978-0324784640 Chapter 12 Solution Manual

subject Type Homework Help
subject Pages 9
subject Words 2102
subject Authors Thomas J Pinkowish

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© Cengage Learning 1
CHAPTER 12
RESIDENTIAL MORTGAGE LOAN
ORIGINATION AND PROCESSING
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, students should be able to:
Discuss the importance of the initial interview
Describe the type of information provided on an
application
Explain the impact of ECOA, TILA, RESPA, and the
SAFE Act on the mortgage origination and processing
areas
Understand the function and components of a credit
report and distinguish it from a credit score
Describe what constitutes acceptable alternative
documentation
Explain the information that should be supplied to the
underwriter
© Cengage Learning 2
I. Introduction
II. Technology
A. Mortgage Loan OriginatorSAFE Act
III. Interview
IV. Formal Application
A. Be Careful Not to Discourage a Formal
Application
B. Other Application Compliance Issue
C. The Uniform Residential Loan Application and
Uniform Documentation
D. Information that Applicants Must Bring to
Application
E. Applications Received by Mail
F. Telephone Applications
G. Electronic Applications
V. Qualifying an Applicant
A. Sample Qualification Worksheet
B. Loan Transaction and Program
C. Debt/Income Ratios
D. Income of Applicant(s)
VI. Supporting Documentation and Tax Returns
A. Self Employment
B. Interest, Dividends, Investments, and Trusts
C. Rental Income
D. Child Support, Alimony, or Separate
Maintenance
E. Pension, Retirement, and Social Security
F. Public Assistance
G. Assets
VII. Credit History
A. Credit Scores
B. Derogatory Items
VIII. Collateral
IX. Other Compensating Factors
X. Final Check
Teaching Tips
How has the SAFE Act and recent
RESPA/TILA changes impacted the mortgage
application and processing areas?
What is the best way to take a loan
application?
Discuss your preferred method of meeting
with the consumer. What are the advantages
and disadvantages of meeting with someone
face to face, at least initially?
What might be different about meeting with
first-time home buyers?
What are the differences for lender and
consumer between counseling,
prequalification and preapproval?
What are three things you should ask about
right away when pre-qualifying a borrower?
How must you inquire about a person’s
marital status? How do you inquire about the
maintenance or child support in order to
qualify them for the mortgage?
Who knows their credit (FICO) score?
Discuss the importance of knowing your
score and maintaining a good score.
In a role play, explain a credit report to a
client. Use the example in the text book as a
reference.
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SUGGESTED TRUE/FALSE QUIZ (Correct answer is at end of
question.)
1. Loan processing today averages about 45 days from start to finish.
2. A mortgage lender should never discourage a person from submitting
an application for a mortgage loan.
3. A prequalification involves running the numbers but not giving an
opinion on credit approval or denial.
4. Whenever a mortgage lender denies credit it must provide the
applicant with an adverse action notice.
5. Lenders must use only tax returns to verify rental income.
6. Unemployment benefits or welfare can never be used to qualify for a
mortgage loan.
7. A lender only needs to obtain a completed standard gift letter to use
those funds for closing.
8. Credit scores are used on only a third of all mortgage applications.
9. Child support can be used to qualify for a mortgage loan if it can be
verified.
10. A person with only 25% ownership in a business is normally
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considered self-employed.
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© Cengage Learning 5
MULTIPLE CHOICE QUESTIONS. More than one answer
may be correct select all correct answers. (Correct answers are
italicized.)
1. The initial interview for a residential mortgage loan can have four
outcomes including:
d. Underwriting
2. Which of the following is NOT an acceptable way to submit an
application for a first mortgage loan?
a. By Internet
3. The standard secondary mortgage market guideline for the total debt
to income ratio is:
a. 33 percent
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© Cengage Learning 6
4. Acceptable income for qualifying for a residential mortgage loan
DOES NOT include:
a. Wages/salary
5. The secondary mortgage market guideline for the amount of gross
monthly income that should be spent on housing expenses is:
a. 20 percent
SUGGESTED SHORT ESSAY QUESTIONS
1. A woman approaches a bank official at a cocktail party and asks if
she would qualify for a mortgage loan with her income. The bank
official says the secondary mortgage market has guidelines for total
debt to gross monthly income and recited those ratios. Discuss
whether the bank official acted correctly.
ANSWER: The bank official acted properly. He did not give an
opinion, instead he stated facts. If he had asked how much she earned
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© Cengage Learning 7
2. Why has Alternative Documentation (“alt doc”) become so common
in residential mortgage lending?
ANSWER: Many mortgage lenders do not require all of the
documentation that used to be required. The primary reason for this is
3. If an applicant is using self-employment income to qualify for a
residential mortgage loan, what must the mortgage lender do? Why is
this important?
ANSWER: Self-employed borrowers represent the high-risk
category for default. Therefore it is critical that a mortgage lender
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© Cengage Learning 8
4. How should a mortgage lender handle the situation where a mother
gives her daughter money for a down payment on a condo?
ANSWER: The mortgage lender must require the mother to sign a
“gift letter” that stipulates the money is a gift and does not have to be
5. Today many mortgage lenders rely heavily on an applicant’s credit
score. What is a credit score and why is it important?
ANSWER: All credit reports today contain a credit score a numeric
rating of the applicant’s overall credit history. The credit score is
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© Cengage Learning 9
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
discussion in class. Suggested answers to the questions are found below.
1. In what three general ways have mortgage origination and processing
changed in the last twenty years?
ANSWER: First, since the turn of the century the time to fully process an
application shortened dramatically from 30 45 days to normally under 15
days. This was due to more use of technology and broader acceptance of
2. How has technology impacted mortgage origination and processing (benefits
and drawbacks)?
ANSWER: These recent marketplace changes are a result of improvements
in technology in practically all aspects of loan origination and processing,
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© Cengage Learning 10
affecting all lenders from the largest to the smallest. The impact of
technology on the mortgage industry cannot be overstated it has allowed
3. What documentation should a consumer bring to a mortgage lender
when applying for a loan?
ANSWER: Different information will expedite the application process:
- Names in which title will be held and how title will be held (e.g., joint
tenants),
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© Cengage Learning 11
4. What special challenges do Internet applications present?
ANSWER: Today, consumers have another option for submitting
applications over the Internet. Internet applications comprised about 10
percent of all originations in 2002, up from only 2 percent in 1995. A
lender’s website reaches potential applicants nationwide.
5. What three issues must a lender identify when qualifying an applicant and
why are they important?
ANSWER: loan transaction and program, financial strength: debt/income
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© Cengage Learning 12
6. Discuss the benefits and risks of using alternative documentation loan
programs.
ANSWER: To expedite the process the secondary market now accepts
“alternative documentation” (“alt doc”) for verification of wage or salary
income and assets. Alt doc consists of pay stub(s) covering the most recent
month and IRS Form W-2s for the most recent two years. Often the lender
7. What recent compliance changes affect origination behavior and fees?
ANSWER: RESPA and TILA have changed drastically since 2008. The
loan originator must provide the applicant more disclosures and

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