CMA Mortgage Underwriting & Risk Analysis 3 — Questions and Answers
Question 1: When evaluating layered risk in mortgage underwriting, which combination of factors represents the HIGHEST risk profile?
- High LTV with excellent credit and low DTI
- Low LTV with high credit score and moderate DTI
- High LTV with low credit score and high DTI (Correct answer)
- Moderate LTV with average credit and average DTI
Correct answer: High LTV with low credit score and high DTI
Layered risk occurs when multiple risk factors compound together; a high LTV paired with a low credit score and high DTI creates the most elevated risk profile.
Question 2: Under Fannie Mae guidelines, what is the maximum allowable seller concession for a primary residence purchase with an LTV between 75.01% and 90%?
- 2%
- 3% (Correct answer)
- 6%
- 9%
Correct answer: 3%
Fannie Mae limits seller concessions to 3% of the lesser of the sales price or appraised value when LTV is between 75.01% and 90% on a primary residence.
Question 3: A borrower receives rental income from a property they have owned for two years. How does the underwriter typically calculate qualifying rental income?
- 100% of gross rents collected
- 75% of gross rents to account for vacancy and maintenance (Correct answer)
- 50% of gross rents as a conservative estimate
- Net rental income after all expenses including depreciation
Correct answer: 75% of gross rents to account for vacancy and maintenance
Most conventional guidelines use 75% of gross rental income to account for vacancies, management fees, and maintenance when calculating qualifying income.
Question 4: What is the primary purpose of mortgage insurance on a conventional loan with LTV above 80%?
- Protects the borrower in case of job loss
- Compensates the lender if the borrower defaults and the sale proceeds are insufficient (Correct answer)
- Covers the property for physical damage and hazard losses
- Guarantees the loan will be purchased by Fannie Mae or Freddie Mac
Correct answer: Compensates the lender if the borrower defaults and the sale proceeds are insufficient
Private mortgage insurance (PMI) protects the lender, not the borrower, against losses when a borrower defaults on a loan with less than 20% equity.
Question 5: An underwriter discovers a $15,000 deposit in a borrower's bank account 45 days prior to closing that is not explained. What is the appropriate underwriting action?
- Ignore it since it is older than 30 days
- Request a Letter of Explanation and supporting documentation for the source of funds (Correct answer)
- Require the borrower to return the funds before closing
- Reduce the qualifying assets by $15,000 and proceed
Correct answer: Request a Letter of Explanation and supporting documentation for the source of funds
Large unexplained deposits must be sourced and documented to ensure funds are not borrowed, as undisclosed liabilities could affect the borrower's DTI and qualification.
Question 6: What does the term 'seasoning' refer to in mortgage underwriting?
- The process of reviewing seasonal income fluctuations
- The length of time an asset, property, or loan has been held or established (Correct answer)
- Adjusting credit scores for recent payment history improvements
- Testing the stability of the local real estate market
Correct answer: The length of time an asset, property, or loan has been held or established
Seasoning refers to the amount of time an asset, down payment fund, property ownership, or previous loan has been in place, which affects eligibility under various guidelines.
Question 7: Which of the following best describes a 'streamline refinance' in the context of FHA underwriting?
- A refinance requiring full income and asset documentation with a new appraisal
- A simplified refinance for existing FHA borrowers with reduced documentation and no new appraisal required (Correct answer)
- A refinance that removes the mortgage insurance premium from an FHA loan
- A cash-out refinance that allows borrowers to access home equity quickly
Correct answer: A simplified refinance for existing FHA borrowers with reduced documentation and no new appraisal required
FHA streamline refinances allow existing FHA borrowers to refinance with reduced documentation, no new appraisal, and simplified underwriting if the refinance provides a net tangible benefit.
CMA Mortgage Underwriting & Risk Analysis 3
When evaluating layered risk in mortgage underwriting, which combination of factors represents the HIGHEST risk profile?