CMP - Certified Mortgage Processor Analyzing Borrower Financials Questions and Answers — Questions and Answers
Question 1: A self-employed borrower provides two years of tax returns. Their Schedule C net profit was $75,000 in the most recent year and $65,000 in the prior year. What is the qualifying monthly income a mortgage processor should calculate for this borrower?
- $5,417
- $6,250
- $5,833 (Correct answer)
- $7,000
Correct answer: $5,833
To calculate the qualifying monthly income for a self-employed borrower, lenders typically average the net profit from the two most recent years of tax returns. The calculation is: ($75,000 + $65,000) / 24 months = $140,000 / 24 = $5,833.33.
Question 2: When analyzing a borrower's bank statements, which of the following would be the BIGGEST red flag for an underwriter?
- A large, documented gift from a family member
- Consistent monthly deposits from a verified employer
- Several non-sufficient funds (NSF) fees within the last 60 days (Correct answer)
- A one-time large withdrawal for a documented earnest money deposit
Correct answer: Several non-sufficient funds (NSF) fees within the last 60 days
Multiple non-sufficient funds (NSF) fees, or overdrafts, indicate to a lender that the borrower may have difficulty managing their finances and could be a high-risk borrower. While large deposits or withdrawals require documentation, NSF fees directly question the borrower's ability to handle their existing financial obligations.
Question 3: A borrower is purchasing a duplex as an owner-occupied property. They will live in one unit and rent out the other. The appraiser determines the fair market rent for the second unit is $1,600 per month. How much of this rental income can typically be used for qualifying purposes?
- $1,600
- $800
- $1,200 (Correct answer)
- $0, as the property is not yet leased
Correct answer: $1,200
Lenders typically use 75% of the gross estimated rental income to account for potential vacancies and maintenance costs. Therefore, the qualifying income would be $1,600 * 0.75 = $1,200.
Question 4: A borrower has a gross monthly income of $7,000. Their monthly liabilities include a $500 car payment, a $250 student loan payment, and a $150 minimum credit card payment. The proposed new housing payment (PITI) is $2,100. What is the borrower's back-end debt-to-income (DTI) ratio?
- 30%
- 43% (Correct answer)
- 38%
- 50%
Correct answer: 43%
The back-end DTI ratio includes all recurring monthly debts plus the new housing payment, divided by the gross monthly income. The calculation is: ($500 car + $250 student loan + $150 credit card + $2,100 PITI) / $7,000 = $3,000 / $7,000 = 0.4285, or approximately 43%.
Question 5: Which of the following is generally considered an acceptable source for a borrower's down payment funds?
- A cash advance from a credit card
- An unsecured loan from a friend
- Undocumented cash stored at home
- A documented and verified gift from an immediate family member (Correct answer)
Correct answer: A documented and verified gift from an immediate family member
Lenders require that down payment funds be sourced and seasoned to prevent fraud and undisclosed debt. A documented gift from a family member, accompanied by a proper gift letter, is an acceptable source. Cash advances, unsecured loans, and unseasoned cash are not acceptable as their origins cannot be verified and may represent new, undisclosed liabilities.
Question 6: A mortgage processor is reviewing an application where the borrower is a 30% owner of an S-Corporation. To accurately determine qualifying income, in addition to personal tax returns, which business tax form is essential to analyze?
- Form 1099-MISC
- Form W-2
- Schedule C (Form 1040)
- Form 1120-S and K-1 (Correct answer)
Correct answer: Form 1120-S and K-1
For borrowers with 25% or more ownership in a business, lenders must analyze the business's financial health to ensure income stability. For an S-Corporation, the processor needs the business tax return (Form 1120-S) and the Schedule K-1, which reports each shareholder's share of income, deductions, and credits.
CMP - Certified Mortgage Processor Analyzing Borrower Financials Questions and Answers
A self-employed borrower provides two years of tax returns.
Their Schedule C net profit was $75,000 in the most recent year and $65,000 in the prior year.
What is the qualifying monthly income a mortgage processor should calculate for this borrower?