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2009 Rockwell Institute

Financing Residential Real Estate

Lesson 8:

Qualifying the Buyer

Introduction

In this lesson we will cover:

the underwriting process,

automated underwriting,

credit reports and credit scores,

income analysis,

net worth,

other factors in underwriting,

subprime lending, and

risk-based loan pricing.

Introduction

Loan underwriting involves evaluation of:

1. Loan applicants overall financial situation.

Is buyer likely to make the payments on time?

2. Value of the property (collateral).

If buyer did default, would foreclosure sale proceeds cover the debt?

The Underwriting Process

Underwriting involves:

reviewing loan application;




obtaining additional information about applicant from other sources;





verifying information applicant provided;






applying lenders qualifying standards;







evaluating property appraisal; and







evaluating property appraisal; and

making recommendation.


Qualifying standards : minimum standards used in underwriting.

Draw line between acceptable and unacceptable risks.

Qualifying standards


Although lenders can set their own standards, most use Fannie Mae/Freddie Mac standards for conventional loans.

FHA and VA standards must beused for FHA and VA loans.

Qualifying standards


Automated underwriting system (AUS) : computer program that analyzes loan applications.

Used in conjunction with traditionalunderwriting.

Traditional underwriting now called manual underwriting.

Automated underwriting

Automated Underwriting

Most widely used AU systems:

Desktop Underwriter (Fannie Mae)

Loan Prospector (Freddie Mac)

Either may be used to underwrite conventional, FHA, or VA loans.

AU and secondary market

Automated Underwriting

Most widely used AU systems:

Desktop Underwriter (Fannie Mae)

Loan Prospector (Freddie Mac)

Either may be used to underwrite conventional, FHA, or VA loans.

Although Fannie Mae and Freddie Mac encourage lenders to use AU, they will still buy manually underwritten loans.

AU and secondary market


Programming of secondary market agency AU systems based on performance of millions of loans.

lLoan performance: whether payments are made as agreed.

lAnalysis of performance statistics highlights factors that make default either more likely or less likely.

AU programming


Fannie Mae/Freddie Mac computer analysis of loan performance is ongoing.

lBoth agencies use latest information to adjust their AU systems and underwriting standards.

lAdjustments have nationwide impact on underwriting practices.

AU programming


Information from loan application entered into AU system.

lAUS obtains applicant s credit information from credit reporting agencies.

lAUS issues report with recommendations.

How AU works


Three main categories of recommendations in AU report:

Risk classification

Level of documentation

Property appraisal or inspection

How AU works


Risk classification

AU report indicates level of scrutiny application should receive.

Approve/Accept = meets all qualifying standards.

Approve/Ineligible = meets credit risk standards, but other aspects of loan makeit ineligible for purchase by agency.

Refer/Caution = doesnt meet all standards, should be reviewed.

How AU works


Risk classification

If application requires further review, underwriter looks at application in traditional way (manual underwriting).

How AU works


Risk classification


lSome lenders reject Refer/Caution loans without further review.

How AU works


Risk classification


lSome lenders reject Refer/Caution loans without further review.

lFannie Mae or Freddie Mac may buy manually underwritten Refer/Caution loan, but it will be treated as A-minus loan.

How AU works



AU report indicates how much documentation is needed to verify information on application.

How AU works




Before mortgage crisis, three basic levels:standardstreamlined (low -doc)

minimal (no doc )

How AU works




Before mortgage crisis, three basic levels:standardstreamlined (low -doc)

minimal (no doc )

Now just standard or streamlined; no docloans no longer widely available.

How AU works



Refer/Caution loans:

Standard documentation (and manual underwriting) generally required.

Approve/Accept loans:

Streamlined documentation permitted.

How AU works


Appraisal recommendation

AU report also indicates which of these is appropriate:

full appraisal

drive-by inspection

report on propertys likely value (with no inspection)

How AU works


Advantages of automated underwriting over manual underwriting:

streamlines process;

Advantages of AU




increases objectivity; and

Advantages of AU




increases objectivity; and

improves underwriting accuracy.

