CRMP - Certified Reverse Mortgage Professional Financial Assessment and Underwriting Questions and Answers — Questions and Answers
Question 1: An underwriter is reviewing a HECM application where the borrower's residual income is $50 below the required threshold for their region. The borrower has a satisfactory credit history but no significant liquid assets beyond the HECM proceeds. Based on Financial Assessment guidelines, what is the underwriter's most likely course of action?
- Approve the loan as is, since the shortfall is minimal and credit is satisfactory.
- Require a fully-funded Life Expectancy Set-Aside (LESA) for property charges. (Correct answer)
- Deny the loan due to the failure to meet the residual income threshold.
- Approve the loan with a partially-funded LESA.
Correct answer: Require a fully-funded Life Expectancy Set-Aside (LESA) for property charges.
When a borrower demonstrates a willingness to pay (satisfactory credit) but lacks the capacity (fails the residual income test), a fully-funded LESA is typically required to mitigate the risk of future default on property charges. A partially-funded LESA is generally used when the borrower has satisfactory credit but an income shortfall, but a fully-funded LESA is the more comprehensive solution when capacity is a significant concern. The shortfall, no matter how small, cannot be ignored.
Question 2: During the Financial Assessment, an underwriter notes a borrower had a 90-day delinquency on a medical bill two years ago but has a perfect payment history on all other obligations. The borrower provides a letter explaining the delinquency was due to a dispute with an insurance company that has since been resolved. Which of the following best describes how an underwriter may view this situation?
- The single delinquency results in an automatic loan denial regardless of the reason.
- A Life Expectancy Set-Aside (LESA) is now mandatory due to the major delinquency.
- The borrower's explanation and otherwise clean credit history can be considered a satisfactory extenuating circumstance. (Correct answer)
- The underwriter can disregard the delinquency entirely as it is not housing-related.
Correct answer: The borrower's explanation and otherwise clean credit history can be considered a satisfactory extenuating circumstance.
FHA guidelines allow underwriters to consider and document extenuating circumstances for adverse credit events. An isolated, documented, and resolved issue, especially when compared to an otherwise strong payment history, can be used to justify approving the loan without further requirements like a mandatory LESA.
Question 3: When calculating a HECM applicant's surplus or shortfall for the residual income analysis, which of the following debts or expenses must be included in their monthly obligations?
- The estimated monthly property tax and homeowners insurance (PITI) charges. (Correct answer)
- A revolving credit card balance that the borrower intends to pay off with HECM proceeds.
- A personal loan with only three monthly payments remaining.
- A monthly gym membership fee paid via automatic debit.
Correct answer: The estimated monthly property tax and homeowners insurance (PITI) charges.
The residual income analysis is designed to determine if the borrower can meet their living expenses after paying all significant debts and housing-related costs. Estimated property taxes and insurance are a core component of these monthly obligations. The analysis is done before considering the payoff of debts with loan proceeds, and debts with a very short remaining term are often excluded from the calculation.
Question 4: The HECM Financial Assessment evaluates two key principles regarding the borrower's ability to meet their financial obligations: willingness and capacity. A borrower's history of making timely mortgage and installment loan payments over the past seven years is a primary indicator of which principle?
- Collateral
- Liquidity
- Willingness (Correct answer)
- Capacity
Correct answer: Willingness
'Willingness' refers to the borrower's intent and commitment to paying obligations, which is demonstrated by their past payment behavior as reflected on a credit report. 'Capacity' refers to their financial ability to make payments, which is assessed through an analysis of their income and assets.
Question 5: An underwriter is assessing the income of a 68-year-old HECM applicant who has been a self-employed consultant for the past 15 years. To verify the stability and likely continuance of this income, which set of documents is most critical for the underwriter to review?
- The two most recent years of signed federal income tax returns, including all schedules, and a year-to-date profit and loss statement. (Correct answer)
- A signed profit and loss statement for the current year-to-date and the previous full year.
- The most recent three months of bank statements showing business deposits.
- A letter from the applicant's largest client confirming their ongoing business relationship.
Correct answer: The two most recent years of signed federal income tax returns, including all schedules, and a year-to-date profit and loss statement.
For self-employed borrowers, underwriters must establish a stable and effective income. The standard requirement is to analyze the two most recent years of complete personal and business (if applicable) tax returns to calculate an average income. A current year-to-date Profit & Loss (P&L) statement is also required to ensure income has remained stable or is increasing.
Question 6: A HECM applicant meets the credit history requirements but has insufficient monthly income to cover their ongoing property charges and meet residual income thresholds. Which of the following would be an acceptable method for the applicant to satisfy the Financial Assessment requirements without requiring a Life Expectancy Set-Aside (LESA)?
- Pledging future HECM draws from their available line of credit.
- Documenting significant verifiable liquid assets, such as from a 401(k) or savings account, that can be used to offset the shortfall. (Correct answer)
- Providing a gift letter from a family member promising to pay the charges annually.
- Showing a history of large, irregular cash withdrawals from a brokerage account.
Correct answer: Documenting significant verifiable liquid assets, such as from a 401(k) or savings account, that can be used to offset the shortfall.
HUD guidelines allow for a process called 'Asset Dissipation,' where a borrower's documented liquid assets can be converted into a qualifying monthly income stream to offset a shortfall in residual income. The underwriter verifies the assets are sufficient to cover property charges. Future HECM draws, gift letters from non-parties to the loan, and irregular withdrawals are not considered stable income sources for this purpose.
CRMP - Certified Reverse Mortgage Professional Financial Assessment and Underwriting Questions and Answers
An underwriter is reviewing a HECM application where the borrower's residual income is $50 below the required threshold for their region.
The borrower has a satisfactory credit history but no significant liquid assets beyond the HECM proceeds.
Based on Financial Assessment guidelines, what is the underwriter's most likely course of action?