Chapter 8 — Self-Check Quiz

Twenty-five questions. Multiple choice and short answer, in the style of the SAFE MLO test where the material is exam-relevant. Answer key at the bottom in a collapsed block — write your answers down before you open it.

1. A pre-qualification differs from a pre-approval primarily because a pre-qualification:

  • A. is issued by a broker rather than a lender
  • B. rests on information the borrower stated and the lender has not verified
  • C. expires more quickly
  • D. may not be given to a real estate agent

2. Which of the following is true of a pre-approval letter?

  • A. It is a commitment to lend once signed by the borrower.
  • B. It locks the interest rate through the expiration date printed on it.
  • C. It is not a commitment to lend and not a rate lock.
  • D. It must be issued within three business days of application.

3. Under Regulation Z's integrated disclosure rules, which of the following is not one of the six pieces of information that constitute an application?

  • A. The property address
  • B. An estimate of the value of the property
  • C. The consumer's employer's name
  • D. The loan amount sought

4. A loan originator has a borrower's name, income, Social Security number, an estimate of value, and the loan amount sought, but no property has been identified. Under the integrated disclosure rules, the originator most likely:

  • A. has an application and must deliver a Loan Estimate
  • B. does not yet have an application, because one of the six items has not been submitted
  • C. has an application only if a credit report was pulled
  • D. has an application only once the borrower signs a Uniform Residential Loan Application

5. Short answer. Define affordability and purchasing power, and say which one an automated underwriting system reports.

6. The denominator of both qualifying ratios is:

  • A. net take-home pay
  • B. gross monthly income
  • C. gross monthly income less income taxes
  • D. gross monthly income less non-debt living expenses

7. A household with a 42.66% back-end ratio is approvable. Which of the following does that ratio tell you nothing about?

  • A. Their monthly debt payments
  • B. Their gross monthly income
  • C. Their childcare costs
  • D. Their proposed housing payment

8. Short answer. A borrower has base pay of \$2,400.00 a month plus commissions of \$19,800 and \$23,400 over the last two years. Compute the qualifying monthly income using a 24-month commission average, then compute what the borrower actually earned per month in the most recent year, and state the difference.

9. A commission income trend is declining year over year. Compared with a rising trend, an underwriter is generally more likely to:

  • A. use the 24-month average unchanged
  • B. use the higher of the two years
  • C. use the lower, more recent figure
  • D. disregard commission income entirely

10. Short answer. Explain the difference between income that is documented and income that is verified, and say which one a pre-approval rests on.

11. Which of the following obligations will generally not appear on a residential credit report but must still be counted in a qualifying ratio?

  • A. An auto loan in the borrower's name
  • B. Court-ordered child support
  • C. A credit card minimum payment
  • D. A student loan in repayment

12. Short answer. The Linden Street borrowers pay \$1,850.00 a month in rent and the proposed payment is \$3,033.72. State the multiple and the percentage increase, then write one sentence delivering that fact to the borrower without using the phrase "payment shock."

13. A budget-first conversation means:

  • A. asking the borrower's price range before anything else
  • B. establishing the borrower's target monthly payment before any purchase price is discussed
  • C. reviewing the borrower's bank statements before quoting
  • D. disclosing closing costs before the rate

14. On the Linden Street file, taxes are \$385.00 and insurance is \$130.00 of a \$3,033.72 payment. Approximately what share of the payment is escrow, and why does that matter to a first-time buyer?

  • A. About 5%; it is the smallest component
  • B. About 17%; it can change on an escrow analysis without anyone in the transaction deciding to change it
  • C. About 17%; it is fixed for the life of the loan
  • D. About 30%; it includes mortgage insurance

15. Short answer. A pre-approval letter must not contain a credit score, an income figure, or an asset balance. Give the two distinct reasons.

16. The best reason to write a pre-approval letter for the offer amount rather than the maximum the file supports is:

  • A. it is required by the Real Estate Settlement Procedures Act
  • B. a letter at the maximum discloses the buyer's ceiling to the seller's side
  • C. lenders may not issue more than one letter per transaction
  • D. the maximum cannot be computed before an appraisal

17. A pre-approval letter should carry:

  • A. a duration such as "valid 90 days"
  • B. a specific expiration date, with re-issuance rather than extension
  • C. no expiration, since the underwriting does not change
  • D. an expiration matching the purchase contract's closing date

18. Short answer. State the governing rule for what may appear in a pre-approval letter, in one sentence, and describe the mechanical audit that enforces it.

