Chapter 12 — Exercises
Assets, Reserves, and the Down Payment
Work these with a calculator and the chapter open. Items marked † get worked solutions in the answers appendix. Nothing in this file has an answer attached to it, which is deliberate — an asset figure you looked up is not an asset figure you can defend.
All Linden Street figures are the book's frozen constructed figures: contract \$385,000.00, loan \$365,750.00, 95% LTV, PITI + MI \$3,033.72, gross monthly income \$10,500.00, monthly debts \$1,446.00, verified assets \$38,000.00, cash to close \$25,376.34.
A. Recall and definitions
12.1 State the difference between sourcing and seasoning in one sentence each, then give an example of money that is seasoned but unsourceable and an example of money that is unseasoned but fully sourced.
12.2 Name the three questions an underwriter asks about any asset, in order.
12.3 What single field distinguishes a Verification of Deposit from a bank statement, and why does that field matter?
12.4 List the six items a gift letter must contain.
12.5 Define reserves. State the unit reserves are expressed in and explain why that unit is used rather than dollars.
12.6 Explain why the equity in the property being purchased is never an asset for that purchase.
12.7 Distinguish vested from unvested in a retirement account, and say which figure a loan officer should be reading off the statement.
12.8 What is a "large deposit"? Write the definition without using a percentage — and then explain, in one sentence, why this book will not print one.
B. Reading documents and finding the problem
12.9 † A borrower's savings statement shows these credits during the documentation window. Mark each P (payroll, nothing to do), T (transfer, get the other account), or ? (a condition unless cleared now), and for every ?, name the specific documents you would request:
DAY DESCRIPTION AMOUNT
────────────────────────────────────────────────────────
-58 DIRECT DEP - [EMPLOYER] PAYROLL +2,140.00
-51 MOBILE DEPOSIT +1,875.00
-44 ACH TRANSFER FROM ****9903 +3,000.00
-44 DIRECT DEP - [EMPLOYER] PAYROLL +2,140.00
-37 DEPOSIT +6,400.00
-30 IRS TREAS 310 TAX REF +2,208.00
-23 DIRECT DEP - [EMPLOYER] PAYROLL +2,140.00
-16 CASH DEPOSIT +1,200.00
-16 CASH DEPOSIT +1,150.00
-9 ZELLE FROM [PERSON] +900.00
-2 WIRE IN - [TITLE COMPANY] +4,100.00
12.10 In item 12.9, two of the credits are more serious than a routine sourcing question. Identify them and say why — one raises a fair-lending-neutral compliance concern the loan officer must handle carefully, and one may not be the borrower's money at all.
12.11 † A Verification of Deposit comes back showing a current balance of \$31,400.00 and a two-month average balance of \$6,180.00. Compute the ratio. State what that ratio tells you, what it does not tell you, and the first two things you do before submitting the file.
12.12 A borrower sends you page 1 of 5, page 2 of 5, page 3 of 5, and page 5 of 5 of a bank statement, and says page 4 is blank. Draft the two-sentence reply you send. Then say what is statistically likely to be on page 4.
12.13 † Read Figure 12.1 in the chapter again. Write down every fact the statement establishes and every fact it does not. Then answer: if the same \$4,900 had arrived as a direct deposit labeled with the employer's name, would it still have been a large deposit? Would it still have been a condition? Explain the difference between those two questions.
12.14 A borrower's statement shows a \$14,000 deposit described only as "TRANSFER." The borrower says it came from their own money market account at a different institution. Name every document you need and state which end of the trail each one covers.
C. Calculations
12.15 † Build the cash to close. Using only the fee schedule below and the frozen loan figures, build the complete cash-to-close statement for the Linden Street file. Show the closing-cost subtotal, the prepaids-and-escrows subtotal, the total, and the final cash to close. Every column must foot.
