Attached is a sample of loan-level information (Exhibit 2). How would you expect an applicant’s debt-to-income ratio to relate to other loan characteristics, such as credit score? (Narrative)
In analyzing an applicant’s debt-to-income ratio, I would take into account how much money the applicant makes monthly/yearly in order to determine the likelihood that they are able to pay off the loan in its entirety. For example, an applicant whose income greatly surpasses their debt to the point where they will have a sizeable amount of income left over after each loan payment has a much greater chance of having a good credit score as opposed to an applicant that will seemingly not have a reasonable amount of money left over for living expenses.
(Narrative)
The rule requires that the loans be underwritten based on the highest monthly payment that will apply in the first five years of the loan. Most importantly, the rule provides that the consumer’s total monthly debts—including the mortgage payment and related housing expenses such as taxes and insurance—cannot add up to more than 43 percent of the consumer’s monthly gross income.
What does Exhibit 3 tell you about the interaction between loan type and mortgage underwriting? (Narrative)
Exhibit 3 displays that the amount of risk involved with the mortgage varies depending on the specific type of mortgage. Mortgage underwriting itself is used to determine if the risk of offering a mortgage loan to a particular borrower is acceptable. Exhibit 3 shows that loans not backed by the FHA, VA, or FSA/RHS are shown to be riskier in the process of underwriting because they are not insured.
What other factors not included in the model might be useful in predicting whether a loan application is approved or not? Why would these specific factors be relevant? (Narrative)
Other factors that are useful in predicting whether a loan application is approved or not are the down payment, job history, and debt load. Down payment might be useful because it shows an applicant’s ability to save money/be responsible. In addition to showing responsibility, the bigger the down payment, the greater the likelihood the loan will be approved because it will