Advantages of AU

Summary


Underwriting standardsAutomated underwritingManual underwriting

Loan performanceRisk classificationStandard documentation

Streamlined documentation (low -doc)Minimal documentation (no doc)Drive-by inspection

Evaluating Creditworthiness

Buyer considered creditworthy if overall financial situation indicates she can be expected to make payments on time.



Qualification of buyer involves evaluation of three main components of creditworthiness:

Credit reputation




Credit reputation

Income




Credit reputation

Income

Net worth (assets)


Of the three main components of creditworthiness, many consider credit reputation most important.

To evaluate loan applicants credit reputation, lender relies on credit reports prepared by national credit rating agencies.

Credit reputation

Credit Reputation

A personal credit report covers 7 years of information about an individuals:

revolving credit accounts,

installment debts, and

previous mortgages.

Utility bills, medical bills, etc., arent listed unless turned over to collection agency.

Credit reports

Credit Reputation

Credit reporting agencies are private companies.

Three major credit agencies in U.S.:

Equifax

Experian (formerly TRW)

TransUnion

Credit reports

Credit Reputation

Reports prepared by the three agencies dont always match.

lLender may use reports from all three, ortri-merge report that combines them.

Credit reports

Credit Reputation

Credit information important in underwriting:

length of credit history

payment record

derogatory credit incidents

credit scores

Credit reports

Credit Reputation

Credit history widely used as synonym for credit reputation. Narrower definition used in underwriting.

Credit history = duration of applicants experience with credit.

Length of credit history

Credit Reputation

General requirements:

lcredit history at least one year in duration

lwith three or more active accounts

Alternative for applicant without established credit history: provide records of utility bill payments, rent payments.

Length of credit history

Credit Reputation

For each account listed, credit report gives detailed payment record showing whether payments have been made on time.

Late payments shown as 30 days, 60 days, or 90 days overdue.

Payment record

Credit Reputation

Underwriters view chronic late payments as sign applicant is financially overextended and/or irresponsible.

But spotless payment record not essential.

Payment record

Credit Reputation

Negative information on credit report may include:

charge-offs

collections

repossessions

judgments

foreclosures

bankruptcies

Major derogatory incidents

Credit Reputation

Charge-off: Uncollected debt treated as loss for tax purposes.

lTax code allows creditor to write off debt after no payment in 6 months.

lDoesnt relieve debtor of liability.


Credit Reputation

Collections

Creditor may turn delinquent bill over to collection agency that presses debtor for payment.

lDebt held by collection agency appears on credit report, even if original bill did not.


Credit Reputation

Repossessions

If someone buys personal property on credit and fails to make the payments, creditor may have right to repossess the collateral property.


Credit Reputation

Judgments

When someone loses a lawsuit, court may order her to pay money (damages) to the person who sued.


Credit Reputation

Foreclosures

Not surprisingly, foreclosure on applicants credit report is a matter of special concern to mortgage lender.


Credit Reputation

Bankruptcy

Bankruptcy on applicant s credit report also taken very seriously.


Credit Reputation

Under Fair Credit Reporting Act, derogatory incidents can remain on individual s credit report for no more than seven years.

Exception: Bankruptcy ten years.

lMortgage loan underwriters focus mainly on previous two years.

Foreclosures and bankruptcies areserious concerns for longer.


Credit Reputation

Credit score: Figure calculated by credit reporting agency using established scoring model.

lTakes into account all information on credit report.

lIndicates individual s likelihood of default.

lThree main credit reporting agencies may calculate different scores for same person.

Credit scores

Credit Reputation

Scoring models are based on statistical analysis of large numbers of mortgages.

lMost widely used: FICO scores.

Range from under 400 to over 800.

lHigh FICO score = unlikely to default

Credit scores

Credit Reputation

Underwriters use credit scores to determine level of review applied to applicants credit history.

