CMA Underwriting and Risk Assessment 3 — Questions and Answers
Question 1: What is the significance of the 'three Cs' in traditional mortgage underwriting?
- Credit, Collateral, and Capacity (ability to repay) (Correct answer)
- Cash, Collateral, and Contracts
- Credit, Compliance, and Closing costs
- Capital, Conventional, and Conforming
Correct answer: Credit, Collateral, and Capacity (ability to repay)
The three Cs—Credit history, Collateral value, and Capacity (income/DTI)—form the core framework underwriters use to evaluate mortgage risk.
Question 2: When underwriting a rental property, how do most conventional lenders treat projected rental income for a borrower who is a first-time landlord?
- 100% of market rent is added to qualifying income
- 75% of the appraiser's market rent estimate can offset the housing payment, but full income qualification still applies (Correct answer)
- Rental income is never counted for first-time landlords
- Only income from existing tenants under lease is counted at 100%
Correct answer: 75% of the appraiser's market rent estimate can offset the housing payment, but full income qualification still applies
Fannie Mae typically allows 75% of the market rent from an appraisal to be used to offset the subject property's PITIA for a first-time investor.
Question 3: A borrower receives a large deposit of $15,000 into their bank account 30 days before closing. How should an underwriter handle this?
- Accept it as part of assets without question
- Require the borrower to source and document the deposit to confirm it is not an undisclosed loan (Correct answer)
- Ignore it since it is already in the account
- Subtract it from the asset total as it may be fraudulent
Correct answer: Require the borrower to source and document the deposit to confirm it is not an undisclosed loan
Large undocumented deposits must be sourced to ensure funds are not borrowed, as undisclosed liabilities would affect the borrower's actual debt load.
Question 4: In the context of risk assessment, what is a 'compensating factor'?
- A fee the borrower pays to offset a higher interest rate
- A positive element in the borrower's profile that offsets a weakness in another qualifying area (Correct answer)
- A government subsidy that reduces the lender's risk exposure
- An insurance policy that compensates the lender for losses
Correct answer: A positive element in the borrower's profile that offsets a weakness in another qualifying area
Compensating factors such as significant cash reserves or a low LTV can allow approval when one qualifying metric, like DTI, exceeds standard thresholds.
Question 5: What does a 'rate-and-term refinance' typically require compared to a cash-out refinance from an underwriting risk perspective?
- Higher minimum credit scores and lower LTV limits
- Less stringent LTV and reserve requirements because no equity is being extracted (Correct answer)
- Identical guidelines since both are refinance transactions
- More documentation because it changes the loan structure
Correct answer: Less stringent LTV and reserve requirements because no equity is being extracted
Rate-and-term refinances are considered lower risk than cash-out transactions, so they typically allow higher LTVs and have fewer reserve requirements.
Question 6: Which automated underwriting system (AUS) is primarily used by Freddie Mac?
- Desktop Underwriter (DU)
- Loan Product Advisor (LPA) (Correct answer)
- TOTAL Mortgage Scorecard
- GUS (Guaranteed Underwriting System)
Correct answer: Loan Product Advisor (LPA)
Freddie Mac uses Loan Product Advisor (LPA), while Fannie Mae uses Desktop Underwriter (DU), FHA uses TOTAL, and USDA uses GUS.
Question 7: A borrower is purchasing a home in a flood zone. What underwriting requirement is triggered?
- The lender must deny the loan
- The borrower must obtain flood insurance as a condition of the loan (Correct answer)
- The appraisal must be completed by a state-certified appraiser only
- The loan must be structured as an ARM
Correct answer: The borrower must obtain flood insurance as a condition of the loan
Federal law (Flood Disaster Protection Act) requires lenders to mandate flood insurance for properties in Special Flood Hazard Areas (SFHAs).
CMA Underwriting and Risk Assessment 3
What is the significance of the 'three Cs' in traditional mortgage underwriting?