Borrower qualification ratios, credit analysis, and underwriting concepts tested on the SAFE Act mortgage loan originator exam.
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- What is the debt-to-income ratio (DTI) and what does it measure?
- The ratio of a borrower's total monthly debt payments to gross monthly income, expressed as a percentage. It measures the borrower's ability to repay the loan.
- What is the front-end ratio?
- The ratio of housing expenses (mortgage payment, taxes, insurance, HOA fees) to gross monthly income.
- What is the back-end ratio?
- The ratio of all monthly debt payments (housing plus auto loans, credit cards, student loans, child support) to gross monthly income.
- What are typical DTI limits for conventional loans?
- Front-end ratio 28 percent, back-end ratio 36 percent (can be higher with compensating factors).
- What are typical DTI limits for FHA loans?
- Front-end ratio 31 percent, back-end ratio 43 percent (may stretch to 50 percent with strong compensating factors).
- What is the maximum debt-to-income ratio allowed for VA loans?
- VA loans typically allow a back-end DTI of 41 percent, with case-by-case exceptions up to 60 percent.
- What is a credit score, and what range is considered acceptable?
- A three-digit number (typically 300-850) that reflects creditworthiness. Generally, 620+ is acceptable for conventional loans and 580+ for FHA.
- What are the five factors that make up a FICO credit score?
- Payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
- What is a loan-to-value (LTV) ratio?
- The ratio of the loan amount to the property's appraised value (or purchase price, whichever is lower), expressed as a percentage.
- What LTV ratio typically requires private mortgage insurance (PMI)?
- An LTV of more than 80 percent generally requires PMI on conventional loans.
- What are cash reserves, and why are they important in underwriting?
- Liquid assets (savings, investments) that a borrower has after closing. They demonstrate financial stability and ability to cover payments if income is interrupted.
- What is employment verification, and what document is typically used?
- Confirmation of a borrower's current employment status, income, and job stability. Typically verified using a Verification of Employment (VOE) form.
- What types of income documentation are required for a mortgage application?
- Pay stubs, W-2s (past two years), tax returns (past two years), and for self-employed borrowers, business tax returns and financial statements.
- What is asset verification in mortgage underwriting?
- Confirmation of the borrower's financial assets (bank accounts, stocks, retirement accounts) used for down payment and reserves. Typically verified with bank statements.
- What is an appraisal in mortgage lending?
- An independent professional valuation of the property to ensure the loan amount does not exceed the property's market value.