Credit Risk Management Practice Exam

What key variable is associated with mortgage credit applications?

1. FICO scores

2. Market value estimates

3. Employee income levels

4. Investment portfolios

The correct answer is: FICO scores

FICO scores are a crucial variable associated with mortgage credit applications because they serve as a standardized measure of a borrower's creditworthiness. FICO scores are derived from an individual's credit history and help lenders assess the risk of lending to that borrower. A higher FICO score typically indicates better credit management and a lower likelihood of default, which makes it a fundamental factor in the decision-making process for mortgage approvals. While market value estimates, employee income levels, and investment portfolios are also relevant in the broader context of credit risk assessment, they do not specifically function as primary indicators when evaluating mortgage applications. Market value estimates relate more to the collateral and its worth, employee income levels provide context regarding repayment capacity, and investment portfolios may illustrate financial stability but are not direct measures of creditworthiness in the mortgage application process. Thus, FICO scores stand out as the key variable most directly tied to the evaluation of mortgage credit applications.