Apply Loan Qualification Ratios - Nationwide Multistate Licensing System NMLS

1. What is the formula for loan-to-value ratio (LTV) using loan amount and property value?

   $\text{LTV}=\frac{\text{Loan Amount}}{\text{Property Value}}\times100\%$. This formula calculates the percentage of the property's value that is financed by the loan, assessing borrower equity and lender risk.

2. Identify the qualifying issue: income $5{,}000$, debts $2{,}600$. Does back-end DTI exceed $50\%$?

   Yes, $\frac{2{,}600}{5{,}000}=52\%$. Back-end DTI exceeding the threshold indicates potential overextension, as calculated by debts divided by income.

3. Find the maximum total monthly debt allowed: income $7{,}000$ and back-end DTI cap $43\%$.

   $3{,}010$. Maximum debt is found by multiplying income by the DTI cap, setting the upper limit for allowable obligations.

4. What is the formula for combined loan-to-value (CLTV) when multiple liens exist?

   $\text{CLTV}=\frac{\sum \text{All Loan Balances}}{\text{Property Value}}\times100\%$. CLTV accounts for all outstanding liens against the property to evaluate total leverage and overall risk exposure for the lender.

5. Which income figure is used in standard DTI calculations: gross or net monthly income?

   Gross monthly income. Gross monthly income is used as it represents pre-tax earnings, providing a standardized basis for DTI ratios in underwriting.

6. Identify the correct credit report factor: What does a higher DTI generally indicate to a lender?

   Higher risk due to reduced repayment capacity. A higher DTI suggests the borrower has less disposable income after debts, increasing the likelihood of payment difficulties.

7. Find the maximum housing payment allowed: income $8{,}000$ and front-end DTI cap $28\%$.

   $2{,}240$. Maximum housing payment is calculated by applying the front-end DTI limit to gross income for affordability assessment.

8. What credit score concept measures the likelihood of repayment based on past credit behavior?

   Credit score (risk-based scoring). Credit scores use statistical models to predict default risk by analyzing patterns in credit history and behavior.

9. Calculate front-end DTI: housing $1{,}800$ and gross income $6{,}000$. What is front-end DTI?

   $30\%$. Front-end DTI divides housing payment by gross income to evaluate the proportion dedicated to housing expenses.

10. Calculate down payment: purchase price $400{,}000$ with LTV $95\%$. What is down payment?

    $20{,}000$. Down payment is the portion of the price not covered by the loan, derived from the complement of the LTV ratio.

11. Which statement is correct: Does a higher credit score generally improve pricing and approval odds?

    Yes, higher scores generally improve pricing and approval odds. Elevated credit scores indicate lower risk, leading lenders to offer better interest rates and higher approval likelihood.

12. What is the formula for housing expense ratio (front-end DTI) used in qualification?

    $\text{Front-end DTI}=\frac{\text{Total Housing Payment}}{\text{Gross Monthly Income}}\times100\%$. Front-end DTI assesses affordability by comparing housing expenses to gross income, ensuring payments are manageable within income constraints.

13. Calculate CLTV: first $200{,}000$ plus second $50{,}000$ on value $300{,}000$. What is CLTV?

    $83.33\%$. CLTV sums all loan balances divided by property value, providing a comprehensive measure of total encumbrance.

14. Calculate back-end DTI: total debts $2{,}700$ and gross income $6{,}000$. What is back-end DTI?

    $45\%$. Back-end DTI divides total debts by gross income to assess overall debt burden relative to earnings.

15. What is the general rule for treating a debt that will be paid off before or at closing in DTI?

    Exclude it if documented to be paid off before or at closing. Debts cleared before closing are omitted from DTI to reflect the borrower's post-closing financial position accurately.

16. Which debts are typically included in back-end DTI calculations for underwriting?

    Housing + installment, revolving, alimony/child support, other obligations. These recurring debts are aggregated in back-end DTI to assess the borrower's total financial commitments against income.

17. Identify the stronger credit profile: Borrower A score $760$ vs Borrower B score $660$. Who is stronger?

    Borrower A ($760$). Higher credit scores reflect better credit management and lower risk, resulting in a stronger profile for loan qualification.

18. What is the general rule for including alimony or child support in DTI qualification?

    Include the monthly obligation as debt if it will continue. Ongoing alimony or child support payments are treated as liabilities in DTI to ensure they do not impair loan repayment ability.

19. Calculate loan amount: value $350{,}000$ with LTV $80\%$. What is the loan amount?

    $280{,}000$. Loan amount is determined by multiplying the property value by the LTV percentage to establish financing limits.

20. Identify the correct credit report factor: What does a lower LTV generally indicate to a lender?

    Lower risk due to more borrower equity. A lower LTV signifies greater borrower investment in the property, reducing the lender's potential loss in case of default.

21. What is the formula for total debt ratio (back-end DTI) used in qualification?

    $\text{Back-end DTI}=\frac{\text{Total Monthly Debt}}{\text{Gross Monthly Income}}\times100\%$. Back-end DTI evaluates overall financial burden by including all debts relative to gross income, indicating repayment capacity.

22. What is the formula for calculating a down payment amount from price and LTV?

    $\text{Down Payment}=\text{Price}\times\left(1-\frac{\text{LTV}}{100\%}\right)$. This calculation determines the borrower's required equity contribution based on the allowed LTV percentage of the purchase price.

23. Calculate LTV: loan $240{,}000$ on value $300{,}000$. What is LTV?

    $80\%$. LTV is computed by dividing the loan amount by the property value and converting to a percentage to gauge equity.

24. What components are included in the monthly housing payment for DTI (PITI)?

    Principal, interest, taxes, and insurance. PITI encompasses all primary housing costs to provide a comprehensive view of monthly obligations for DTI calculations.

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