Chapter 16 — Exercises

Work these with a financial calculator, the chapter's frozen figures, and — where a current guideline value is involved — HUD Handbook 4000.1 open in another window. Items marked † have worked solutions in the answers appendix.

Every FHA factor used in these exercises is illustrative. Where an item asks you to look something up, look it up; do not answer from memory, and note the revision date of whatever you found.

A. Recall and definitions

1. In one sentence each, state what the FHA does and what it does not do. Name the fund from which claims are paid.

2. Name the two mortgage insurance premiums an FHA borrower pays, and state which one may be financed into the loan amount.

3. What is the difference between HUD Handbook 4000.1 and a mortgagee letter? Which one governs when they disagree, and why does the FHA case number date matter to that question?

4. † FHA computes the minimum required investment as a percentage of the adjusted value. Define adjusted value, and explain why the definition matters more when an appraisal comes in low than when it comes in at contract.

5. What does CAIVRS stand for, what kinds of debt land a person in it, and what does a hit do to a file?

6. Section 203(b) is which program? Name two other FHA programs and say, in one clause each, what they are for.

7. State the MIP duration rule for terms greater than fifteen years in one sentence, and then state — in a second sentence — the thing about it that most surprises borrowers.

8. What is an identity of interest transaction, and what is FHA's default treatment of one?

B. Applied reasoning

9. † A colleague tells a borrower, "FHA is the bad-credit loan; conventional is for people with good credit." Identify the two distinct things wrong with that sentence — one about FHA's underwriting and one about FHA's pricing — and write the corrected version in under forty words.

10. A borrower asks why the loan-to-value on their FHA file shows 96.50% when the loan amount divided by the purchase price is 98.19%. Explain the difference and name which figure drives the MIP duration category.

11. Your borrower's minimum decision credit score is 574. What does the illustrative structure in §16.3 say about their minimum required investment? What separate question must you answer before you tell them they are approved for anything?

12. † Explain why the Homeowners Protection Act does not help an FHA borrower at 96.50% LTV, and name the only two events that end their annual MIP obligation.

13. A listing agent tells your buyer's agent that "the sellers don't want to deal with an FHA buyer." Write out, in three bullets, what the agent is probably actually worried about, and which one of the three is a legitimate concern.

14. Why does the FHA appraisal follow the case number rather than the lender? Name one situation where that helps a borrower and one where it hurts them.

15. A borrower with an FHA loan wants to buy a second home using FHA financing. Under what narrow circumstance might that be permitted, and what distance threshold appears in the rule?

16. † A file has an Approve/Eligible from TOTAL with a 48% back-end ratio. Under what circumstances could that file still end up being measured against the 31%/43% manual benchmark? Name at least three specific triggers.

C. Qualify this borrower

17. † Compute the full structure. [Constructed teaching example. FHA factors illustrative.]

Purchase price \$248,000. Appraised value \$248,000. FHA 203(b), 30-year fixed at 6.375%. Minimum decision credit score 664. Gross monthly income \$5,600.00. Other monthly debts \$540.00. Property taxes \$260.00/month. Homeowners insurance \$95.00/month. No HOA. Use a 3.5% MRI, UFMIP of 1.75% financed, and an annual MIP factor of 0.55%.

Produce: (a) MRI, (b) base loan amount, (c) LTV at origination, (d) UFMIP dollars, (e) total loan amount, (f) P&I, (g) monthly MIP, (h) PITI + MIP, (i) housing ratio, (j) back-end ratio, and (k) the MIP duration category. Then state whether the ratios clear the manual benchmark, and whether that matters.

18. Same borrower as #17, but the appraisal returns at \$241,000. Recompute (a) through (e), and then compute the cash the borrower must now bring to the down payment line. Explain in one sentence why the down payment went up when the value went down.

19. † A single borrower earns \$4,850.00 a month, has \$610.00 in monthly debts, and is buying at \$189,000 with FHA. Taxes are \$180.00/month and insurance \$88.00/month. Their P&I at the quoted rate is \$1,163.42 and their monthly MIP is \$85.60. Compute the housing and back-end ratios. Then state what you would need to be true about the file for you to submit it with confidence.

20. Take the borrower in #19 and add a non-occupant co-borrower — the applicant's mother — with \$3,200.00 of qualifying income and \$450.00 of monthly debts. Recompute both ratios. Then state the FHA-specific question you must answer before you promise this structure works.

D. Structure the deal

21. † Same house, two down payments. [Constructed. All factors illustrative.]

Purchase price \$300,000. FHA 203(b), 30-year fixed. UFMIP 1.75% financed. Annual MIP factor 0.55% in both scenarios (hold it constant so you can isolate the duration effect).

Scenario A: 3.5% down. Scenario B: 10% down.

For each scenario compute the base loan, the LTV at origination, the UFMIP dollars, the total loan amount, the annual MIP in dollars per year, and the total annual MIP paid over the applicable duration. Then compute the difference in total MIP and the additional cash required to get from A to B. Write the two-sentence recommendation you would give a borrower who has the money but would rather keep it.

22. A borrower qualifies for both an FHA 96.5% structure and a conventional 95% structure. Their representative score is 782, they intend to stay in the house "forever," and they have the cash for either. Without running a single calculation, state which program is almost certainly cheaper and give the one-sentence structural reason. Then name the fact that would change your answer.

23. A borrower's representative score is 638. They have 5% down. Their back-end ratio is 47%. Write the three-line comparison memo you would send your processor explaining which program you are running first and why.

