Finance
What is 'underwriting' in mortgage lending and what factors do Illinois lenders evaluate?
AThe process of writing up the loan documents for signing
BThe process of evaluating a borrower's creditworthiness and the property's value to determine if the loan meets lending standards; evaluates the '3 Cs': credit, capacity (income/DTI), and collateral (property value/LTV)✓ Correct
CThe government oversight process for all Illinois mortgage loans
DThe process of insuring the mortgage through FHA or PMI
Explanation
Mortgage underwriting is the process by which a lender evaluates whether to approve a loan. The three C's framework focuses on: Credit (credit score, credit history, derogatory items); Capacity (ability to repay—income, employment stability, DTI ratio); and Collateral (the property's value and condition relative to the loan amount/LTV).
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Key Terms to Know
Loan-to-Value Ratio (LTV)
The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Private Mortgage Insurance (PMI)Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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