Credit Analysis & Risk Assessment Flashcards
9 cards from real CRU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 9 Credit Analysis & Risk Assessment flashcards as text
What is the primary purpose of credit analysis in mortgage underwriting?
Answer: To evaluate repayment capability
Credit analysis is a fundamental step in mortgage underwriting, focusing on the borrower's financial history and current obligations. Its primary purpose is to assess the borrower's likelihood of consistently making timely mortgage payments. Underwriters examine credit scores, payment history, and existing debts to determine the borrower's ability and willingness to repay the loan.
Which credit score model is most commonly used in mortgage lending?
Answer: FICO Score
The FICO Score is the most widely used credit scoring model in mortgage lending. Lenders rely on FICO scores to assess a borrower's creditworthiness and determine the risk associated with extending a loan. These scores are derived from credit report data and significantly influence interest rates and loan approval.
Which of the following is considered a red flag in credit risk assessment?
Answer: Multiple recent credit inquiries
Multiple recent credit inquiries, especially for new lines of credit, can be a red flag in credit risk assessment. It may suggest that the borrower is seeking to take on significant new debt, potentially indicating financial instability or an increased risk of default. While one or two inquiries are usually fine, a sudden surge can raise concerns for underwriters.
What is considered a good debt-to-income (DTI) ratio for mortgage approval?
Answer: Below 36%
A debt-to-income (DTI) ratio below 36% is generally considered good for mortgage approval, though some lenders may approve higher ratios depending on other factors. This ratio indicates that a borrower's total monthly debt payments, including the proposed mortgage, are less than 36% of their gross monthly income. A lower DTI suggests a borrower has more disposable income to manage their mortgage payments, reducing the risk for lenders.
Which document provides detailed information on a borrower’s credit history?
Answer: Credit report
The credit report is a comprehensive document that provides detailed information on a borrower’s credit history. It includes payment history, outstanding debts, types of credit accounts, and public records like bankruptcies. Mortgage underwriters use this report to evaluate a borrower's creditworthiness and financial responsibility.
What does a high credit utilization ratio suggest?
Answer: Potential financial risk
A high credit utilization ratio indicates that a borrower is using a large percentage of their available credit. This suggests a reliance on credit and can signal potential financial strain or difficulty managing debt. Lenders view high utilization as a potential financial risk, as it may indicate a borrower is overextended and less capable of taking on new debt like a mortgage.
Why is payment history critical in credit scoring?
Answer: It shows repayment behavior
Payment history is the most crucial factor in credit scoring because it directly demonstrates a borrower's past behavior in meeting financial obligations. A consistent record of on-time payments indicates reliability and a lower risk of default. Conversely, late or missed payments signal potential repayment issues, significantly lowering a credit score.
Which of the following can negatively impact a credit score?
Answer: Late payments
Late payments are one of the most significant negative factors affecting a credit score. They indicate a failure to meet financial obligations as agreed, signaling increased risk to potential lenders. Even a single late payment can cause a noticeable drop in a credit score, especially if it's recent or on a major account.
What is the role of a credit analyst?
Answer: Assess borrower credit risk
A credit analyst's primary role is to assess the creditworthiness and financial risk of a borrower. They meticulously review credit reports, financial statements, and other relevant data to determine the borrower's ability and willingness to repay a loan. This assessment is crucial for making informed lending decisions and mitigating potential losses.