Good scores: basic review

Mediocre or poor scores: in-depth review

Credit scores

Credit Reputation

Aside from major derogatory incidents, other factors that have negative impact on credit scores:

Chronic late payments

Maintaining high balance on credit card, even if payments on time

Applying for too much credit

Credit scores

Credit Reputation

Prospective buyers should look at their credit reports and scores before applying for mortgage.

Some information may be incorrect.

Fair Credit Reporting Act requires credit reporting agencies to investigate in response to complaint and correct errors.

Obtaining credit information

Credit Reputation

If underwriter is convinced that past problems dont reflect applicants attitude towards credit, loan may be approved.

Explaining credit problems

Credit Reputation

Letter to lender explaining negative credit report should:

lstate reason for problem;

lpoint out that it occurred during specific period;

lshow problem no longer exists;

lhighlight good credit before and since;

lprovide documentation from third parties; and

lnot blame creditors.

Explaining credit problems

Summary

Credit Reputation

CreditworthinessCredit reportCredit history

Charge-offsCollectionsForeclosure

BankruptcyCredit scores (FICO scores)Fair Credit Reporting Act


Second main component of creditworthiness: income.

lEven if buyer has excellent credit reputation, loan wont be approved unless buyer can afford payments.

lBuyers income is starting point in determining:

maximum loan amount

price range for houses

Income analysis

Income Analysis

Income has three dimensions:

QuantityEnough monthly income to affordmonthly mortgage payment

QualityFrom dependable sources

DurabilityLikely to continue for at leastthree years

Characteristics of income

Income Analysis

lwages or salary

lbonuses

lcommissions

lovertime

lpart-time earnings

lself-employment income

lretirement income

lalimony

lchild support

lpublic assistance

linvestment income

Stable monthly incomeIncome that meets tests of quality and durability is stable monthly income. May include:

Stable Monthly Income

Permanent employment is major income source for most home buyers.

Positive employment history:

consistency (usually 2 years in samejob or field)

opportunities for advancement

special training or education

Employment income


Commissions, overtime and bonuses

lConsidered stable if consistent part of applicants overall earnings pattern.

Employment income


Part-time work

lConsidered stable if applicant has held job for at least two years.

Seasonal work

lConsidered stable if established earnings pattern exists.

Employment income


Self-employment income

lIncludes income from personal business, freelance work, or consulting work.

lUnderwriters consider earnings trend, training and experience, and nature of business.

lGenerally regarded as risky income source:

amount of income unpredictable

small businesses often fail

Employment income


Employment verification:

lVerification form sent to employer, or

lW-2 forms for 2 years plus pay stubs for 30 days, with phone call to employer.

Lender may also request income tax returns for previous two years to verify earnings.

Employment income


Pension and social security payments are usually dependable and durable.

lLenders cant discriminate on basis of age.

Life expectancy can be considered.

Retirement income


Dividends or interest may be counted as part of stable monthly income.

lUnderwriter calculates average investment income for previous two years.

Investment income


If a stable pattern can be verified, rental income is considered stable monthly income.

lApplicant may have to show gross earnings and operating expenses for previous two years.

Rental income


Many unpredictable factors affect rental income:

Emergency repairs

Vacancies

Tenants who dont pay

lUnderwriter includes only a percentage of verified income to leave a margin for error.

lNegative rental income treated as liability.

Rental income


Considered stable income sources if it appears payments will be made reliably.

Depends on:

whether payments required by court decree

how long payments have been made

financial/credit status of ex-spouse

ability to compel payment

Maintenance, alimony, child support


Lenders usually require:

copy of court decree

proof of receipt of payments

Child support no longer counts when child reaches mid-teens.



Applicants may not want to list these as sources of income if ex-spouse is hostile or uncooperative.

lEqual Credit Opportunity Act prohibits lenders from asking if applicants are divorced or requiring them to disclose alimony or child support.

lIncome wont be counted if not listed, of course.



Equal Credit Opportunity Act also prohibits lenders from discriminating against an applicant because part or all of his income is from a public assistance program.

lBut public assistance wont count if eligibility will terminate in near future.

