Mortgage Process 5 — Questions and Answers
Question 1: What is a 'subordination agreement' and when is it needed in the mortgage process?
- An agreement between the buyer and seller to reduce the purchase price
- A document where a junior lienholder agrees to remain in a lower lien priority position behind a new first mortgage (Correct answer)
- A lender's commitment to offer the best available rate
- A title company's guarantee of clear title
Correct answer: A document where a junior lienholder agrees to remain in a lower lien priority position behind a new first mortgage
When refinancing, existing second mortgages or HELOCs must sign a subordination agreement to maintain their junior position behind the new first mortgage.
Question 2: What does 'mortgage commitment letter' signify in the home buying process?
- The seller's commitment to complete agreed-upon repairs
- A formal written offer of a mortgage loan that is contingent on specified conditions (Correct answer)
- The buyer's promise to proceed with the purchase
- The appraiser's certification of the property value
Correct answer: A formal written offer of a mortgage loan that is contingent on specified conditions
A mortgage commitment letter is the lender's formal conditional approval indicating they will fund the loan if stated conditions are met by the expiration date.
Question 3: What is 'income averaging' in mortgage underwriting, and when is it applied?
- Splitting income between two co-borrowers to meet qualification standards
- Using a multi-year average of variable or self-employment income to determine qualifying income (Correct answer)
- Averaging the interest rate over multiple loan products
- Calculating the mean of multiple appraisal values
Correct answer: Using a multi-year average of variable or self-employment income to determine qualifying income
For self-employed borrowers or those with variable income, underwriters typically average two years of tax returns to arrive at a stable qualifying income figure.
Question 4: What is the purpose of a 'verification of deposit' (VOD) in the loan process?
- To confirm the seller's bank account is valid for wire transfer
- To verify the borrower's bank account balances and ownership for down payment and reserve verification (Correct answer)
- To confirm property tax deposits held in escrow
- To authenticate the earnest money deposit received by the title company
Correct answer: To verify the borrower's bank account balances and ownership for down payment and reserve verification
A VOD is sent by the lender to the borrower's bank to confirm account ownership, current balance, and average balance, supporting down payment and reserve requirements.
Question 5: What is 'recasting' a mortgage and how does it differ from refinancing?
- Recasting means switching from a fixed rate to an ARM; refinancing means the opposite
- Recasting re-amortizes the existing loan after a lump-sum principal payment without changing the rate or terms; refinancing creates a new loan (Correct answer)
- Recasting requires a new credit check; refinancing does not
- Recasting only applies to FHA loans; refinancing applies to conventional loans
Correct answer: Recasting re-amortizes the existing loan after a lump-sum principal payment without changing the rate or terms; refinancing creates a new loan
Mortgage recasting recalculates monthly payments based on the reduced principal after a large payment, using the existing rate and remaining term, with minimal fees and no new credit inquiry.
Question 6: What is a 'post-closing audit' and why do lenders conduct them?
- A review of the borrower's payment history after 12 months
- A quality control review of the loan file after closing to ensure compliance, accuracy, and investor salability (Correct answer)
- An IRS audit triggered by the mortgage interest deduction
- A title company review of recorded documents for errors
Correct answer: A quality control review of the loan file after closing to ensure compliance, accuracy, and investor salability
Post-closing audits verify that the loan file is complete, accurate, and compliant with guidelines so the loan can be sold on the secondary market without repurchase risk.
Question 7: What is a 'Notice of Right to Cancel' and when must lenders provide it?
- A notice given to sellers when a buyer withdraws their offer
- A federally required disclosure given to borrowers in certain refinances, informing them of the three-day right to rescind (Correct answer)
- A document the lender uses to cancel a loan after closing if fraud is detected
- A title company notice about outstanding liens found during search
Correct answer: A federally required disclosure given to borrowers in certain refinances, informing them of the three-day right to rescind
Under the Truth in Lending Act, lenders must provide two copies of the Notice of Right to Cancel to each borrower at closing of a refinance on their primary residence.
Mortgage Process 5
What is a 'subordination agreement' and when is it needed in the mortgage process?