Origination charge 1.000% of the loan amount
Discount points 0.500% of the loan amount
Appraisal $650.00
Credit report $85.00
Flood certification $14.00
Tax service $78.00
Lender's title insurance $1,150.00
Settlement / closing fee $595.00
Recording fees $212.00
Owner's title insurance (optional) $875.00
Survey $450.00
Pest inspection $125.00
Prepaid interest 8 days at the loan's per-diem
Homeowners insurance 12 months at $130.00/month
Escrow deposit 5 months tax at $385.00 + 3 months insurance at $130.00
Down payment 5% of $385,000.00
Earnest money already paid $5,000.00
Seller credit $3,000.00
12.16 † Compute the per-diem interest on the Linden Street loan from first principles (\$365,750.00 at 6.625%, 365-day basis), then compute the prepaid interest for 8 days, 15 days, and 22 days. State what a borrower actually saves by moving a closing two weeks later, and name two things that move in the opposite direction when they do.
12.17 † Reserves. Verified assets are \$38,000.00 and cash to close is \$25,376.34. Compute reserves in dollars and in months of a \$3,033.72 PITI. Then recompute both figures under each of these scenarios, independently:
(a) The \$4,900.00 deposit cannot be sourced and is backed out of verified funds. (b) The borrowers decline owner's title insurance, the survey, and the pest inspection. (c) The borrowers must pay off a \$5,200.00 obligation from reserves before closing. (d) The borrowers increase the down payment to 10% and the seller credit stays at \$3,000.00. (For (d), assume closing costs and prepaids are unchanged; note in one sentence why that assumption is not quite true.)
12.18 On the Linden Street file, gross monthly income is \$10,500.00. Compute how many dollars of new monthly obligation add exactly one percentage point to the back-end ratio. Then compute the new back-end ratio if a \$185.00 monthly payment appears, starting from 42.66%.
12.19 † A borrower has \$62,000 in a 401(k). Employee contributions are \$41,000; employer contributions are \$21,000 and are 60% vested. Compute the vested balance. Then state the two documents you need before you can count any of it, and explain why a vested balance the borrower cannot withdraw may still matter to the file.
12.20 A borrower's total funds needed at closing are \$41,880.00. They have \$52,000.00 verified and a PITI of \$2,640.00. Compute reserves in dollars and months. Then compute how much additional down payment they could make and still retain exactly 3.00 months of reserves.
12.21 Verified assets \$33,100.00; cash to close \$25,376.34; PITI \$3,033.72. Compute reserves in months. Compare your answer with the 4.16 months in the chapter and state, in dollars and in months, what one unsourced \$4,900 deposit cost this file.
D. Structure the deal
12.22 † A borrower's parents want to give \$18,000 toward a down payment. They have offered three ways to do it: (a) hand the borrower a cashier's check next week, (b) write a personal check the borrower deposits, (c) wire the funds to the closing agent on closing day. Rank the three by paper trail. For each, list every document the file will need. Then write the two-sentence instruction you would give the donor.
12.23 A borrower is \$6,000 short of the cash needed to close. They have a \$60,000 401(k) and a \$14,000 brokerage account. Lay out both routes — the 401(k) loan and the securities sale — naming the documents each requires, the effect each has on the debt-to-income ratio, and one risk of each you are obligated to state out loud. Say what you would need to verify in the current guide before recommending either.
12.24 A borrower asks whether to put an extra \$9,000 into the down payment. Write the two-column comparison you would show them. Name at least one thing on the "more down" side that has nothing to do with reserves, and at least one thing on the "keep it" side that has nothing to do with comfort.
12.25 A self-employed borrower wants to use \$45,000 from an LLC in which they hold a 55% membership interest. State the three questions the file must answer, name the documents for each, and identify which question could reopen the income calculation.
E. Clear the condition
12.26 † You receive this condition on day 28:
CONDITION 7 of 11
Provide source and evidence of the $4,900.00 deposit posted to account
****4419. Letter of explanation alone will not satisfy this condition.
Write the complete condition response: the cover note to the underwriter, the list of attachments, and the borrower letter of explanation you would ask the borrower to sign. Keep the borrower letter under 80 words.
