Chapter 8 — Exercises

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Chapter 8 — Exercises

Work these with a calculator, a blank page, and the frozen figures from the chapter. Items marked † have worked solutions in the answers appendix. Everything here is constructed for teaching; none of it is a real borrower's file.

A. Recall

8.1 Define affordability and purchasing power in one sentence each. Then say which of the two an automated underwriting system reports, and which one appears nowhere in a loan file.

8.2 Chapter 4 §4.6 established six things a debt-to-income ratio is structurally blind to. Name all six from memory, then check yourself against §8.2.

8.3 † Distinguish a pre-qualification from a pre-approval in three specific respects. For each respect, name the document — or the absence of one — that creates the difference.

8.4 Explain the difference between documented and verified, and say which of the two a pre-approval rests on.

8.5 † List the six pieces of information whose submission constitutes an application under Regulation Z's integrated disclosure rules. Which one is most often absent during a pre-approval, and what does that absence mean operationally?

8.6 Chapter 1 named four facts that must be known before a rate can be quoted. List them, and say which one you typically learn last on a discovery call.

8.7 † Define a budget-first conversation. State, word for word, the question that opens it — and explain why "what's your budget?" is not that question.

8.8 Define expectation setting and give one concrete example from this chapter of expectation setting that is not reassurance.

B. Applied reasoning

8.9 † A borrower says, "I make about \$72,000." Write five follow-up questions that would turn that sentence into an income structure an underwriter could evaluate. For each, write the one-sentence reason you would give the borrower if they asked why you were asking.

8.10 "A credit report is a complete picture of a household's obligations." This is false. List five categories of monthly obligation that generally will not appear on a residential credit report but that a qualifying ratio must include, and write the single question that surfaces each.

8.11 † Borrower 2 on the Linden Street file has commissions of \$19,800 and \$23,400 over the last two years, and the file uses a 24-month average. Explain, in terms a borrower would accept, why a rising trend permits an average while a falling trend generally does not — and say which figure a falling trend would produce instead.

8.12 A buyer's agent asks you to add "borrowers have verified liquid assets of \$38,000" to the pre-approval letter, because "it makes the offer look stronger." Answer her in three sentences: one naming the risk to her own client, one naming the privacy issue, and one offering the correct alternative.

8.13 † Your company's procedure requires that pre-approval letters not name a subject property. Explain the regulatory reason behind that procedure, name the rule it relates to, and state one practical drawback of the policy from the borrower's side.

8.14 A borrower asks: "Should I pay off my credit cards before I apply?" Before you answer, list the four things you need to know. Then state the general principle about what a debt-to-income ratio actually responds to.

8.15 † Explain, in a paragraph you could read aloud to a new colleague, why "good news — you qualify up to \$460,000" is a dangerous first sentence even though it is entirely true. Then write the sentence you would say instead.

8.16 A pre-approval letter says "valid for 90 days." Give two reasons to print a date instead, and one reason to re-issue a letter rather than extend one.

C. Calculations

Show your arithmetic. Every figure below is constructed.

8.17 † Payment shock. A household pays \$1,425.00 a month in rent, verified by twenty-four months of cancelled checks. The proposed housing payment on the property they are considering is \$2,166.00. Compute:

(a) the multiple of their current payment
(b) the percentage increase
(c) the additional dollars per month, and per year
(d) the total accumulated if they make the difference a "practice payment" into savings for four months
(e) State in one sentence what (d) is worth to the file, beyond testing whether the number is livable.

8.18 Purchasing power, worked backwards. At 6.625% over 30 years, principal and interest run \$6.403117 per \$1,000 borrowed. A borrower's target total housing payment is \$2,400.00 a month. In their market and price range, estimate taxes at \$290.00, homeowners insurance at \$105.00**, and mortgage insurance at **\$132.00 a month.

(a) How much of the \$2,400.00 is available for principal and interest?
(b) What loan amount does that support?
(c) At 5% down, roughly what purchase price does that imply?
(d) Name two reasons the answer to (c) is an estimate rather than a number you would put in a letter.

8.19 † Affordability versus qualification. A household has gross monthly income of \$8,400.00** and monthly debts of **\$760.00. The proposed housing payment on a \$310,000 home is \$2,520.00.

