CRU Documentation & Legal Requirements 3 — Questions and Answers
Question 1: When underwriting a self-employed borrower, how many years of signed federal tax returns (IRS Form 1040) are typically required per GSE guidelines?
- One year
- Two years (Correct answer)
- Three years
- Only current year is needed
Correct answer: Two years
Fannie Mae and Freddie Mac guidelines typically require two years of signed federal income tax returns for self-employed borrowers to establish a stable income history.
Question 2: Which IRS transcript type is used by lenders to verify a borrower's reported W-2 income and tax filing status directly with the IRS?
- IRS Form 4506-C (IVES Request) (Correct answer)
- IRS Form 8821 (Tax Information Authorization)
- IRS Form 1099-MISC
- IRS Form W-9 (Request for Taxpayer ID)
Correct answer: IRS Form 4506-C (IVES Request)
IRS Form 4506-C (IVES) is the standard form lenders use to request tax transcripts directly from the IRS to verify income documentation.
Question 3: A borrower uses funds from a retirement account (401k) for a down payment. Which condition must be met for these funds to be considered acceptable sourced assets?
- The account must be fully vested and the withdrawal must be documented (Correct answer)
- Only employer contributions are eligible for down payment
- The borrower must be at least 59½ years old
- Retirement accounts are never acceptable for down payment funds
Correct answer: The account must be fully vested and the withdrawal must be documented
Retirement account funds are acceptable when the account is accessible to the borrower and the withdrawal (with any penalties) is documented with account statements.
Question 4: Under GSE guidelines, what is the maximum acceptable age for income documentation (pay stubs, W-2s) at the time of closing?
- 30 days for pay stubs; 2 years for W-2s (Correct answer)
- 60 days for pay stubs; 1 year for W-2s
- 90 days for pay stubs; 2 years for W-2s
- 45 days for pay stubs; 3 years for W-2s
Correct answer: 30 days for pay stubs; 2 years for W-2s
GSE guidelines require pay stubs to be dated within 30 days of application and W-2s for the most recent two tax years.
Question 5: A gift letter for down payment funds must include which of the following elements to be acceptable per agency guidelines?
- The donor's tax ID number and notarized signature
- Dollar amount, donor relationship, property address, and statement that no repayment is required (Correct answer)
- Only the donor's bank statement showing the transfer
- A signed promissory note from the donor
Correct answer: Dollar amount, donor relationship, property address, and statement that no repayment is required
A valid gift letter must state the dollar amount, the donor's relationship to the borrower, the subject property address, and explicitly confirm repayment is not required.
Question 6: When a borrower has rental income from a property they own, which document is the primary source for qualifying that income per Fannie Mae guidelines?
- A current signed lease agreement only
- Schedule E from the most recent two years' federal tax returns (Correct answer)
- Verbal confirmation from the tenant
- Bank statements showing rental deposits for 12 months
Correct answer: Schedule E from the most recent two years' federal tax returns
Fannie Mae primarily uses Schedule E of federal tax returns over two years to calculate net rental income, applying a vacancy/maintenance factor.
Question 7: Which document is used to verify a borrower's employment and income when the employer cannot be reached by phone and the borrower is a W-2 employee?
- A notarized letter from the borrower
- IRS Form 1099 from prior year
- Written Verification of Employment (VOE) signed by the employer (Correct answer)
- Three months of bank statements
Correct answer: Written Verification of Employment (VOE) signed by the employer
A Written Verification of Employment (VOE) completed and signed by the employer is the standard alternative when verbal verification is unavailable.
CRU Documentation & Legal Requirements 3
When underwriting a self-employed borrower, how many years of signed federal tax returns (IRS Form 1040) are typically required per GSE guidelines?