Mortgage Underwriting & Risk Analysis Flashcards

A borrower's tax returns show significant unreimbursed employee expenses on Form 2106. How does an underwriter typically handle this?

Answer: The 2106 expenses are subtracted from the borrower's gross W-2 income

Underwriters deduct unreimbursed employee business expenses reported on Form 2106 from gross W-2 income because these represent real out-of-pocket costs that reduce effective income.

What is the maximum loan-to-value ratio for a conventional cash-out refinance on a primary residence under standard Fannie Mae guidelines?

Answer: 80%

Fannie Mae limits cash-out refinances on primary residences to a maximum LTV of 80%, requiring at least 20% equity to remain after the transaction.

An underwriter is reviewing an appraisal where the appraiser used only distressed sales (REOs and short sales) as comparables. What risk does this present?

Answer: The value may be understated because distressed sales typically sell below market value, potentially causing unnecessary deal failure

Using only distressed sales as comparables can artificially depress the appraised value because REOs and short sales typically sell at a discount, potentially causing a creditworthy deal to collapse unnecessarily.

Under HMDA reporting requirements, which borrower characteristic must NOT be used as a basis for underwriting decisions?

Answer: Race or national origin

HMDA and the Fair Housing Act strictly prohibit using protected characteristics such as race, color, national origin, sex, or religion as factors in underwriting or pricing decisions.

A borrower has student loan debt currently in deferment. Under Fannie Mae guidelines, how must the underwriter treat this liability?

Answer: Calculate 1% of the outstanding balance as the monthly payment or use the fully amortizing payment, whichever is greater

Fannie Mae requires underwriters to use either 1% of the outstanding student loan balance or the fully amortizing payment when a loan is deferred, ensuring the liability is accounted for in DTI.

What is the primary distinction between a 'hard inquiry' and a 'soft inquiry' on a credit report in the context of mortgage underwriting?

Answer: Hard inquiries result from credit applications and can temporarily lower a credit score; soft inquiries do not affect scores

Hard inquiries are triggered by formal credit applications and can reduce a credit score by a few points; soft inquiries from pre-screenings or personal checks have no score impact.

When performing an income analysis for a self-employed borrower using Schedule C, the underwriter calculates net profit of $60,000 with $8,000 in depreciation and $5,000 in business use of home. What is the qualifying income?

Answer: $73,000

For Schedule C borrowers, non-cash deductions like depreciation and business use of home are added back to net profit; $60,000 + $8,000 + $5,000 = $73,000 qualifying income.