Chapter 33 — Self-Check Quiz

Twenty-five questions. Multiple choice and short answer, written in the style of the SAFE MLO test where the material is exam-relevant. Answer key in the collapsed block at the bottom — work the whole quiz before opening it.

Where a question involves the Harlow Street file, the frozen facts are: \$215,000 purchase price, FHA 203(b), base loan \$207,475.00, total loan \$211,105.81 at 6.250%, P&I \$1,299.81, monthly mortgage insurance premium \$96.76, taxes \$215.00, insurance \$110.00, gross monthly income \$4,150.00, other monthly debts \$395.00, and a \$10,000 forgivable county second at 0% forgiven 20% per year over five years.

1. Under the definition most assistance programs use, a first-time homebuyer is a borrower who:

  • (a) has never owned real property of any kind
  • (b) has never owned a home
  • (c) has had no ownership interest in a principal residence in the past three years
  • (d) is purchasing their first home with a mortgage

2. Which of the following is a first-time homebuyer program?

  • (a) FHA 203(b)
  • (b) VA
  • (c) USDA Guaranteed Rural Housing
  • (d) None of the above is defined by first-time buyer status

3. A borrower sold the home they lived in 26 months ago. Under the common three-year test, are they a first-time homebuyer? What single follow-up question could change your answer?

4. A forgivable second with no monthly payment is added to a file. What happens to the borrower's front-end ratio?

  • (a) it rises by the amount of the imputed payment
  • (b) it does not change
  • (c) it falls, because the second reduces the first mortgage
  • (d) it depends on the forgiveness schedule

5. The same \$10,000 second, structured as repayable at 5.000% over ten years, produces a payment of \$106.07. On the Harlow Street file, what are the new front-end and back-end ratios?

6. Why does a repayable subordinate lien payment on an FHA loan affect the front-end ratio and not only the back-end ratio?

7. Compute Harlow Street's CLTV. State which loan figure goes in the numerator and why.

8. A deferred second and a forgivable second, both at 0% with no monthly payment, are:

  • (a) identical in every respect
  • (b) identical at application and different at exit
  • (c) different at application and identical at exit
  • (d) different in both respects

9. Which of the following is not a loan?

  • (a) a forgivable second
  • (b) a deferred second
  • (c) a repayable second
  • (d) a grant

10. What is a housing finance agency, and why can most loan officers not simply "sign up" a borrower for an HFA program on the day the contract is executed?

11. Area median income is published by:

  • (a) the Consumer Financial Protection Bureau
  • (b) the Department of Housing and Urban Development
  • (c) Fannie Mae
  • (d) the Federal Housing Finance Agency

12. A DPA program states an income limit as a household limit. Your borrower's qualifying income is \$3,900 and an adult child living in the home earns \$2,100 and is not on the loan. What is the risk, and what do you do?

13. A mortgage credit certificate is best described as:

  • (a) down payment assistance
  • (b) a subordinate lien
  • (c) a federal income tax credit based on a percentage of mortgage interest paid
  • (d) a grant administered by HUD

14. A borrower has a certificate with a 25% credit rate and a \$2,000 annual cap. First-year mortgage interest is \$13,124.05. What is the credit for the year, and what is its monthly value?

15. True or false: the mortgage interest claimed under a mortgage credit certificate may also be taken as an itemized mortgage interest deduction. Explain.

16. A mortgage credit certificate worth \$166.67 per month can be used in qualifying either as a reduction to the mortgage payment or as additional income. On the Harlow Street file, which treatment produces the lower back-end ratio, and by roughly how much?

17. A nonrefundable tax credit is worth nothing beyond:

  • (a) the borrower's gross income
  • (b) the borrower's actual federal income tax liability for the year
  • (c) the borrower's itemized deductions
  • (d) the loan amount

18. Your borrower completes homebuyer education on day 22. The assistance was reserved on day 4. The program requires the certificate to predate the reservation. What is the outcome, and what is the cure?

19. Which of the following most commonly kills an assistance file?

  • (a) the appraisal
  • (b) the borrower's credit score
  • (c) a sequencing error, such as an education certificate dated after the reservation
  • (d) the debt-to-income ratio

20. Down payment assistance funded, directly or indirectly, by the seller is not an acceptable source of the FHA minimum required investment. What federal statute closed this practice, and in what year?

21. Harlow Street's ratios are 41.48% front and 51.00% back against a manual benchmark commonly stated as 31/43. On what basis is the file approvable?

22. A grandmother's home appraises at \$300,000. She agrees to give up \$30,000 of value and the buyer has \$0 for a down payment. Which structure produces a financeable loan, and what is the LTV in each case?

  • Structure A: contract at \$270,000, no gift of equity
  • Structure B: contract at \$300,000 with a \$30,000 gift of equity

23. Loan-to-value is computed on the lesser of the purchase price or the appraised value. State in one sentence why that rule is the reason a gift of equity must be structured as a credit rather than as a discount.

24. Name the three documents that must agree on the amount of a gift of equity.

25. Your first-time buyer is calling twice a week. The chapter argues this is a measurement rather than a personality trait. What is it measuring, and what is the fix?