19. Before obtaining a consumer's credit report in connection with a mortgage inquiry, an originator must have:

  • A. a fully executed purchase contract
  • B. a permissible purpose and the consumer's authorization consistent with the Fair Credit Reporting Act
  • C. a delivered Loan Estimate
  • D. a completed appraisal order

20. A prospective applicant with a low score is told by an originator that "there's really no point in applying." The most directly implicated law is:

  • A. the Home Mortgage Disclosure Act
  • B. the Equal Credit Opportunity Act, implemented by Regulation B
  • C. the Gramm-Leach-Bliley Act
  • D. the Real Estate Settlement Procedures Act

21. Short answer. A borrower is roughly seven months from being ready. Name the four elements of the written plan you send them the same day, and state the one thing you may never promise.

22. For qualifying purposes, a borrower with limited cash should generally consider retiring:

  • A. the debt with the highest interest rate
  • B. the debt with the largest balance
  • C. the debt with the largest monthly payment relative to the cost of retiring it
  • D. the oldest debt on the credit report

23. Short answer. An agent asks for a letter \$45,000 above what your file supports, at 4:50 on a Friday. Write your answer in the number-reason-time form.

24. The most valuable single line in a discovery call note is:

  • A. the borrower's stated income
  • B. the computed ratios
  • C. the list of facts you do not have
  • D. the borrower's contact information

25. Short answer. You have pulled credit, received and read two pay statements and two W-2s per borrower plus one bank statement, and run automated underwriting. Nothing has been confirmed by any third party. Name what you are entitled to issue, and list four things it must say it is not.