Public assistance


These usually dont count as stable monthly income:

Wages from temporary job

Unemployment compensation

Contributions from family members

Unacceptable types of income


Income from temporary work not durable by definition.

lBut steady series of temporary jobs may be treated as freelance work (self -employment income).

Temporary employment


Unemployment benefits end after a specified number of weeks (ordinarily 26 weeks).

lBut unemployment benefits paid to seasonal worker for a certain number of weeks everyyear could be considered stable monthly income.

Unemployment compensation


Usually only earnings of head of household are counted in underwriting.

lBut if borrowers family member is listed as a co-borrower, that persons income is also considered.

Income from family members

Calculating Stable Monthly Income

All income payments must be converted into monthly figures.

Example:

Gwen is paid $14.50/hour. She works 40 hours per week.

$14.50 40 = $580

$580 52 = $30,160

$30,160 12 = $2,513

Monthly figures


Gross income figures are used when calculating stable monthly income.

Payroll taxes arent subtracted.

Gross income


Gross income figures are used when calculating stable monthly income.

Payroll taxes arent subtracted.

lQualifying standards take into account that:

buyer will have to pay taxes, and

only after-tax amount will be availablefor expenses.

Gross income


Certain types of income are exempt from taxation:

Child support

Disability payments

Some public assistance

lFull amount of payments available for expenses.

Nontaxable income


Certain types of income are exempt from taxation:

Child support

Disability payments

Some public assistance

lFull amount of payments available for expenses.

lUnderwriter may gross up nontaxable income.

For example, might add 25% to child support payments received.

Nontaxable income

Income Analysis

To measure adequacy of applicants monthly income, underwriters use income ratios .

Rationale:

Borrower may have difficulty making payments if:

Monthly Expenses > X% of Monthly Income

Income ratios

Income Analysis

Two types of income ratios:

Debt to income ratio

Measures proposed monthly mortgage payment and any other regular debt payments against monthly income.

Income ratios

Income Ratios

Two types of income ratios:

Debt to income ratio

Measures proposed monthly mortgage payment and any other regular debt payments against monthly income.

Housing expense to income ratio

Measures monthly mortgage payment alone against monthly income.

Two types of ratios

Income Ratios

Proposed monthly mortgage payment used in calculating income ratios is PITI payment.

Includes impounds for property taxes and hazard insurance.

Also mortgage insurance and/or homeowners association dues, if applicable.

PITI

Income Ratios

Qualifying standards set maximum income ratios.

Example: Borrowers monthly housing expense should not exceed 31% of stable monthly income.

Maximum ratios

Income Ratios

Qualifying standards set maximum income ratios.

Example: Borrowers monthly housing expense should not exceed 31% of stable monthly income.

Maximum ratios are generally treated as guidelines, not hard-and-fast limits.

Lender may approve loan if sufficient compensating factors make up forweakness in income.

Maximum ratios

Income Analysis

Cosigner helps borrower qualify by sharing responsibility for loan.

Primary borrower and cosigner have joint and several liability for loan.

lCourt can order either one of them to payloan balance.

Cosigners

Income Analysis

Cosigner must have acceptable income, assets, and credit reputation.

Cosigners

Income Analysis


lCosigners stable monthly income added to applicants.

lCosigners monthly debts and housing expense combined with applicant s.

lThen income ratios are calculated.

Cosigners

Income Analysis


lCosigners stable monthly income added to applicants.

lCosigners monthly debts and housing expense combined with applicant s.

lThen income ratios are calculated.

Applicants separate income ratios are also calculated; shouldnt be too far over limits.

Cosigners

Summary

Income AnalysisQuantity, quality, and durability of income

Stable monthly incomeIncome ratiosDebt to income ratio

Housing expense to income ratioCosignerJoint and several liability


Net Worth = Assets Liabilities

Net worth



Significance of net worth in underwriting:

Substantial net worth indicates ability to manage financial affairs.

Net worth



Significance of net worth in underwriting:

Substantial net worth indicates abilityto manage financial affairs.

Also, buyer must have enough liquid assets to close transaction.