Answer key — open only after you have worked all 25 **1. (c)** — no ownership interest in a *principal residence* during the three-year period ending on the date of purchase. (a) and (b) are the near-universal misconception; (d) confuses the buyer with the financing. **2. (d)** — none of them is defined by first-time buyer status. FHA 203(b) has no first-time requirement and never has; VA turns on qualifying service; USDA turns on area and household income. FHA is *popular* with first-time buyers, which is where the confusion comes from. **3.** No — 26 months is inside the three-year window, so under the common definition they are not a first-time homebuyer. The follow-up that could change it: whether they fall into an exception category commonly written into the definition (a single parent or displaced homemaker who owned only with a spouse, for example), or whether the specific program uses a different look-back or measures from a different date. Verify with the program. **4. (b)** — it does not change. No monthly payment means no ratio effect. The lien is still real and still counts in CLTV. **5.** Housing expense \$1,721.57 + \$106.07 = \$1,827.64 → \$1,827.64 ÷ \$4,150.00 = **44.04%** front. Back-end (\$1,827.64 + \$395.00) ÷ \$4,150.00 = \$2,222.64 ÷ \$4,150.00 = **53.56%**. **6.** Because a subordinate lien payment secured by the subject property is part of the total mortgage payment for FHA qualifying purposes — it is housing expense, not an unrelated consumer debt. So it lands in the numerator of both ratios. The move is \$106.07 ÷ \$4,150.00 = 2.56 percentage points on each. **7.** (\$207,475.00 + \$10,000.00) ÷ \$215,000 = \$217,475.00 ÷ \$215,000 = **101.15%**. The **base** loan goes in the numerator, not the total loan — FHA measures program LTV and CLTV on the base loan amount, before the financed upfront premium. Using the total loan would give 102.84% and would be the wrong figure to quote against a program CLTV cap. **8. (b)** — identical at application (no payment, no ratio effect, same lien in the CLTV) and different at exit (the forgivable one disappears on a schedule; the deferred one is due in full whenever the borrower sells, refinances, or pays off, forever). **9. (d)** — a grant. No note, no lien, no repayment, though the granting entity may still impose conditions such as an occupancy period enforced by a separate agreement. **10.** A state or locally chartered entity created to expand access to affordable housing finance. It designs programs and delivers them through a network of **approved participating lenders**; it generally does not take applications from consumers. A loan officer whose employer is not on the approved list cannot offer the program, and approval is an institutional process — a master agreement, delivery contract, and training — that cannot be completed on demand for one file. The right response is to know in advance whether your employer participates, and to refer rather than lose the borrower if it does not. **11. (b)** — HUD, adjusted for household size and revised annually. Look it up for the borrower's county each time; never quote from memory. **12.** The risk is that the program counts household income while the underwriter counts only qualifying income, so the borrower can qualify for the mortgage and blow the program limit — \$3,900 + \$2,100 = \$6,000 per month, \$72,000 per year, against a limit that was checked at \$46,800. Get the program's income definition **in writing** from the administrator before telling the borrower anything about eligibility. **13. (c)** — a federal income tax credit based on a stated percentage of the mortgage interest paid. It is not a loan, not a lien, and not down payment assistance. **14.** \$13,124.05 × 0.25 = \$3,281.01, capped at **\$2,000.00** for the year, which is **\$166.67 per month** (\$2,000.00 ÷ 12). The remaining \$11,124.05 of interest stays available as an itemized deduction if the borrower itemizes. **15. False.** The interest claimed as a credit is not also deducted — the itemized deduction is reduced by the amount taken as a credit. One bite at the interest, not two. Refer the borrower to a tax professional. **16.** Treating it as a **payment reduction** produces the lower back-end: \$1,554.90 + \$395.00 = \$1,949.90 ÷ \$4,150.00 = **46.99%**, against **49.03%** when it is added to income (\$2,116.57 ÷ \$4,316.67). About two full percentage points, from an accounting convention. Which treatment is permitted is program- and investor-specific — confirm before relying on it. **17. (b)** — the borrower's actual federal income tax liability for the year. A borrower at a modest income may have a liability smaller than the full credit. **18.** The agency's compliance review rejects the file, the assistance is lost, and there is no cure — a certificate cannot be backdated, and the reservation usually cannot be cancelled and re-made because the funding round has closed. The prevention is the only remedy: on any assistance file, the education certificate is the **first** task assigned, before the reservation and before the appraisal. **19. (c)** — a sequencing error. Assistance files die on process order far more often than on underwriting. **20.** The **Housing and Economic Recovery Act of 2008**. The practice ran through nonprofit conduits that accepted a "donation" from the seller and passed a gift to the buyer, with the price adjusted to cover it; the IRS challenged the conduits' tax-exempt status and government reviews found materially higher default rates on the resulting loans. **21.** Only on an **Approve/Eligible** recommendation from the TOTAL Scorecard, supported by documented compensating factors. Under the 31/43 manual benchmark the file would not be approvable — the chapter's arithmetic puts the manual-benchmark purchase price at roughly \$148,000 rather than \$215,000. (Chapter 16 owns the Scorecard and the manual framework.) **22.** **Structure B.** In A, the loan is \$270,000 against the *lesser* of price or value — the \$270,000 price — for an LTV of **100.00%**, which is not financeable on FHA or conventional. In B, the loan is \$270,000 against a \$300,000 price and value, for an LTV of **90.00%**. Same house, same family, same \$0 out of pocket, same \$270,000 note. **23.** Because a discount lowers the price, and the price becomes the denominator — so the "instant equity" does nothing for LTV; a credit at a contract price supported by the appraisal keeps the denominator at value and lets the gift function as a down payment. **24.** The executed **purchase contract**, the signed **gift letter**, and the **settlement statement**. All three must show the same figure; a disagreement is a redraw, not a correction. **25.** It measures the gap between your update cadence and their anxiety cadence — they are calling because they ran out of information and started imagining. The fix is structural, not emotional: a scheduled weekly update at a fixed day and time, sent even when nothing happened; the next three things named in order with dates; warnings issued before the events they warn about; and a specific task for the borrower to hold. Patience alone is a treadmill.