Credit Analysis and Borrower Qualification Flashcards
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Read the first 6 Credit Analysis and Borrower Qualification flashcards as text
What is the 'middle score' rule used by mortgage lenders when evaluating a borrower's creditworthiness?
Answer: The middle of the three credit bureau scores, ranked from lowest to highest
Lenders use the middle score (ranked numerically from lowest to highest among three bureau scores) as the qualifying credit score for mortgage decisions.
What is considered a 'self-employed' borrower for mortgage purposes, and what documentation is typically required?
Answer: A borrower with 25% or more ownership in a business; typically requires two years of personal and business tax returns
Borrowers with 25% or greater ownership in a business are classified as self-employed and generally must provide two years of personal and business tax returns plus a P&L statement.
What is 'alternative documentation' income verification in mortgage lending?
Answer: Non-traditional income verification methods such as bank statements, asset depletion, or 1099s for non-QM loans
Alternative documentation programs, common in non-QM lending, allow income to be verified through bank statements, asset depletion calculations, or 1099 history rather than traditional tax returns.
What is 'asset depletion' income in mortgage qualification?
Answer: A calculation where a borrower's liquid assets are divided over a loan term to create qualifying income
Asset depletion (or asset dissipation) divides eligible liquid assets by the remaining loan term in months to create a monthly qualifying income figure.
What is a 'Letter of Explanation' (LOE or LOX) and when is it required in mortgage underwriting?
Answer: A written statement from the borrower explaining credit anomalies, employment gaps, or large deposits
An LOE is a borrower-written explanation addressing underwriter questions about credit inquiries, late payments, employment gaps, or large unverified bank deposits.
Under Fannie Mae guidelines, how many months of reserves are typically required for a second home purchase?
Answer: 2 months PITI
Fannie Mae typically requires a minimum of 2 months' PITI reserves for second home purchases, though lender overlays may require more.