CMA Credit Analysis and Borrower Qualification 2 — Questions and Answers
Question 1: What is the 'middle score' rule used by mortgage lenders when evaluating a borrower's creditworthiness?
- The average of scores from all three credit bureaus
- The middle of the three credit bureau scores, ranked from lowest to highest (Correct answer)
- The highest score from any single credit bureau
- The lowest score from any single credit bureau
Correct 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.
Question 2: What is considered a 'self-employed' borrower for mortgage purposes, and what documentation is typically required?
- Any borrower who works from home; requires one year of tax returns
- A borrower with 25% or more ownership in a business; typically requires two years of personal and business tax returns (Correct answer)
- A borrower with a 1099 for any amount; requires three months of bank statements
- Any borrower not receiving a W-2; requires one month of pay stubs
Correct 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.
Question 3: What is 'alternative documentation' income verification in mortgage lending?
- Using tax returns instead of W-2s
- Non-traditional income verification methods such as bank statements, asset depletion, or 1099s for non-QM loans (Correct answer)
- Using a verbal employment verification instead of written
- IRS transcripts as a substitute for pay stubs
Correct 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.
Question 4: What is 'asset depletion' income in mortgage qualification?
- Income derived from selling assets to make mortgage payments
- A calculation where a borrower's liquid assets are divided over a loan term to create qualifying income (Correct answer)
- The decline in asset value used to reduce tax liability
- Withdrawals from retirement accounts counted as regular income
Correct 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.
Question 5: What is a 'Letter of Explanation' (LOE or LOX) and when is it required in mortgage underwriting?
- A lender's explanation of loan terms to the borrower
- A written statement from the borrower explaining credit anomalies, employment gaps, or large deposits (Correct answer)
- An appraiser's justification of the property value
- A title company's explanation of closing cost variances
Correct 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.
Question 6: Under Fannie Mae guidelines, how many months of reserves are typically required for a second home purchase?
- No reserves required
- 2 months PITI (Correct answer)
- 6 months PITI
- 12 months PITI
Correct 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.
CMA Credit Analysis and Borrower Qualification 2
What is the 'middle score' rule used by mortgage lenders when evaluating a borrower's creditworthiness?