New York Real Estate Salesperson ExaminationFinancingEasy
A buyer has submitted a loan application for a new home. As part of the underwriting process, the lender requests a copy of the buyer's most recent tax returns and employment verification. What specific aspect of the buyer's financial health is the lender primarily trying to evaluate with these documents?
- ACapacity to repay the loan.
- BProperty appraisal and condition.
- CLegal title and encumbrances.
- DCredit history and score.
Show answer & explanationAnswer & explanation
Correct answer: A. Capacity to repay the loan.
Tax returns and employment verification are used to confirm a borrower's income, stability of employment, and overall financial capacity to make regular mortgage payments, which is a key component of the 'Capacity' in the '3 Cs of Underwriting'.
Why the other options are wrong
- B. Property appraisal and condition are evaluated through an appraisal report, not borrower financial documents.
- C. Legal title and encumbrances are checked through a title search, not borrower financial documents.
- D. Credit history and score are evaluated through credit reports, not tax returns or employment verification.
Capacity to Repay
A borrower's ability to make mortgage payments, determined by their income, employment stability, and existing debts.
- Assessed through income verification (pay stubs, tax returns).
- Employment history and stability are crucial.
- Debt-to-income (DTI) ratio is a key metric.
Memory trick: Capacity is about your cash flow: income in, debts out.