Net worth

Net Worth

Liquid assets: cash and assets that can be easily converted into cash.

Applicant must have enough to cover:

downpayment

closing costs

Funds for closing

Net Worth

Also, desirable for buyer to have reserves left over after closing.

lIn case of financial emergency, can draw on reserves to keep paying mortgage.

Reserves

Net Worth



lIn some cases, lender may require applicant to have enough reserves to cover a certain number of mortgage payments.

Reserves

Net Worth



lIn some cases, lender may require applicant to have enough reserves to cover a certain number of mortgage payments.

lEven if not required, reserves strengthen application.

Reserves

Net Worth

Almost any assets may help a loan applicant:

real estate

automobiles

furniture

jewelry

stocks/bonds

life insurance policy

Assets

Assets

To verify funds applicant has in bank accounts:

lverification of deposit form sent to bank(s), or

lapplicant provides bank statements for 2 or 3 months.

Bank accounts

Assets

Reviewing verification information:

lDoes it match statements in loan application?

lDoes applicant have enough cash for closing?

lHas bank account been opened only recently (last 3 months)?

lIs present balance much higher than average balance?

lIf account is supposed to be source of good faith deposit, is balance high enough?

Bank accounts

Assets

Underwriters concern: Did applicant borrow funds?

lLenders generally want borrower to use own funds for downpayment and reserves.

Bank accounts

Assets



lBorrowed funds would defeat purpose of lenders requirements.

Bank accounts

Assets




Exception: loan secured by asset (other than home being purchased)

Bank accounts

Assets




Exception: loan secured by asset (other than home being purchased)

lAffordable housing programs more flexible about borrowed funds.

Bank accounts

Assets

If applicant selling another property to raise cash, net equity in property can count as liquid asset.

Net Equity =

Market Value (Liens + Selling Expenses)

Real estate for sale

Assets

If equity is main source of money for purchase of new home, lender wont fund loan until old home sold.

Copy of settlement statement usually required as verification.


Assets

If equity is main source of money for purchase of new home, lender wont fund loan until old home sold.

Copy of settlement statement usually required as verification.

lIf new home ready to close before old home sold, buyers may apply for swing loan.


Assets

Some applicants own real estate they arent planning on selling.

lShould be listed as asset in loan application.

But only equity contributes to net worth.

Other real estate

Net Worth

Applicants personal liabilities are subtracted from total value of assets to calculate net worth.

Liabilities include:

credit card and charge account balances

installment debts

taxes owed

liens against real estate owned

Liabilities

Net Worth

Rules regarding gift funds usually limit how much of downpayment and closing costs may be covered by gift funds.

Borrower must invest some of her own funds.

Gift funds

Net Worth

Rules regarding gift funds usually limit how much of downpayment and closing costs may be covered by gift funds.

Borrower must invest some of her own funds.

lDonor must sign letter stating that the gift funds dont have to be repaid.

lFunds must be deposited into applicants bank account for verification.

Gift funds

Other Factors in Underwriting

Type of loan (fixed-rate, adjustable-rate, partially amortized, etc.) affects underwriting.

lBorrowers default more on ARMs and other loans that involve changes in payment amount.

Loan type


Length of repayment period affects size of monthly payment.

lShorter repayment period, larger payment.

More difficult to qualify for larger payment.

Repayment period


Length of repayment period affects size of monthly payment.

lShorter repayment period, larger payment.

More difficult to qualify for larger payment.

lBut lender may be slightly more inclined to approve loan with shorter repayment period.

Lenders funds are tied up for less time.

Repayment period


Investor loans have much higher default rate than loans to owner-occupants.

lBecause of additional risk, investor loans are subject to stricter LTV requirements, additional fees, and higher interest rates.

Owner-occupancy


Regular single-family homes appreciate much more, and more reliably, than:

manufactured homes

condominium units

some other types of residential property

Nontraditional property type is treated as additional risk factor in underwriting.

Property type

Summary

Net Worth and Other Factors

Liquid assetsReservesAssets

LiabilitiesNet equitySwing loan

Gift fundsOwner-occupantInvestor loan

Subprime Lending

Subprime lending: Making loans to riskier borrowers.

