Chapter 33 — Exercises

Work these with a calculator and the chapter open. Items marked † have worked solutions in the answers appendix; the rest are for your own file notes or classroom discussion. Where a question asks for a program figure, the correct answer always includes "and I would verify the current figure with the administering agency."

No answers appear in this file.

A. Recall and definitions

33.1 State the definition of "first-time homebuyer" that most assistance programs use. Then write the exact sentence you would say on a discovery call to establish it, and explain why "have you ever owned a home?" is the wrong question.

33.2 † Build a three-column table comparing a forgivable second, a deferred second, and a repayable second. For each, state: whether there is a monthly payment; whether it affects the qualifying ratios; whether it affects CLTV; what triggers repayment; and what the borrower owes if they sell in month 30.

33.3 A grant and a forgivable second both cost the borrower \$0 per month. Name three ways they are legally different, and one situation in which the difference costs the borrower money.

33.4 What is a housing finance agency, and why can a loan officer at a non-participating lender not offer an HFA program to a borrower who qualifies for one? What should that loan officer do instead?

33.5 Define area median income. Who publishes it, what is it adjusted for, and how often does it change? Why should a loan officer never quote an AMI figure from memory?

33.6 Explain the difference between a tax credit and a tax deduction in one sentence each, then explain why an MCC is worth more to a borrower at a modest income than an equivalent deduction would be.

33.7 A real estate agent tells a client, "FHA is the first-time buyer loan." Correct the statement in two sentences without embarrassing the agent, and name one thing FHA actually is that makes the confusion understandable.

33.8 List, in order, the six places you would look for down payment assistance in a market you have never worked. For each, name the specific thing you are trying to get out of that source.

B. Qualify this borrower

33.9 † Verify the Harlow Street baseline from the raw facts. Given a \$215,000 purchase price, FHA 203(b), a 3.5% minimum required investment, a 1.75% upfront mortgage insurance premium financed into the loan, a note rate of 6.250% for 360 months, an annual mortgage insurance premium factor of 0.55% applied to the total loan, taxes of \$215.00 and insurance of \$110.00 per month, gross monthly income of \$4,150.00, and \$395.00 in other monthly debts, compute: the minimum required investment, the base loan, the LTV, the financed premium, the total loan, the principal and interest payment, the monthly premium, the total housing payment, the front-end ratio, and the back-end ratio. Show every step.

33.10 † Replace Harlow Street's forgivable second with a repayable \$10,000 second at 5.000% amortized over 10 years. Compute the payment, the new front-end ratio, the new back-end ratio, and the new CLTV. Then explain in one sentence why the front-end ratio moved by the same number of percentage points as the back-end ratio.

33.11 Repeat 33.10 with the same \$10,000 at 5.000% over 7 years. By how many percentage points do the ratios move now, and what does that tell you about which variable in a repayable second matters most for qualifying?

33.12 Compute Harlow Street's CLTV two ways: once using the base loan of \$207,475.00 and once using the total loan of \$211,105.81, in both cases adding the \$10,000 second and dividing by \$215,000. Which figure does the chapter use, why, and what would happen to a file if a loan officer quoted the other one to a program with a hard CLTV cap?

33.13 A single borrower earns \$3,600.00 per month gross and has \$240.00 in monthly debts. Taxes and insurance on the target property run \$260.00 per month combined. Using a 6.250% rate for 360 months, a 1.75% financed upfront premium, a 0.55% annual premium factor on the total loan, and a 96.5% base LTV, compute the maximum purchase price that keeps the front-end ratio at or below 31%. Then compute the maximum that keeps the back-end at or below 43%. Which one binds?

33.14 Using your answer to 33.13, compute the same borrower's maximum purchase price if an automated finding supports a 45% back-end ratio and there is no front-end cap. State the dollar difference in purchasing power, and write the one sentence you would use to explain to the borrower why you cannot promise the higher number before the findings are run.

33.15 A borrower's qualifying income is \$3,900.00 per month. Their adult son lives with them, is not on the loan, and earns \$2,100.00 per month. The county DPA program's income limit is stated as a household limit. Explain what has to happen next, what you need in writing, and what you must not tell the borrower until you have it.

C. Structure the deal

33.16 † A borrower is buying their grandmother's home. It appraises at \$300,000. The grandmother is willing to give up \$30,000 of value. The borrower has \$0 for a down payment. Structure the transaction two ways — a reduced contract price and a gift of equity at value — and compute the loan amount and LTV for each. State which structure you would put in the contract and what has to be true for it to work.

33.17 † The layering problem. A borrower is buying at \$240,000 with the following proposed stack: an FHA 203(b) first; a \$12,000 forgivable county second at 0%; a \$3,000 grant from a nonprofit; a mortgage credit certificate from the state HFA, which is also providing the first mortgage through its bond program; a \$2,000 gift from an aunt; and \$4,000 in seller concessions negotiated into the contract. Identify every layer that has its own eligibility rule, compute the CLTV, and name at least three specific ways this stack could fail. For each failure, state when in the process it would be discovered.

33.18 A borrower with a 641 representative score and \$6,900 in savings is buying at \$215,000. Compare FHA 203(b) at 3.5% down against a conventional 97% product at 3% down on cash required alone, then explain in three sentences why the cash comparison does not decide the file.

33.19 Your borrower is \$3,325.00 short on cash to close. Work the four sources named in §33.10 in order, and for each, write the specific action you would take this week and the person you would take it with.

