CHCP Mortgage Processing & Underwriting 3 — Questions and Answers
Question 1: The three Cs of underwriting used to evaluate a mortgage application are capacity, capital, and what?
- Collateral (Correct answer)
- Credit history
- Current employment
- Cash reserves
Correct answer: Collateral
The three Cs of mortgage underwriting are Capacity (ability to repay), Capital (assets), and Collateral (the property securing the loan).
Question 2: What is the primary purpose of Private Mortgage Insurance (PMI) on a conventional loan?
- To protect the borrower from foreclosure
- To protect the lender against default when LTV exceeds 80% (Correct answer)
- To insure the title against defects
- To guarantee the appraisal value
Correct answer: To protect the lender against default when LTV exceeds 80%
PMI protects the lender — not the borrower — against losses if the borrower defaults when the loan-to-value ratio is above 80%.
Question 3: A borrower has a FICO score of 619. Which loan program would most likely still allow them to qualify with a 3.5% down payment?
- Conventional conforming loan
- FHA loan (Correct answer)
- VA loan
- USDA loan
Correct answer: FHA loan
FHA allows credit scores as low as 580 for the 3.5% down payment option, while conventional loans typically require at least 620.
Question 4: What is 'layered risk' in underwriting?
- Multiple lien holders on one property
- Multiple risk factors present simultaneously that increase default probability (Correct answer)
- A second mortgage behind a first lien
- Risk distributed across multiple investors
Correct answer: Multiple risk factors present simultaneously that increase default probability
Layered risk occurs when a loan file has several risk factors at once (e.g., low credit score + high DTI + minimal down payment), compounding the likelihood of default.
Question 5: Under the Ability-to-Repay (ATR) rule, lenders must verify a borrower's ability to repay using which standard?
- The teaser rate on an ARM
- The fully indexed, fully amortized payment (Correct answer)
- The minimum monthly payment on the Note
- The initial fixed-rate payment only
Correct answer: The fully indexed, fully amortized payment
The ATR rule requires lenders to qualify borrowers based on the fully indexed, fully amortizing payment, not just the initial or teaser rate.
Question 6: Which document evidences the borrower's promise to repay a mortgage loan?
- Deed of Trust
- Promissory Note (Correct answer)
- HUD-1 Settlement Statement
- Closing Disclosure
Correct answer: Promissory Note
The Promissory Note is the borrower's written, legally binding promise to repay the loan under specified terms.
Question 7: A loan officer discovers a borrower's deposit account shows a large unexplained deposit equal to 20% of the purchase price. How should the underwriter treat this?
- Accept it without question if it arrived 60+ days ago
- Require a letter of explanation and documentation sourcing the funds (Correct answer)
- Automatically deny the loan
- Count it as gift funds automatically
Correct answer: Require a letter of explanation and documentation sourcing the funds
Large undisclosed deposits must be sourced and explained to ensure the funds are not an undisclosed loan that would affect the borrower's debt obligations.
CHCP Mortgage Processing & Underwriting 3
The three Cs of underwriting used to evaluate a mortgage application are capacity, capital, and what?