Ch.9: Loan Qualifying

Practice flashcards covering the underwriting process, borrower qualification (income, net worth, credit), loan choosing factors, and regulatory disclosures as outlined in the Chapter 9 transcript.

What are the three main categories lenders use to evaluate a potential borrower's creditworthiness?

Income, net worth, and credit reputation qualifications.

What is the underwriting process?

The process a lender follows to evaluate a mortgage loan applicant and the property to determine if the proposed loan is a good risk.

What is a preapproval letter?

A document stating a lender will lend a buyer up to a certain amount provided the property meets the lender's standards, typically valid for a specified period such as $60$ days.

Who established the uniform underwriting standards used by most lenders?

The two major government-sponsored enterprises, Fannie Mae and Freddie Mac.

What is a nonconforming loan?

A loan that does not meet the uniform standards of Fannie Mae and Freddie Mac and therefore may not be sellable on the secondary market.

How does a lender define stable monthly income?

Income that is from a reliable source and is expected to continue for some time, typically at least $3$ years.

What are the two key characteristics of stable monthly income?

Quality (reliability) and durability (expected duration).

What is the general employment history requirement for income to be considered stable?

The applicant should usually have at least $2$ years of continuous employment in the same field.

How is secondary employment income like bonuses or commissions treated?

They may be counted if they are an established part of the earnings history, typically for the past $2$ years.

At what age does child support usually stop being counted as stable monthly income?

If a child is over the age of $15$, the lender likely won't count the support payments.

What percentage of rental income is typically included in stable monthly income?

Lenders generally include only 75[\text{%}] of the monthly rental payment to account for vacancies and repairs.

What types of income are usually considered unacceptable by lenders?

Unemployment benefits, income from family members not on the loan, and most temporary employment income.

What are the two main income ratios used to evaluate a borrower?

Housing expense-to-income ratio and debt-to-income ratio (also called the back-end ratio).

What is the formula for calculating net worth?

$$\text{Assets} - \text{Liabilities} = \text{Net Worth}$$

What are liquid assets?

Cash and other assets that can be converted to cash quickly, such as stocks.

How is net equity in a current home calculated?

$\text{Appraised Value} - \text{Liens} - \text{Selling Costs}$ (where selling costs are usually between 10[\text{%}] and 13[\text{%}] of the sales price).

What are the requirements for gift funds to be used in a home purchase?

The money must be a gift, not a loan, and must be confirmed with a signed gift letter from the donor.

What are the three major credit reporting agencies?

Equifax, Experian, and TransUnion.

What is the range for FICO scores?

$300$ to $850$.

How long do most derogatory credit items stay on a credit report compared to bankruptcy?

Most derogatory items stay for $7$ years, while bankruptcy stays for $10$ years.

What is a subprime loan?

A loan made to a borrower with a mediocre or limited credit history, usually featuring a higher interest rate and higher fees.

What does the Truth in Lending Act (TILA) require lenders to disclose?

The annual percentage rate (APR) and other loan costs in a uniform manner.

What is the Annual Percentage Rate (APR)?

The relationship of the total finance charge to the total amount financed, expressed as an annualized percentage.

How many business days does a lender have to provide a Loan Estimate after receiving an application?

Within $3$ business days.

What is the rule of thumb regarding discount points and interest rates?

Six discount points are roughly equivalent to a 1[\text{%}] reduction in the interest rate.

Under California's Real Property Loan Law, what are some items required in a mortgage loan disclosure statement?

Principal amount, loan costs, broker/lender fees, interest rate, payment terms, and prepayment penalties.

What are some common predatory lending practices?

Predatory steering, fee packing, loan flipping, and failing to disclose balloon payments.

What characterizes the loans covered by California’s predatory lending law?

Loans secured by a principal residence of $4$ or fewer units where points and fees exceed 6[\text{%}] of the loan amount.