A credit = Prime or standard financing

A- to B, C, D credit = Subprime financing

Subprime Lending

In addition to buyers with B, C, or D credit, subprime financing may be needed by buyers who:

Subprime borrowers

Subprime Lending


lcant (or dont want to) meet income and asset documentation requirements imposed by prime lenders;

Subprime borrowers

Subprime Lending



lcarry more debt than prime lenders consider acceptable; or

Subprime borrowers

Subprime Lending



lcarry more debt than prime lenders consider acceptable; or

lwant to make smaller downpayment thanprime lender would allow.

Subprime borrowers

Subprime Lending

These buyers are in the A-minus credit category:

they have good credit ratings,

but their applications present anadditional special risk factor.

A-minus loans

Subprime Lending




lLine between prime and subprime blurred when Fannie Mae and Freddie Mac started buying A-minus loans.

A-minus loans

Subprime Lending




lLine between prime and subprime blurred when Fannie Mae and Freddie Mac started buying A-minus loans.

lA-minus loans are somewhere betweenprime and subprime.

A-minus loans

Subprime Lending

Subprime lenders charge higher interest rates and loan fees in exchange for more flexible underwriting.

Characteristics of subprime loans

Subprime Lending


Subprime loans more likely to have features such as:

prepayment penalty

balloon payment

negative amortization


Subprime Lending


Subprime loans more likely to have features such as:

prepayment penalty

balloon payment

negative amortization

Predatory lending practices have been a serious problem in subprime market.


Subprime Lending

Annual volume of subprime loans:

1994: $35 billion

2003: $332 billion

2007: $1.3 trillion

Subprime boom

Subprime Lending

Subprime boom fueled by growth of secondary market for subprime loans during 1990s.

lWall Street investors bought and securitized subprime loans.

Issued private-label mortgage-backedsecurities.

Secondary market for subprime loans

Subprime Lending

HUD encouraged Fannie Mae and Freddie Mac to enter subprime market to meet affordable housing goals.

lAt least at first, GSEs purchased only very top layer of subprime market (A-minus loans)

Secondary market for subprime loans

Subprime Lending

Subprime boom led to loosening of underwriting standards throughout industry, even in prime market.

Lax underwriting standards eventually led to skyrocketing default rates.

lMany subprime lenders failed.

lProminent Wall Street investment banks collapsed.

lPrime lenders also affected.

End of the boom

Subprime Lending

As mortgage crisis unfolded, subprime share of market shrank.

lFar fewer subprime lenders now.

lMost lenders have tightened underwriting standards and wont make risky loans.

End of the boom

Risk-Based Loan Pricing

Risk-based pricing: Charging borrowers different interest rates and loan fees depending on their credit risk.

Poor credit risk = higher rate and/or fees

Good credit risk = lower rate and/or fees


Risk-based pricing used to be confined to subprime lending.

Prime lenders have traditionally used average cost pricing or par rate pricing.

lAll approved borrowers are charged same interest rate and fees.

lThose who dont meet lender standards are denied loan.


Now risk-based pricing taking hold in prime lending.

One of the main reasons is automated underwriting.

lAdvantages:

Fewer applicants are denied financing.

Fairer, because good credit risks dont subsidize poor credit risks.


lDisadvantages:

Buyers who dont qualify for best ratesmay be priced out of market.

May make loan shopping more confusing,since lenders cant advertise just one interest rate or APR.

Summary

Subprime Loans and Risk -Based Pricing

Subprime loanPrime loanA, B, C, D credit ratings

A-minus loanPrivate-label MBSRisk-based pricing

Average cost pricing

Real Estate Finance Lesson 8 Cumulative Quiz

1. All of the following are among the tasks an underwriter will perform when evaluating a mortgage loan, EXCEPT:

A. verifying information provided by applicant B. evaluating appraisal of property C. making a recommendation for or against loan approval D. arranging for a buyer's policy of title insurance

2. Desktop Underwriter is a commonly used program for:

A. automated underwriting B. manual underwriting C. credit scoring D. detecting redlining

3. A report generated by an automated underwriting system will include recommendations in all of the following categories, EXCEPT:

A. risk classification B. document recommendation C. property classification D. appraisal recommendation

4. A loan application is classified as "Refer" by an automated underwriting system. What level of documentation must be used?