Answer key **1. B.** A pre-qualification rests on unverified borrower statements. It may not even include a credit pull, in which case the score — one of the four facts that price a loan — is also a guess. (§8.5) **2. C.** It is neither a commitment to lend nor a rate lock, and the letter should say so in its own text. A is wrong because a pre-approval binds no one; B is wrong because locking is a separate act (day 12 on the Linden Street file); D confuses the letter with the Loan Estimate. (§8.5, §8.6) **3. C.** The employer's name is not one of the six. The six are the consumer's name, 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. (§8.5) **4. B.** The property address has not been submitted, so the set is incomplete. This is why many lenders' procedures require pre-approvals to be issued without naming a subject property. Verify your company's procedure and the current rule. (§8.5, §8.6) **5.** *Affordability* is whether a household can actually carry the payment alongside everything else it must pay, with margin for ordinary emergencies — it is not a ratio and has no threshold. *Purchasing power* is the maximum loan amount, and therefore maximum price, that documented income and documented debts support under a program's ratio limits at a given rate. **An automated underwriting system reports on purchasing power only.** Affordability appears nowhere in the file. (§8.2) **6. B.** Gross monthly income — which is precisely why the ratio cannot see income taxes, withholding, or the difference between two households with identical gross pay. (§8.2, Ch. 4) **7. C.** Childcare is not a debt, so it never enters the ratio. A, B, and D are all inputs to the ratio itself. (§8.2) **8.** Commission average: $(\$19{,}800 + \$23{,}400) \div 24 = \$43{,}200 \div 24 = \$1{,}800.00$ per month. Qualifying income: $\$2{,}400.00 + \$1{,}800.00 = \$4{,}200.00$. Most recent year actual: $(\$2{,}400.00 \times 12) + \$23{,}400 = \$28{,}800 + \$23{,}400 = \$52{,}200 \div 12 = \$4{,}350.00$ per month. **Difference: \$150.00 a month**, and the file uses the lower figure. (§8.3) **9. C.** A declining trend generally means the lower, more recent figure is used rather than the average, because two years of declining income does not support an expectation that the average will continue. Verify the current treatment in the applicable guide. (§8.3; Chapters 11 and 32 for the full treatment) **10.** *Documented* means the lender holds and has read the paystub, W-2, or statement. *Verified* means an independent third party has confirmed it — a verification of employment, a verification of deposit, a tax transcript. **A pre-approval rests on documentation, not verification**, which is exactly why it can still be wrong and why the letter must say so. (§8.5) **11. B.** Court-ordered child support and alimony are obligations of record that do not appear as credit tradelines. Ask about them explicitly; borrowers do not volunteer them. Also missing from a credit report: garnishments, co-signed obligations somebody else is paying, some leases, and informal family repayment arrangements. (§8.3) **12.** $\$3{,}033.72 \div \$1{,}850.00 = 1.64$, an increase of **64.0%**. A model sentence: *"Right now you write a check for \$1,850. On this house it's \$3,033.72 — that's \$1,183.72 more a month, and I want you to hear that from me today rather than find it out in November."* (§8.4) **13. B.** The target monthly payment is established first, and the price is derived from it. The opening question is *"What number, coming out of your checking account on the first of every month, would not scare you?"* (§8.3, §8.4) **14. B.** $\$385.00 + \$130.00 = \$515.00$, and $\$515.00 \div \$3{,}033.72 = 16.97\%$. Escrow moves on an annual escrow analysis, and property tax reassessment following a sale is governed by local law — which is why a first-time buyer should be told to expect the payment to change. (§8.4; Chapter 23) **15.** First, **negotiating position**: a letter that discloses assets or income tells the seller's side exactly how much room your buyer has. Second, **privacy**: it discloses the borrower's nonpublic personal information to parties who have no need for it, and what you may share is governed by your privacy notice and the borrower's authorization. Verify with your compliance department. (§8.6) **16. B.** It discloses the ceiling. The secondary reason is that writing every letter for its specific offer forces you to think about each one. (§8.6) **17. B.** Print a date, not a duration, and re-issue rather than extend — because re-issuing forces you to look at the file again, and extending is a keystroke. Choose a date shorter than the shortest-lived document in the file, and check the current validity windows in the applicable guide. (§8.6) **18.** The rule: **every fact in the letter must be traceable to a document in your file.** The audit: write the letter, then read it sentence by sentence and name aloud the document behind each sentence. Any sentence you cannot source is deleted — not softened. (§8.6) **19. B.** Permissible purpose plus the consumer's authorization, consistent with the Fair Credit Reporting Act. Pulling the report also triggers disclosure obligations to the consumer regarding the credit score used. (§8.1, §8.6) **20. B.** The Equal Credit Opportunity Act and Regulation B address discouragement. Giving a borrower accurate arithmetic is your job; telling them not to apply is a different act, and "I was saving them the inquiry" is not a defense to a pattern. If a borrower wants to apply after hearing the arithmetic, take the application. (§8.8; Chapter 25) **21.** The four elements: **where you are today** (the two or three numbers, stated plainly); **what has to change** (the specific constraint, not a category); **three actions**, each a verb with an object; and **a date** — a real date on which you will call, recorded in the follow-up system and repeated in the email you send that day. You may **never promise a credit score outcome**, and you must never refer a borrower to an operation charging advance fees to dispute accurate information. (§8.8) **22. C.** Debt-to-income responds to *monthly payment*, not to balance and not to interest rate — so the best target is the obligation with the largest payment per dollar it costs to retire, which is often a nearly-paid-off installment loan. Two caveats: the cash is no longer available for down payment or reserves, and Chapter 4's ten-month exclusion may remove the debt for free anyway. (§8.8) **23.** Number, reason, time. A model answer: *"I can write \$385,000 right now — that one I can back up completely. I can't write \$430,000 yet because I haven't seen the second borrower's commission statements, and commission is a third of that income. Get me the last two years' W-2s and the most recent pay statement and I'll tell you tonight what the real ceiling is."* Never a number you cannot support; always a path and a time. (§8.6) **24. C.** The `DO NOT HAVE` line. It is tomorrow's task list, it is the honest record of what you knew when you issued the letter, and it is what stops you from mistaking a conversation for a verification. (§8.9) **25.** You may issue a **pre-approval**. It must say, at minimum, that it is **not a commitment to lend**, **not a rate lock**, **not a guarantee of financing**, and **not a verification** — employment, income, and assets have not been confirmed with third parties. It should also recite specifically what *was* reviewed and on what date, and list the conditions that remain. (§8.5, §8.6)