CMPS CMPS Credit Analysis and Underwriting Standards Questions and Answers 2 — Questions and Answers
Question 1: In mortgage underwriting, what is the purpose of a 'rapid rescore'?
- To request a lower interest rate from the lender
- To dispute and update credit report errors in days rather than months to improve a borrower's score before closing (Correct answer)
- To combine two loan applications into one file
- To remove a borrower from a joint application
Correct answer: To dispute and update credit report errors in days rather than months to improve a borrower's score before closing
Rapid rescoring is a lender-initiated process that corrects credit report inaccuracies or updates paid-off balances within 3–5 business days to potentially improve the borrower's score.
Question 2: What is 'layered risk' in mortgage underwriting?
- Stacking multiple loan products on one property
- The presence of multiple risk factors simultaneously, which together make approval more difficult (Correct answer)
- Using both fixed and adjustable rate products in a portfolio
- Charging multiple fee layers on a single transaction
Correct answer: The presence of multiple risk factors simultaneously, which together make approval more difficult
Layered risk occurs when several risk factors — such as low down payment, low credit score, and high DTI — appear together, making compensating factors critical for approval.
Question 3: A borrower is self-employed. Under standard agency guidelines, how many years of self-employment income documentation are typically required?
- 6 months of bank statements
- 1 year of tax returns
- 2 years of federal tax returns (personal and business) (Correct answer)
- 3 years of audited financials
Correct answer: 2 years of federal tax returns (personal and business)
Fannie Mae and Freddie Mac generally require two years of personal and business federal tax returns to document self-employment income.
Question 4: What is a 'compensating factor' in mortgage underwriting?
- A fee charged to offset lender risk
- A positive financial strength that offsets a borrower's risk weakness to support loan approval (Correct answer)
- A rate adjustment added to the loan when DTI is high
- A second appraisal ordered to confirm value
Correct answer: A positive financial strength that offsets a borrower's risk weakness to support loan approval
Compensating factors such as large cash reserves, low LTV, or a long employment history can offset weaknesses like a high DTI and support loan approval.
Question 5: Which of the following income sources is NOT eligible to be used for qualifying income under standard conventional mortgage guidelines?
- Rental income from a two-unit primary residence
- Child support received for 3+ years remaining
- Lottery winnings received once last year (Correct answer)
- Social Security retirement income
Correct answer: Lottery winnings received once last year
Lottery or gambling winnings are considered one-time, non-recurring income and cannot be used as qualifying income under conventional guidelines.
Question 6: What is the significance of the 'ability-to-repay' (ATR) rule under the Dodd-Frank Act for mortgage underwriting?
- It caps all mortgage interest rates at 6%
- It requires lenders to make a good-faith determination that the borrower can repay the loan based on documented income and assets (Correct answer)
- It mandates a 20% minimum down payment on all loans
- It eliminates the use of adjustable-rate mortgages
Correct answer: It requires lenders to make a good-faith determination that the borrower can repay the loan based on documented income and assets
The ATR rule requires lenders to verify a borrower's financial ability to repay through documented income, assets, employment, and existing debt obligations.
CMPS CMPS Credit Analysis and Underwriting Standards Questions and Answers 2
In mortgage underwriting, what is the purpose of a 'rapid rescore'?