Underwriting and Risk Assessment Flashcards

What is the primary risk that mortgage underwriters assess when reviewing a borrower's credit utilization ratio?

Answer: High utilization indicates reliance on credit and can signal cash-flow stress, predicting higher default risk

High credit utilization—using a large percentage of available revolving credit—suggests the borrower may be over-extended financially, increasing default risk.

Under RESPA and related underwriting guidelines, what is an 'affiliated business arrangement' disclosure requirement?

Answer: When a settlement service provider refers business to an affiliated company, the borrower must be informed and given the option to use other providers

RESPA requires an AfBA disclosure when a referral is made to an affiliated entity, ensuring borrowers know of the relationship and their right to shop elsewhere.

A borrower's Schedule E shows rental income of $24,000 but also $8,000 in depreciation and $4,000 in mortgage interest already included in their DTI. What is the net rental income added to qualifying income?

Answer: $28,000 (adding back depreciation)

Depreciation is a non-cash expense added back to rental income; $24,000 + $8,000 depreciation = $32,000 gross, minus adjustments already counted = $28,000 approximate qualifying rental income.

Which of the following scenarios would most likely trigger an underwriter to request a 'desk review' or 'field review' of an appraisal?

Answer: The appraised value is significantly higher than the contract price or there are inconsistencies in the comparables used

When an appraisal raises red flags—such as an inflated value relative to the contract price or questionable comparable selection—lenders order a second review to validate accuracy.

What is the difference between a 'hard inquiry' and a 'soft inquiry' on a credit report, and why does it matter in underwriting?

Answer: Hard inquiries result from credit applications and slightly lower scores; soft inquiries (like pre-approvals) do not affect scores

Hard inquiries from credit applications can modestly reduce scores and are visible to lenders, while soft inquiries from pre-approvals or monitoring do not impact the score.

A borrower applies for a VA loan and has full entitlement. What is the maximum loan amount they can obtain without a down payment?

Answer: There is no set limit—borrowers with full entitlement can finance above conforming limits with no down payment

The Blue Water Navy Act (2020) eliminated VA loan limits for borrowers with full entitlement, allowing 100% financing at any loan amount subject to lender overlays.

In underwriting, what does 'seasoning' of a bankruptcy or foreclosure refer to?

Answer: The mandatory waiting period that must elapse after a bankruptcy or foreclosure before a borrower can qualify for a new mortgage

Seasoning periods (e.g., 4 years post-Chapter 7 for conventional, 2 years for FHA) ensure borrowers have had sufficient time to rebuild credit before taking on a new mortgage.