CHCP Mortgage Processing & Underwriting 4 — Questions and Answers
Question 1: What is the 'seasoning' requirement for funds used in a down payment on most conventional loans?
- Funds must be in the account for 30 days
- Funds must be in the account for 60 days (Correct answer)
- Funds must be in the account for 90 days
- No seasoning is required if documented
Correct answer: Funds must be in the account for 60 days
Conventional guidelines generally require down payment funds to be seasoned — present in the borrower's account — for at least 60 days, avoiding the need to source deposits older than 60 days.
Question 2: In mortgage underwriting, what does the term 'compensating factor' refer to?
- Income from a second job
- A positive element that offsets a risk factor or allows an exception to a guideline (Correct answer)
- Lender-paid mortgage insurance
- An appraisal adjustment
Correct answer: A positive element that offsets a risk factor or allows an exception to a guideline
A compensating factor is a strength in a loan file (such as high reserves, low LTV, or stable employment) that can offset a weakness and support guideline exceptions.
Question 3: Which ratio measures only housing costs (PITI) against gross monthly income?
- Back-end ratio
- Front-end ratio (Correct answer)
- Combined LTV ratio
- Expense ratio
Correct answer: Front-end ratio
The front-end ratio (or housing ratio) compares only PITI (principal, interest, taxes, insurance) to gross monthly income.
Question 4: Under FHA guidelines, what is the maximum front-end DTI ratio typically allowed?
- 28%
- 31% (Correct answer)
- 36%
- 43%
Correct answer: 31%
FHA guidelines set a standard front-end ratio limit of 31%, though exceptions may be granted with compensating factors.
Question 5: A property appraisal comes in $15,000 below the purchase price. How does this typically affect underwriting?
- The loan amount is automatically increased to cover the gap
- The loan is based on the appraised value, requiring the borrower to cover the shortfall (Correct answer)
- The lender must accept the contract price
- The deal must be cancelled immediately
Correct answer: The loan is based on the appraised value, requiring the borrower to cover the shortfall
Lenders base the loan on the lower of the purchase price or appraised value, so a low appraisal means the borrower must make up the difference with additional cash.
Question 6: What is a 'streamline refinance' in the context of FHA loans?
- A refinance that eliminates mortgage insurance
- A simplified refinance requiring reduced documentation when the borrower is current on an existing FHA loan (Correct answer)
- A cash-out refinance with no appraisal
- A refinance for borrowers with perfect credit
Correct answer: A simplified refinance requiring reduced documentation when the borrower is current on an existing FHA loan
FHA Streamline Refinance allows existing FHA borrowers in good standing to refinance with minimal documentation and often without a new appraisal.
Question 7: Which item is NOT typically included in the PITI payment used for underwriting?
- Property taxes
- Homeowner's insurance
- HOA dues
- Home warranty fees (Correct answer)
Correct answer: Home warranty fees
PITI stands for Principal, Interest, Taxes, and Insurance — home warranty fees are not included, though HOA dues are added separately for qualifying purposes.
CHCP Mortgage Processing & Underwriting 4
What is the 'seasoning' requirement for funds used in a down payment on most conventional loans?