12.27 A condition reads: "Provide donor's bank statement evidencing ability to give." The donor is an eighty-one-year-old who is upset at being asked and does not use email. Write the script for the call you make, and state what you will and will not do with the document once you have it.
12.28 A condition reads: "Provide most recent 30 days of statements for all asset accounts." The updated statement now shows a \$3,400 deposit that did not exist at submission. Describe your next three actions, in order, and say which one you take before calling the borrower.
F. Write it
12.29 † Draft a gift letter. Write a complete gift letter for a \$12,500 gift from a borrower's aunt toward the purchase of a property at 118 Callow Road. Include every required element. Then write a separate two-sentence note to the file identifying the two things your gift letter does not prove, and what documents cover them.
12.30 Write the three sentences you will say to every borrower at pre-approval about assets. Then write the one additional sentence you will add at conditional approval that the chapter identifies as preventing a day-40 disaster.
12.31 Write a 150-word explanation, addressed to a real estate agent who refers you business, of why a buyer should not move money between accounts after they are pre-approved. Write it so the agent can forward it to a client without editing it.
12.32 A borrower emails: "I don't understand why you need my parents' bank statement. They're not buying the house." Draft the reply. Under 120 words, no jargon, and it must not use the phrase "the guidelines require."
G. Judgment and ethics
12.33 A borrower tells you the \$8,000 in their account came from their brother and that they "will probably pay him back eventually, but there's no agreement or anything." What is your next question, what is the range of correct outcomes, and what may you never do? Answer in three short paragraphs.
12.34 † A borrower has \$9,400 in currency saved at home. They ask whether they should deposit it "in a few chunks so it doesn't look weird." State exactly what you say, why, and what federal concern their suggestion touches. Then lay out the legitimate path and the timeline cost, and write the two sentences you would use to make sure the borrower does not feel judged.
12.35 Your borrower's file is short \$4,000. The listing agent offers to "help out with a gift" to get the deal closed. Explain what is wrong with this, what it would do to the sales price and the loan-to-value, and what you say to the agent. Then say what you say to your own manager.
12.36 You realize on day 30 that you accepted a verbal explanation for a deposit on day 5 and never got the document, and the underwriter has now conditioned it. Write the two sentences you say to the borrower. Do not blame the underwriter and do not blame the borrower.
H. NMLS-style exam items
12.37 A borrower receives a \$15,000 gift from a fiancé. The gift letter is signed by both parties and states the amount, the property, and the relationship, but omits any statement about repayment. What is the deficiency, and why is it the one that matters most?
12.38 Which of the following is a liquid asset: (a) a vested but non-withdrawable 401(k) balance, (b) a money market account, (c) unvested employer stock, (d) the equity in the subject property? Explain each wrong answer in one clause.
12.39 A Verification of Deposit is sent to whom, by whom, and what distinguishes the information it returns from a borrower-supplied statement?
12.40 True or false, with a one-sentence justification each: (a) Seasoned funds are, by definition, properly sourced funds. (b) Earnest money reduces cash to close and must also be sourced. (c) Gift funds may always be counted toward reserves. (d) A party who is paid at closing may be a gift donor if the gift letter is properly executed.
I. Loan File extension
12.41 † Take the Linden Street asset schedule and rebuild it as though the \$10,000 gift had been deposited into the borrowers' joint savings account on day 30 rather than wired to the closing agent at closing. State every new document the file now needs, the new savings-account balance at verification, whether the reserve figure changes, and what you would have told the donor on day 6 to prevent all of it.
12.42 The Linden Street borrowers finish with 4.16 months of reserves. Write the one-paragraph note you would put in the submission comments to the underwriter about the asset picture. It should be under 100 words and should surface the two strengths in this file that an underwriter would otherwise have to find on their own.