33.20 A borrower's employer has told them they will likely be transferred to another state in about two years. They qualify for a \$10,000 forgivable second (five-year forgiveness) and a \$10,000 repayable second at 5% over ten years. Which do you recommend, and what is the arithmetic that supports your recommendation? What do you tell them about the third option — not buying yet?

33.21 On the Harlow Street file, compute what the borrower would have to bring to a closing table to sell in month 30 if the property appreciates 3% instead of staying flat. Use 7% selling costs and a first-lien payoff of approximately \$204,600. How much appreciation would be required to break even?

D. Clear the condition

33.22 The county returns a condition: "Provide updated paystub and re-certify household income; program income limit applies as of the reservation date." Your borrower received a \$0.75/hour raise two weeks ago. Write the steps you take, in order, and identify the outcome you are most afraid of.

33.23 Your processor discovers that the borrower's homebuyer education certificate is dated four days after the assistance reservation date, and the program requires the certificate to predate the reservation. Write out what you do in the next hour, what you tell the borrower, and what you tell the buyer's agent. Then write the process change that prevents it happening again.

33.24 The DPA program requires documentation of non-ownership for the past three years. Your W-2 borrower has never filed anything but a simple return and does not have copies. List the documents you would request, in the order you would request them, and name the one that takes the longest to obtain.

33.25 On a gift-of-equity file, the underwriter conditions for "gift letter and evidence the gift is reflected in the transaction." Name the three documents that must agree with each other, state the exact figure that must appear in all three, and explain what happens if the settlement statement is drawn with a different number.

E. Read this document and find the problem

33.26 A DPA term sheet reads, in part: "Assistance is provided as a 0% second lien, forgiven at 20% per year. Recapture applies on sale or transfer." Name at least four questions this term sheet leaves unanswered that you must resolve before describing the program to a borrower, and say which document answers each one.

33.27 An automated underwriting findings report on an assistance file shows a total loan amount that matches the first mortgage and no secondary financing anywhere in the report. The file has a \$10,000 county second. What has happened, what is the finding worth, and what do you do before anything else?

33.28 A settlement statement on a family sale shows a contract price of \$275,000, a loan of \$247,500, a "seller credit — gift of equity" of \$27,500, and cash from the borrower of \$0. The appraisal came in at \$268,000. Identify the problem, compute the actual LTV, and state what has to change.

F. Write the disclosure, memo, or borrower letter

33.29 Write the paragraph you would put in an email to a borrower explaining, in plain language, what a \$10,000 forgivable second at 20% per year means for them if they sell in three years. No jargon, no more than 150 words, and it must include a number.

33.30 Write the three-question email you would send to a county DPA administrator on the first day of a new file. Each question must be answerable in one line and must be a question whose wrong answer would kill the file.

33.31 Write the weekly update email you would send an anxious borrower in a week when nothing happened. Maximum 120 words. It must contain a date.

33.32 Draft the file note documenting an assistance eligibility check that came back ineligible. Two sentences. It should be good enough that a reader three years from now knows exactly what was checked, against what, and when.

G. Judgment and ethics

33.33 † A colleague tells you they "don't really do DPA deals" because they take four times the work for the same commission, and that they refer those calls out. Another colleague tells you they mention the county program only to callers who "sound like they'll actually close." Analyze both positions. One of them is a business decision and one of them is a serious problem — say which, which chapter of this book governs it, and what the difference is.

33.34 A borrower with the Harlow Street facts asks you directly: "Should I do this, or should I rent for another year and save?" Write your answer. It must contain at least two numbers from the file, must not contain a promise, and must end with the decision belonging to the borrower.

33.35 A real estate agent tells you they advise their sellers to reject offers with down payment assistance because "those deals never close." Respond. Then identify the one thing in the agent's experience that is probably true and what you would change about your own process because of it.

H. NMLS-style exam questions

33.36 A borrower sold the home they lived in as a principal residence 30 months ago and has rented since. Under the definition most commonly used by assistance programs, are they a first-time homebuyer? Explain your reasoning and name the one thing that could change the answer.

33.37 Which of the following is added to the borrower's monthly housing expense for qualifying purposes on an FHA loan: (a) a forgivable second with no payment; (b) a deferred second with no payment; (c) an amortizing subordinate lien payment on the subject property; (d) a mortgage credit certificate? Justify your answer and explain what each of the others does instead.

33.38 A mortgage credit certificate is best described as: (a) down payment assistance; (b) a second mortgage; (c) a federal income tax credit based on mortgage interest; (d) a grant from HUD. Explain why each wrong answer is a plausible distractor.

I. Loan File extension

33.39 † Run the assistance eligibility check the Linden Street file never got. Using a real metropolitan area you know, find the state housing finance agency, locate its current income and purchase price limits, and determine whether a two-borrower household with \$10,500.00 per month in qualifying income (\$126,000 per year) buying at \$385,000 would clear them. Record the result as a file note in the format from exercise 33.32, then repeat the exercise against the Harlow Street facts and write one sentence on why the outcomes differ.

33.40 The Linden Street borrowers received a \$10,000 gift from a parent. Write a one-page comparison of that gift against a hypothetical \$10,000 forgivable DPA second, covering lien, CLTV, recapture, eligibility limits, education requirements, and calendar impact. Then write the closing paragraph: what does the comparison say about who can buy a house in America, and what does it not say?