A. Standard documentation B. Streamlined documentation C. Minimal documentation D. No documentation; the loan is automatically rejected

5. All of the following are primary aspects of a borrower's financial situation, EXCEPT:

A. income B. net worth C. credit reputation D. earnings potential

6. The dependability of the sources of an applicant's income is known as its:

A. quantity B. quality C. durability D. transferability

2009 Rockwell Publishing 1

7. All of the following would be considered stable monthly income, EXCEPT:

A. full-time permanent employment income B. income from bonuses received reliably for five years C. self-employment income from a business profitably operated for three years D. income from unemployment compensation

8. Which of the following sources of income is likely to be considered stable monthly income?

A. Seasonal employment as a commercial fisherman over several decades B. A temporary job with a major company with no definite termination date C. Overtime earned only during the previous year D. Alimony payments where the ex-husband has frequently skipped payments

9. Which of the following sources of income may be subject to a 25% reduction by an underwriter to allow for vacancies and unpaid debts?

A. Retirement income B. Investment income C. Rental income D. Public assistance

10. In which of the following instances are child support payments likely to be excluded from stable monthly income?

A. One of the payments within the last year was never received B. The child in question is 16 years old C. The non-custodial parent lives out-of-state D. Both A and B

11. Larry, who has been a freelance writer for one year, and Sara, who has been employed as a chef for eight years, are applying for a loan. Larry's dad, who receives Social Security, will be living with them but not co-signing the loan. Whose income will be considered stable monthly income?

A. Larry only B. Sara only C. Larry and Sara D. Larry, Sara, and Larry's dad

12. Theo receives $3,000 every two weeks from his employer. What is his monthly income?

A. $3,000 B. $6,000 C. $6,500 D. $13,000


13. The ratio that measures the borrower's proposed mortgage payment and all other regular monthly installment debt payments against monthly income is the:

A. debt to income ratio B. housing expense to income ratio C. debt-to-housing gap ratio D. income to debt ratio

14. A lender has a maximum housing expense to income ratio of 28%, and a maximum debt to income ratio of 36%. The Connells have a monthly income of $6,000. Their proposed monthly PITI payment is $2,000. They have no other regular monthly debt payments. They will:

A. qualify under both the debt to income and housing expense to income ratios B. qualify under the debt to income ratio, but not the housing expense to income ratio C. qualify under the housing expense to income ratio, but not the debt to income ratio D. not qualify under either the debt to income or the housing expense to income ratio

15. With regards to a loan, a primary borrower and a cosigner each have:

A. vicarious liability B. joint and several liability C. sole liability D. imputed knowledge

16. To calculate net worth:

A. subtract assets from liabilities B. subtract liabilities from assets C. subtract liabilities from reserves D. subtract income from assets

17. The Mayers own a house that has been appraised at $400,000. There is a mortgage for $325,000 against the house. They anticipate selling expenses of 10%, or $40,000. What is their net equity in the house?

A. $35,000 B. $60,000 C. $75,000 D. $125,000

18. Sheila received her first credit card in college nine years ago, and she has used credit consistently since then. This describes her:

A. credit history B. credit report C. credit score D. payment record


19. Which of the following would NOT appear on an individual's credit report?

A. Judgment one year ago B. Unpaid utility bills two years ago C. Foreclosure six years ago D. Bankruptcy nine years ago

20. Which of the following would not be an additional consideration which might increase or decrease risk, according to a lender?

A. A borrower applies for a 15-year loan, rather than a 30-year loan B. A borrower intends to lease out the property rather than live there C. A borrower intends to buy a manufactured home, rather than a site-built home D. A borrower receives her income from public assistance, rather than employment


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