Chapter 13 — Exercises
Work these with a financial calculator or an amortization tool. Items marked † get fully worked solutions in the answers appendix. No answers appear in this file — that is deliberate. An originator who can only recognize the right structure when it is sitting next to the wrong one has not learned anything.
Unless stated otherwise, all figures are illustrative and constructed. Where an exercise asks you to verify a guideline, the answer is always the current published source, never this book.
A. Recall and definitions
13.1 Name the six decisions that make up a loan structure, in the order the chapter gives them. Which three mostly determine whether the loan is possible, and which three mostly determine what it costs?
13.2 Distinguish a permanent buydown from a temporary buydown in one sentence each. Which one changes the note rate?
13.3 State the four questions that pick a program, and the gate that comes before all four.
13.4 A rate sheet shows a price of 100.625 on a \$412,000 loan. Is the borrower paying or receiving, and how much? Now do the same for a price of 98.750 on the same loan.
13.5 Define total cost of credit as this chapter uses it. Name two things it includes that the note rate does not, and one thing it deliberately excludes — and say why it is excluded, using the word "equity."
13.6 Under the Ability-to-Repay rule, at what rate must a standard adjustable-rate mortgage be qualified? State the rule, not an example.
13.7 In a temporary buydown, who funds the account, where does the money live between closing and the month it is spent, and what generally happens to any unspent balance if the loan is refinanced in month 14?
B. Applied reasoning
13.8 † A borrower has \$19,000 in verified funds and is buying at \$260,000. Conventional 5% down requires \$13,000; FHA 3.5% down requires \$9,100. Closing costs and prepaids will run approximately \$5,900 either way. Determine whether the \$3,900 of FHA relief is feasibility or convenience on this file, show the arithmetic that decides it, and state the one additional fact that would flip your answer.
13.9 Rewrite the following sentence so that it is defensible: "FHA is the cheaper loan for first-time buyers."
13.10 A borrower with a 780 representative score and a borrower with a 640 representative score are both putting 5% down on identical houses at identical prices. Explain, without quoting any specific factor, why the program recommendation is likely to differ, and name the single line item that drives the difference.
13.11 Your borrower says, "Everyone says you should put twenty percent down." They have \$41,000 and are buying at \$340,000. Respond in four sentences, with arithmetic.
13.12 A real estate agent tells your mutual client that "the ARM will get you approved for more house." Explain in three sentences why that is generally false for a standard ARM, and name the rule that makes it false.
13.13 Explain why a lender credit cannot be taken as cash back on a purchase, and describe the practical problem that creates when the available credit exceeds the borrower's closing costs.
C. Qualify this borrower
13.14 † Gross monthly income \$7,200.00. Monthly debts \$640.00. Purchase price \$285,000. Conventional, 5% down, 30-year fixed at 6.750%. Taxes \$285.00/month, homeowners insurance \$105.00/month, mortgage insurance factor 0.58% annually.
Compute: (a) the loan amount and LTV; (b) principal and interest; (c) monthly mortgage insurance; (d) the total housing payment; (e) the housing ratio; (f) the back-end debt-to-income ratio. Show every numerator and denominator.
13.15 Using the borrower in 13.14, the seller offers a \$6,000 concession against closing costs and prepaids of \$8,400. Should the concession go to closing costs, a permanent buydown, or a temporary buydown? State what you would need to know first, then answer for each of two horizons: eighteen months, and twenty years.
13.16 A borrower qualifies at 44.9% back-end on a fixed-rate loan. You are considering restructuring to a 5/6 ARM with an initial rate 0.750% below the fixed rate and a fully indexed rate 0.375% above it. Will the restructure improve or worsen the qualifying ratio? Explain in one sentence.
D. Structure the deal
13.17 † Points break-even. A \$300,000 loan, 30-year fixed. Par is 6.750% with a P&I of \$1,945.80. For 1.000 point the borrower can have 6.500% with a P&I of \$1,896.21.
(a) Convert 1.000 point to dollars. (b) Compute the monthly saving. (c) Compute the break-even in months and in years. (d) The borrower says they expect to be transferred in about three years. Compute exactly how much of the point they will have recovered at month 36 and how much they will have lost. (e) State your recommendation and the one fact that would reverse it.
13.18 † Buydown costing. A builder offers a 2-1 buydown on a \$300,000 loan with a note rate of 7.000%. P&I at 7.000% is \$1,995.91; at 6.000%, \$1,798.65; at 5.000%, \$1,610.46.
(a) State the effective rate in each of years one, two, and three. (b) Compute the monthly subsidy in each of the first two years. (c) Compute the total that must be escrowed at closing. (d) Express that total as a percentage of the loan amount. (e) State the payment the borrower must be qualified at, and why.
13.19 † ARM worst case. A 7/6 ARM on a \$400,000 loan. Initial rate 6.000%, index 4.25%, margin 2.50%, caps 5/1/5. P&I: at 6.000%, \$2,398.20; at 6.750%, \$2,594.40; at 11.000%, \$3,809.29.
(a) Compute the fully indexed rate. (b) State the rate the file must be qualified at, and the qualifying P&I. (c) State the highest rate permitted at the first adjustment and the highest permitted over the life of the loan. (d) Compute the worst-case payment increase over the initial payment, in dollars per month. (e) Write the two sentences you would say to the borrower — worst case first.
