Chapter 5 — Exercises

Thirty-four problems. Items marked † have worked solutions in Appendix: Answers to Selected Exercises. Where a current figure is needed, use the illustrative values from the chapter and note that you would verify them.

A. Recall

5.1 Name the five loan categories from §5.1 and, for each, name who buys the loan.

5.2 † Distinguish conventional from conforming. Then classify each of these: a \$1.4M loan on a primary residence; a 3%-down Fannie Mae loan; an FHA loan; a bank's own portfolio loan at 90% LTV.

5.3 Who sets the conforming loan limit, how often, and what is the relationship between the baseline and a high-cost area limit?

5.4 † State the FHA minimum down payment at each of the two score bands, and the upfront and annual premium structure.

5.5 Name three things a VA loan does not require that a conventional loan at the same LTV does.

5.6 † Name the two USDA eligibility tests, and state which one counts the income of people who are not on the loan.

5.7 Define index, margin, fully indexed rate, and caps. Then state what "5/6 ARM, 2/1/5" means in full.

5.8 † Build the four-row mortgage insurance table from memory: program, what it is called, whether there is a monthly charge, and whether it terminates.

5.9 State the FHA annual MIP duration rule at each LTV band.

5.10 Name three property-type situations that can make an otherwise qualified borrower ineligible.

B. Applied reasoning

5.11 † A borrower says "I want a conventional loan, not one of those government ones." Write the reply that corrects the framing without being condescending, in under 90 words.

5.12 Explain, using §5.1, why non-QM loans price higher than agency loans. Your answer must not use the word "risky."

5.13 † A jumbo file is declined for a reason the borrower finds arbitrary. Explain to them why you cannot show them the guideline, and state what you will do next.

5.14 §5.5 says "'rural' is broader than it sounds." Describe how you would actually check USDA eligibility for a property, and at what point in the process you would do it.

5.15 † A real estate agent tells your borrower that VA offers get rejected and they should use conventional. Write what you say to the borrower, and separately, what you say to the agent.

5.16 A borrower asks why mortgage insurance exists "if it doesn't protect me." Answer honestly in under 70 words, and connect it to what MI makes possible.

5.17 † Explain why an ARM's lower initial payment does not help a borrower qualify. Name the rule and the historical failure behind it.

5.18 Describe two borrowers for whom an ARM is genuinely the right product, and one for whom it is clearly wrong. Be specific about what makes the difference.

C. Run the numbers

5.19 † A borrower is buying at \$860,000 with 5% down in an area with a \$806,500 limit. Compute the loan amount and the overage. Then compute the additional down payment required to bring the loan to the limit exactly.

5.20 Compute the FHA base loan amount, UFMIP at 1.75%, and total loan amount for a \$310,000 purchase at 3.5% down.

5.21 † Using your answer to 5.20, compute the annual MIP at a 0.55% factor and the monthly amount. Then state, with the reason, whether that MIP will terminate.

5.22 A VA borrower buys at \$450,000 with no down payment and a 2.15% funding fee, financed. Compute the funding fee and the total loan amount. Then compute the same for a borrower who is exempt from the funding fee.

5.23 † On a \$365,750 loan, a 5/6 ARM has an initial rate of 5.875%, an index of 4.25%, and a margin of 2.75%, with 2/1/5 caps. Compute: the fully indexed rate; the qualifying rate; the maximum rate after the first adjustment; and the lifetime maximum rate.

5.24 Using 5.23's rates, compute the P&I at the initial rate and at the lifetime cap. State the worst-case monthly increase and write the one sentence you would say to the borrower before quoting the 5.875%.

5.25 † Compare total mortgage insurance paid over the full term on the Linden Street file's two options: conventional MI of \$176.78 terminating at payment 137, versus FHA MIP of \$173.26 for 360 payments. Show the difference and state which figure a borrower is more likely to have been shown.

5.26 A borrower has \$14,000 in total funds and is buying at \$385,000. Compute the down payment required under conventional 5% and under FHA 3.5%, and state which program the cash constraint selects — and what you still need to check before saying so.

D. Structure the deal

5.27 † Work the §5.10 decision tree, in order, for each of the following. State the program and the question that decided it. (a) A Navy veteran buying a \$395,000 primary residence with \$9,000 saved. (b) A borrower with a 610 score, 5% down, buying a \$240,000 townhome. (c) A self-employed borrower with strong bank deposits and two years of returns showing very low taxable income, buying a \$700,000 primary residence. (d) A borrower buying a \$1,150,000 second home with 25% down and a 780 score. (e) A household earning \$71,000 buying a \$260,000 house eleven miles outside a mid-size city.

5.28 For borrower (b) in 5.27, describe what would have to change for conventional to become competitive, and how you would find out whether it can.

5.29 † A borrower qualifies for both conventional 95% and FHA 96.5%. Write the comparison you would put in front of them — as a table plus three sentences — and then state what question you would ask to let them decide.

5.30 §5.10's Rule 2 says the borrower decides on your numbers. Describe a situation in which you are confident the borrower is choosing wrong, and state exactly what you may and may not do about it.

E. Judgment

5.31 † A borrower is buying a house two hours from their workplace and tells you it will be their primary residence. They already own a home they are keeping. State what you do, in order, and what you do not do.

5.32 A colleague tells an FHA borrower their "PMI will come off at 78 percent." Describe the error, what it will cost the borrower, and how you would raise it with the colleague.

5.33 LPMI produces a clean quote with no mortgage insurance line. Describe the borrower for whom it is a good structure and the borrower for whom it quietly costs money, and explain why it is popular with loan officers.

F. The Loan File

5.34 † In your Appendix C workbook, complete the six-question decision tree for the Linden Street file. Write one sentence for each eliminated program stating why it is out — "not eligible" is not an acceptable answer without a reason. Then list every fact you would need to choose between conventional 95% and FHA 96.5%, and mark which ones you already have and which ones you do not.