CMA - Certified Mortgage Advisor Underwriting and Risk Assessment Questions and Answers 1 — Questions and Answers
Question 1: An underwriter is evaluating a loan application using the 'Three C's' of underwriting. Which of the following best represents the 'Capacity' component?
- The borrower's consistent payment history on previous debts.
- The appraised value of the property being used as security for the loan.
- The borrower's debt-to-income ratio and employment stability. (Correct answer)
- The amount of cash the borrower has for a down payment and closing costs.
Correct answer: The borrower's debt-to-income ratio and employment stability.
Capacity refers to the borrower's ability to repay the loan. Underwriters primarily assess this by analyzing the borrower's income, employment history, and their debt-to-income (DTI) ratio to ensure they can handle the mortgage payments alongside their other financial obligations.
Question 2: A prospective homebuyer is purchasing a property for $400,000 and the property appraises for $410,000. They are seeking a loan for $320,000. What is the Loan-to-Value (LTV) ratio for this transaction?
- 78%
- 82%
- 80% (Correct answer)
- 95%
Correct answer: 80%
The Loan-to-Value (LTV) ratio is calculated by dividing the loan amount by the *lesser* of the property's appraised value or the sales price. In this case, the sales price ($400,000) is lower than the appraised value ($410,000). The calculation is $320,000 / $400,000 = 0.80, or 80%.
Question 3: Which of the following is a primary function of an Automated Underwriting System (AUS) like Fannie Mae's Desktop Underwriter (DU) or Freddie Mac's Loan Product Advisor (LP)?
- To issue a final, legally binding loan approval without human review.
- To physically inspect the collateral property and confirm its condition.
- To provide an initial recommendation based on a loan application's alignment with investor guidelines. (Correct answer)
- To negotiate the interest rate and loan terms directly with the borrower.
Correct answer: To provide an initial recommendation based on a loan application's alignment with investor guidelines.
An Automated Underwriting System (AUS) is software that analyzes a loan application and provides an initial recommendation (e.g., Approve/Eligible, Refer/Caution) by comparing the borrower's data against the guidelines of investors like Fannie Mae or Freddie Mac. It does not issue a final approval, as a human underwriter must still verify the information and clear any conditions.
Question 4: A mortgage advisor is reviewing a client's tri-merge credit report. The scores are 720 (Equifax), 745 (Experian), and 715 (TransUnion). For conventional loan underwriting purposes, which score will typically be used?
- The highest score (745)
- The lowest score (715)
- The average of the three scores (726.67)
- The middle score (720) (Correct answer)
Correct answer: The middle score (720)
When underwriting a mortgage, lenders pull a credit report from all three major bureaus (Equifax, Experian, and TransUnion). The representative score used for a single borrower is the middle of the three scores, not the highest, lowest, or average.
Question 5: A borrower has a gross monthly income of $8,000. Their proposed monthly housing expense (PITI) is $2,400. They also have a $500 monthly car payment and a $300 monthly student loan payment. What is the borrower's back-end debt-to-income (DTI) ratio?
- 30%
- 36%
- 40% (Correct answer)
- 45%
Correct answer: 40%
The back-end DTI ratio includes all recurring monthly debts, including the proposed housing payment. The calculation is: ($2,400 PITI + $500 car payment + $300 student loan) / $8,000 gross monthly income. This equals $3,200 / $8,000 = 0.40, or 40%.
Question 6: During a manual underwriting review, an underwriter notes several 'compensating factors.' What is the purpose of identifying these factors?
- To justify a higher interest rate for a low-risk borrower.
- To offset weaknesses in a loan file and justify an approval for a loan that is a borderline case. (Correct answer)
- To automatically override a 'Refer' finding from an Automated Underwriting System (AUS).
- To increase the loan amount beyond what the borrower originally requested.
Correct answer: To offset weaknesses in a loan file and justify an approval for a loan that is a borderline case.
Compensating factors are positive elements in a loan file that can mitigate risk. Underwriters look for these strengths, such as significant cash reserves, a low loan-to-value ratio, or a history of saving, to justify approving a loan that may have some weaknesses, like a slightly higher-than-ideal debt-to-income ratio.
CMA - Certified Mortgage Advisor Underwriting and Risk Assessment Questions and Answers 1
An underwriter is evaluating a loan application using the 'Three C's' of underwriting.
Which of the following best represents the 'Capacity' component?