13.20 † Program selection. A single borrower. Gross monthly income \$5,300.00. Monthly debts \$610.00. Representative score 648. Verified funds \$14,200.00 — no gift, no assistance program available. Purchasing a single-family primary residence at \$248,000. Closing costs and prepaids will run approximately \$6,400.
Determine which structures are fundable, run the feasibility-versus-convenience test on the down-payment difference, and recommend a program. State the two facts you would need from the borrower before finalizing, and state what would change your answer.
13.21 Take the rate/point grid in §13.5. A different borrower on that same grid tells you they are relocating for work in twenty-six months. Which row do you recommend and why? Compute the dollar advantage of your recommendation over par across their stated horizon.
13.22 A borrower has exactly enough cash for a 5% down payment plus \$1,200 of closing costs, but their costs are \$7,900. Using Figure 13.1's grid, construct a structure that closes. Show the arithmetic, and state what it costs them per month, forever.
13.23 Lay out the three uses of a \$12,000 seller concession on a \$400,000 purchase with a \$380,000 loan: a temporary buydown, a permanent buydown, and a price reduction. You do not have a rate sheet — describe precisely what you would need for each, and state which single borrower fact ranks them.
E. Read this document and find the problem
13.24 A colleague's comparison sheet shows Option A (conventional) priced on a 30-day lock and Option B (FHA) priced on a 60-day lock, on a file with a 47-day closing date. Name the problem, state why it makes the comparison useless, and say what you would do before sending it.
13.25 A comparison sheet lists four columns: conventional 5% down, conventional 10% down, conventional 20% down, and FHA 3.5% down. The borrower has \$31,000 verified on a \$390,000 purchase. Identify which columns should not be on the page, and write the one sentence you would add to the page about them.
13.26 A loan officer's email to a borrower reads: "Good news — I got you a price of 100.750, which means you're only paying 0.750 points." Identify the error, state what 100.750 actually means, and give the correct dollar figure on a \$365,750 loan.
13.27 A builder's flyer advertises "2-1 BUYDOWN — QUALIFY AT 4.625%!" State the two things wrong with that sentence, and what the borrower is actually qualified at.
F. Write the document
13.28 The confirmation email. Using the Linden Street facts, write the two-paragraph email described in §13.10: what the borrowers chose, why, the option they declined, and the number that made it close. Under 250 words, in language a first-time buyer will read to the end.
13.29 † Present these options without steering. A borrower is eligible for two structures you have priced. One produces materially more compensation to your branch than the other; the other is slightly better for the borrower on the horizon they described. Write the comparison page and the spoken presentation — no more than 400 words total — that (a) presents both, (b) quantifies the trade-off in the same units, (c) names the load-bearing assumption, (d) makes a recommendation with a reason, and (e) hands the decision back. Then, in three additional sentences, state what in your written page would demonstrate to a compliance reviewer that you did not steer.
13.30 An underwriter conditions the file: "Provide temporary buydown agreement executed by all parties and evidence of escrowed funds." Write the two-sentence response to your processor naming exactly what you will obtain and from whom.
G. Judgment and ethics
13.31 Your borrower can fund either program. FHA leaves them with two more months of reserves; conventional saves them roughly twenty-five thousand dollars over thirty years. They ask you to just pick for them. What do you say, and what do you put in writing?
13.32 A branch manager tells a new originator, "Always show the 2-1 buydown first — it's the easiest yes." Evaluate that instruction. Is it a compliance problem, a craft problem, both, or neither? Defend your answer.
13.33 You realize on day 30 that the structure you recommended on day 15 was the more expensive of the two, because you misread a mortgage insurance factor. Nothing is locked. What do you do, in what order, and what do you say?
H. NMLS-style exam questions
13.34 Under the Ability-to-Repay rule, a creditor evaluating a 5/1 adjustable-rate mortgage with a 5.500% introductory rate, a 4.00% index, and a 2.75% margin must generally qualify the borrower using a payment based on: (A) 5.500% · (B) 6.750% · (C) 4.00% · (D) the rate at the first adjustment cap
13.35 A borrower pays 1.500 discount points on a \$280,000 loan. The dollar amount is: (A) \$1,400 · (B) \$2,800 · (C) \$4,200 · (D) \$42,000
13.36 In a 2-1 buydown, the borrower's qualifying payment is based on: (A) the year-one rate · (B) the year-two rate · (C) the note rate · (D) the average of the three years
13.37 Which of the following is generally TRUE of FHA mortgage insurance compared with conventional borrower-paid mortgage insurance? (A) FHA's premium varies with the borrower's credit score · (B) FHA charges an upfront premium that may be financed into the loan · (C) FHA's annual premium always terminates at 78% of original value · (D) FHA requires no mortgage insurance above 90% LTV
13.38 A price of 99.250 on a \$320,000 loan represents: (A) a lender credit of \$2,400 · (B) a cost to the borrower of \$2,400 · (C) a lender credit of \$2,960 · (D) a cost to the borrower of \$740
I. Loan File extension
13.39 † Rebuild Figure 13.2 from scratch for the Linden Street file, changing exactly one fact: the borrowers' verified funds are **\$31,500.00** instead of \$38,000.00. Everything else — price, income, debts, score, taxes, insurance, rate sheet — is unchanged.
(a) Recompute which structures are fundable. (b) Determine whether FHA's down-payment relief is now feasibility or convenience. (c) State the recommendation and the reasoning, in the chapter's five-step order. (d) State what this exercise proves about program selection, in one sentence. (e) Write the Loan File workbook entry recording all six structure decisions under the revised facts, one line per decision, each with the number that drove it.