(a) Compute the housing ratio and the back-end ratio.
(b) The household's combined net deposits are \$6,300.00 a month, and when asked they add their non-debt living expenses to \$2,180.00 a month. How much is left after the payment, the debts, and living expenses?
(c) Subtract a maintenance reserve of 1% of the home's value per year. What is actually left?
(d) Write the two sentences you would say to this household about the difference between (a) and (c).

8.20 Qualifying, on the Harlow Street file. Given principal and interest \$1,299.81, annual mortgage insurance premium \$96.76**, property taxes **\$215.00, homeowners insurance \$110.00**, gross monthly income **\$4,150.00, and other monthly debts \$395.00:

(a) Compute the total housing payment.
(b) Compute the front-end and back-end ratios, to two decimals.
(c) Compare both to the 31/43 manual benchmark and state what the file therefore depends on.
(d) Compute what share of gross income the \$395.00 of debt represents, and confirm that the front-end and back-end ratios differ by exactly that amount.

8.21 † What the payment is made of. On the Linden Street file the payment is P&I \$2,341.94, taxes \$385.00, insurance \$130.00, and mortgage insurance \$176.78.

(a) Compute each component as a percentage of the total, to two decimals, and confirm they sum to 100%.
(b) Which portion can change without anyone in the transaction deciding to change it, and by what mechanism?
(c) Write one sentence explaining (b) to a first-time buyer who has only ever paid rent.

8.22 Which debt to retire. A borrower with \$7,500.00 of gross monthly income has two obligations: A, an installment loan at \$312.00 a month with 14 payments remaining; and B, revolving balances of \$9,600** carrying **\$240.00 a month in minimum payments.

(a) Roughly what does it cost to retire each, and how much monthly payment does each retirement remove?
(b) Express each retirement as a reduction in the back-end ratio.
(c) Which is the better use of the same money for qualifying purposes, and by how much?
(d) Name two circumstances in which you would nonetheless advise against doing it at all.

8.23 † The income gap. Using the table in §8.3: the Linden Street household would describe its income as about \$145,000 a year; the file counts \$126,000.

(a) Compute the annual and monthly gap.
(b) At this file's back-end ratio of 42.66%, how much additional monthly obligation would that gap have appeared to support?
(c) At \$6.403117 per \$1,000, how much additional loan is that, in principal-and-interest terms?
(d) In two sentences, connect your answer to Chapter 1's warning about the unsupported letter.

8.24 Reserves. A borrower closes with \$9,700.00 remaining in verified liquid assets against a total housing payment of \$2,166.00. Express their reserves in months, to two decimals. Then state why an underwriter finds that figure more interesting than the same dollars sitting in a retirement account.

D. Write it

8.25 † Write the pre-approval letter. You have, as of 3:15 p.m. today: a tri-merge credit report for both applicants pulled this morning (representative score 691); two pay statements and two Forms W-2 for each applicant; one bank statement; and an automated underwriting recommendation consistent with a conventional 30-year fixed loan, primary residence, 10% down, to a purchase price of \$268,000. You do not have a verification of employment, a verification of deposit, a gift letter, or an appraisal, and no property has been identified.

Draft the letter. Then perform the sentence-by-sentence audit from §8.6: beside each sentence, name the document that supports it. Delete anything you cannot source, and report how many sentences you deleted.

8.26 Write the pre-qualification letter. Same borrower, but two weeks earlier: one phone call, nothing pulled, nothing received. Write the letter, including the "WE HAVE NOT" block. Then write the one sentence you would say to the agent when you send it.

8.27 † Deliver the bad news. Using the Harlow Street facts, write the first four sentences of the call in which you tell this borrower that the price that works is \$215,000, not \$240,000. Your four sentences must, in order: state the fact; state it as a number; bound what it does not mean; and hand over a specific next step with a time attached. No preamble, and no apology longer than five words.

8.28 The confirmation email. Write the same-day written summary that follows the Linden Street discovery call. It must contain the price, the payment broken into its four components, the program assumed, the increase over current rent, what the letter does and does not do, the expiration date, and the next three items you need. Keep it under 250 words.

8.29 † The not-yet plan. A borrower is roughly seven months away: a collection from eighteen months ago is unresolved, savings stand at \$4,200 against a need of about \$9,500, and their back-end ratio is 47% at the price range they want. Write the four-part plan from §8.8 — where they are, what has to change, three actions, and the date. Then write the one sentence you may not include in it, and say why.