24. † The Linden Street borrowers ask you to re-run the FHA option assuming they could somehow find 10% down. Using the chapter's figures, compute what that structure's monthly payment and total MIP would be, and then explain — in one sentence, using their actual asset figure — why the question is academic.

E. Clear the condition

25. Your conditional approval includes: "Provide evidence source of \$8,500 deposit to borrower's checking account 06/14; large deposit per FHA guidelines." The borrower tells you it is a gift from their aunt. List every document you need to clear this condition, and name the one question you must ask before you request any of them.

26. † Condition: "FHA appraisal completed subject to: repair peeling exterior paint, north elevation; install handrail at front stoop. Provide 1004D certification of completion." You have eleven days to closing. Write the sequence of actions, with owners and target days, that clears this condition on time. Identify the single step most likely to slip.

27. Condition: "CAIVRS hit — borrower 1. Provide documentation of resolution or evidence exclusion period has elapsed." Write the phone call you make to the borrower. Include what you will not say.

28. Condition: "Provide evidence seller acquired subject property more than 90 days prior to executed sales contract." The title commitment shows the seller took title 61 days ago. State what this condition actually is, what your options are, and who you call first.

F. Read the document and find the problem

29. † A loan officer's pre-approval worksheet reads:

FHA PRE-APPROVAL WORKSHEET                        [constructed teaching example]
  Purchase price ............................. $265,000
  Down payment 3.5% .......................... $  9,275
  Base loan amount ........................... $255,725
  UFMIP 1.75% (financed) ..................... $  4,637.50
  Total loan ................................. $260,362.50
  LTV ........................................ $260,362.50 / $265,000 = 98.25%
  MIP duration ............................... 11 years (LTV under 90% by year 6)
  Monthly MIP @ 0.55% ........................ $119.33

Find every error. There are at least three. For each, state the correct value or the correct rule, and identify which single misconception produced two of them.

30. † Two documents, two problems.

(a) A borrower forwards you an email from their real estate agent: "Good news — the seller has agreed to a \$12,000 credit, which should cover your down payment and most of your closing costs." The purchase price is \$310,000 and the loan is FHA. Write the reply.

(b) An FHA findings report shows an Approve/Eligible. The file also contains a mortgage statement showing a 30-day late three months ago on the borrower's current residence. State what this combination means procedurally, and what you do about it today rather than at submission.

G. Write it

31. Write the paragraph you would put in a follow-up email to a first-time buyer explaining life-of-loan MIP. Constraints: under 120 words, no percentage signs, no acronym used before it is expanded, and it must state the two exits.

32. † Two writing tasks.

(a) Write a one-page comparison memo for the Linden Street borrowers presenting the FHA and conventional structures side by side. Use the chapter's frozen figures. Lead with the three headline numbers, state the recommendation, and include one sentence that is honest about the uncertainty in the recommendation.

(b) Write the three questions about relationships — not numbers — that you will add to your application script as a result of this chapter, in the words you would actually use on the phone.

H. Judgment and ethics

33. † Two situations, one line to find.

(a) Your branch manager notes that FHA files at your shop close faster and generate a slightly higher margin than conventional files, and asks the team to "lead with FHA on anyone under 720." Identify the specific problems with that instruction — commercial, regulatory, and professional — and write the response you would give in the meeting.

(b) A borrower with a 745 score and 5% down insists on FHA because a family member told them government loans are safer. You have run the comparison and conventional is meaningfully cheaper for them. They are not persuaded. What do you do, what do you document, and where is the line between advising and overriding?

34. You realize on day 30 that you quoted a borrower an FHA annual MIP factor from a training deck that a mortgagee letter superseded four months ago. The correct factor makes their payment \$41 higher. What do you do, in what order, and who do you tell first?

I. NMLS-style exam questions

35. Under an illustrative FHA structure, a borrower closes a 30-year loan with an LTV at origination of 92%. Annual MIP will be collected for: (a) 11 years (b) until the loan reaches 78% LTV (c) the life of the loan (d) 5 years or until 78%, whichever is later

36. † Which of the following is true of FHA's upfront mortgage insurance premium? (a) It must be paid in cash at closing (b) It may be financed into the loan and is included in the LTV calculation for program eligibility (c) It may be financed into the loan and is excluded from the LTV calculation for program eligibility (d) It is refundable in full if the loan is paid off in the first five years

37. A borrower is purchasing a home from their employer under a corporate relocation program. This is best described as: (a) an interested-party contribution (b) an identity of interest transaction (c) a non-arm's-length gift (d) a prohibited transaction

38. The 31%/43% qualifying ratios in FHA policy are best described as: (a) an absolute maximum for all FHA loans (b) the benchmark ratios for manually underwritten files, which may be exceeded with documented compensating factors (c) the ratios required for a TOTAL Scorecard Accept (d) the ratios above which UFMIP increases

J. Loan File extension

39. † Complete the FHA column of your Appendix C program comparison page for the Linden Street file using the chapter's frozen figures, and add a row the chapter's table does not have: "date the mortgage insurance ends." Then write the twenty-five-word explanation of that row for a borrower who does not know what loan-to-value means.

40. † Using only the day-2 comparison, write the two sentences you would have said to the Linden Street borrowers if their verified assets had been \$22,000** instead of **\$38,000. State explicitly which of the four questions in §16.10 changes its answer.