.
55
Section 8 also states _______?
that no person may give or receive a fee, kickback, or any other form of valuable compensation (or arrange to do so) for referring a potential borrower to a certain lender or service provider for a federally-related mortgage loan.
56
If someone violates Section 8 of RESPA, they are looking at ______?
a fine of up to $10,000, up to 1 year in prison or both.
They also may be required to make payment to damaged parties up to 3 times the original fee that violated the section and if more than one individual is involved, then all parties are liable to the damaged borrower both jointly and separately.
57
What is an appraisal?
An appraisal is an evaluation of the borrower’s home (or soon-to-be home).
The appraiser determines the value of the property and provides an appraisal that substantiates that value.
The document itself is the appraisal.
58
The standards for appraisals are
developed and set forth in the Uniform Standards of Professional Appraisal Practice (USPAP) and each appraiser must be licensed in their individual states to perform appraisals.
59
AMC stands for:
Appraisal Management Company
60
Now that we know what an appraisal is, there are three types of appraisals, and it is important that you know the three types and how they are different.
1. Sales Comparison
2. Cost Approach
3. Income Approach
61
The sales comparison approach is
the most common type of appraisal seen, and will be the one as an MLO that you will see the most frequently.
62
What are some examples of adjustments?
There are many different factors that an appraiser can use to adjust the value of a property.
A few examples are:
* Lot size (a bigger lot, smaller lot or the same size).
* Views which add to or detract from the value (basement v. no basement).
* Condition of the property (Great shape, terrible shape, OK shape?).
* Room counts (number of bedrooms, bathrooms, and the total).
* Square footage of living space; and
* Heating and cooling systems (whether there is air conditioning or what type of
heating).
63
Explain Gross Living Space.
When we are talking about appraisals, all living space is going to be above grade, so no basements are included in the square footage on an appraisal, but there could be added value in having that basement.
It also must be finished space. If there is a finished attic, then that could be included in the living space. If it is unfinished, that will not count towards living space.
One other thing to remember is that a garage, though above grade, is not considered gross living space as it is not a finished living space.
64
Fannie Mae and Freddie Mac have established guidelines for acceptable appraisals of homes. These guidelines include:
* Appraisals should include at least 3 comparable sales
* Appraisers must report and consider any prior sales of the subject property for the
3 years preceding the date of the appraisal
* Appraisers must report and consider any prior sales of the comparable properties for at least 1 year preceding the date of the appraisal
65
The Cost approach is
the value of the property is derived by adding the estimated value of the land to the current cost of constructing a reproduction or replacement for the improvements and then subtracting any amount of depreciation in the structures from all causes.
66
The Income Approach is
usually used when someone is buying a property as an investment.
This approach is going to use the earning potential of the property to determine the value of the property.
67
The term title is
a collective term for all a borrower’s legal rights to own, use and dispose of land.
68
The title report will also give information on the
county and city taxes on the property; it will show what the current tax assessment is and whether there are any outstanding tax liens on the property.
69
An Easement is
a legal right to use another’s land for a specific limited purpose.
An example of an easement is a landscape easement, in some subdivisions, the developer has a landscape easement where they can use a specific portion of the borrower’s land for landscaping. That area of land cannot be built on or used by the borrower in any way.
There are also other types of easements where the city or the county has an easement on the property where they can widen the street in front of their house or built a sidewalk if they wish. That easement grants whoever holds the easement the ability to restrict the borrower’s use of that land and then use that land for something else.
70
A Restrictive Covenant 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.
Restrictive covenants allow surrounding property owners, who have similar covenants in their deeds, to enforce the terms of the covenants in a court of law.
They are intended to enhance property values by controlling development.
71
An Encroachment is
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.
72
What are the two types of title insurance?
1. Lenders Title Insurance
2. Owner's Title Insurance
73
The policy protects against things like:
* Mistakes in the recording of legal documents
* Forged deeds, releases or wills
* Undisclosed or missing heirs, including spouses
* Deeds by persons of unsound mind
* Deeds by minors
* Deeds executed under an invalid or expired power of attorney
* Liens for unpaid taxes
* Fraud
74
The lender’s title insurance policy generally lasts until
the mortgage is paid in full.
75
A Deed is
an instrument that conveys a grantors interest, if any, in real property.
76
Co-ownership is also known as concurrent ownership and is
the ownership of a
property by two or more persons who share title to real property.
77
Tenancy in Common is
a form of co-ownership with two or more persons having an undivided interest in the entire line, but no right to survivorship.
78
Joint Tenancy
exists when each co-owner has equal undivided interest in the land with right of survivorship.
78
Right to Survivorship means
that the property passes automatically to other co- owners when one co-owner dies.
79
Tenancy by Entirety is
a form of co-ownership that involves only owners who are husband and with each having an equal and undivided share of the property.
80
A Lien is
not only a financial interest in property, it is also a financial encumbrance.
81
In Foreclosure, the property is sold, and the lien holder collects
the amount of the debt from the proceeds of the foreclosure sale.
82
Voluntary Lien are
placed against property with the consent of the owner.
83
A Mortgage is
a written instrument that use specific real property to secure payment of a debt.
84
A Promissory Note is
a written, legally binding promise to repay a debt. The note creates the debt and the mortgage secures the payment.
85
Give a few examples of involuntary liens.
* Mechanics liens – claimed by someone who performed work on real property and was not paid
* Tax liens – liens on the property to secure the payment of taxes
* Judgment liens – liens against a real person’s property through court action
(payment on lawsuits)
* Attachment liens - liens intended to prevent the transfer of property pending the outcome of litigation
86
TRUE OR FALSE. In almost all situations, a borrower cannot obtain a mortgage without showing proof that they have hazard (better known as homeowner’s insurance).
False
87
Most lenders require that the hazard insurance policy be effective from before the closing of the loan with a renewal of
1 year from the start date.
88
Lenders and servicers are prohibited from
requiring hazard insurance in any amount greater than the insurable value of the home on the property.
89
The reason the lender must be identified, as loss payee is
to protect that mortgagee’s interest in the case of a catastrophic loss.
90
Every loan application is going to be required to
have a flood hazard determination form, this form will notify the borrower if their property is or is not in a flood zone. If it is in a flood zone, the form will indicate that flood insurance is required.