8.30 Rewrite the note. Here is a call note as a first-year loan officer actually wrote it:

Spoke w/ borrowers, seem kind of disorganized, wife does most of the talking. Husband's job seems shaky. They're young so probably first-timers. Told them they're good to about \$300k. Should be fine. Will follow up.

Identify every problem with it — there are at least six — and rewrite it using the template in §8.9. Invent only the facts you need, and mark each invented fact as an assumption.

E. Judgment

8.31 † The letter you cannot support. The buyer's agent who sends you four files a year calls at 4:50 on a Friday. Her clients want to write tonight. Your file supports \$385,000. She needs \$430,000 "in case there's a counter," and adds: "the other lender they talked to said they'd just write it."

(a) Write your answer to her in the number-reason-time form from §8.6.
(b) She pushes back: the letter is "just a formality." Write your second answer — there will be one.
(c) Name what is actually at risk for her client if you write \$430,000 and the file comes back at \$385,000 after verification.
(d) State what you would do if she took the file elsewhere, and why that is not automatically the wrong outcome.

8.32 The inquiry the borrower does not want. A borrower asks for a pre-approval letter but does not want their credit pulled — "we're not ready for the hit yet." What do you issue, what does it say, and what do you tell them about how a listing agent will read it? Then state plainly what you may not do.

8.33 † "We'll just wait." You give a borrower the affordability arithmetic honestly. Their back-end ratio is comfortable and they would very likely be approved, but the residual figure alarms them and they say they want to wait a year. You believe they could buy today.

(a) What do you say?
(b) What may you not say, and why is that boundary a legal one and not only an ethical one?
(c) What goes in the file, and what goes in the follow-up system?

8.34 Uniformity. You have developed a thorough affordability conversation. Reviewing your last thirty calls, you find you ran the full version with borrowers who seemed interested and an abbreviated version with borrowers who seemed rushed. Explain why this is a problem even if every individual decision was made in good faith, and describe the control that fixes it.

F. NMLS-style questions

8.35 † Which of the following best distinguishes a pre-approval from a pre-qualification?

A. A pre-approval commits the lender to make the loan.
B. A pre-approval is based on documentation the lender has obtained and reviewed, including a credit report.
C. A pre-approval locks the interest rate for the borrower.
D. A pre-approval is required by federal law before a purchase offer may be submitted.

8.36 Under Regulation Z's integrated disclosure rules, an application consists of the submission of which of the following?

A. A signed Uniform Residential Loan Application and a credit report authorization.
B. The consumer's name, monthly income, and Social Security number to obtain a credit report; the property address; an estimate of the value of the property; and the loan amount sought.
C. Two years of tax returns, two months of bank statements, and a purchase contract.
D. Any request from a consumer for a rate quote.

8.37 † A pre-approval letter is best described as:

A. a commitment to lend, enforceable by the borrower
B. a rate lock agreement
C. a statement of the purchasing power the lender's documentation supports, subject to stated conditions
D. a disclosure required by the Real Estate Settlement Procedures Act

8.38 A loan originator tells a prospective applicant with a low credit score that "there's really no point in applying." Which statute and implementing regulation are most directly implicated?

A. The Fair Credit Reporting Act and Regulation V
B. The Equal Credit Opportunity Act and Regulation B
C. The Real Estate Settlement Procedures Act and Regulation X
D. The Gramm-Leach-Bliley Act and Regulation P

G. Loan File extensions

8.39 † Build the day-1 note. Using the day-1 timeline in the chapter's 🗂️ The Loan File checkpoint, write the complete discovery call note for the Linden Street file in the template from §8.9. Fill in every field. The DO NOT HAVE line must contain at least seven items. Then answer: of the items on that line, which one, if it turns out badly, would do the most damage to the letter you just issued?

8.40 Re-issue the letter. On day 3 the agent calls: there is a counter at \$396,000 and she needs a new letter within the hour. Using only the frozen facts of the file:

(a) State what changes in the letter and what does not.
(b) State what you must re-check before you press send, and why re-issuing is safer than editing a date on the old one.
(c) The borrowers qualify well above \$396,000. State whether you write the letter for \$396,000 or for the ceiling, and defend the choice in one sentence.
(d) Name the one figure in the original letter that a careless originator would forget to revisit.