New York Real Estate Salesperson ExaminationFinancingMedium
A lender is evaluating a loan application and is concerned about the borrower's ability to maintain the property and make mortgage payments if unexpected expenses arise. Which aspect of the underwriting process directly addresses the borrower's capacity to handle such financial shocks?
- ALoan-to-Value (LTV) Ratio
- BCash Reserves
- CProperty Appraisal
- DCredit Score
Show answer & explanationAnswer & explanation
Correct answer: B. Cash Reserves
Cash reserves are funds a borrower has available after closing, which indicates their ability to cover unexpected expenses or maintain payments during a financial hardship.
Why the other options are wrong
- A. The LTV ratio assesses the loan amount against the property's value, primarily indicating the lender's risk exposure, not the borrower's personal financial cushion.
- C. A property appraisal determines the market value of the collateral, not the borrower's personal financial capacity to manage unexpected expenses.
- D. A credit score reflects a borrower's payment history and debt management, but not necessarily their available liquid funds for emergencies.
Cash Reserves
Funds a borrower has remaining after closing costs are paid, indicating their financial stability and ability to cover future expenses.
- Often expressed as months of mortgage payments
- Provides a buffer against financial hardship
- Considered during underwriting for borrower capacity
Memory trick: Reserves are like your financial 'rainy day fund' for the loan.