CRU Income & Employment Verification 2 — Questions and Answers
Question 1: What IRS form does an underwriter typically use to verify a borrower's reported income directly with the IRS?
- Form 1099
- Form 4506-C (Correct answer)
- Form W-9
- Form 8821
Correct answer: Form 4506-C
IRS Form 4506-C (Request for Copy of Tax Return Transcript) allows the lender to obtain tax transcripts directly from the IRS to verify borrower-reported income.
Question 2: A borrower receives rental income from an investment property. When is rental income from a subject property eligible to offset the mortgage payment?
- Immediately, as long as a lease agreement exists
- Only after two years of documented rental history on tax returns
- When 75% of the gross rents exceed the PITIA of the subject property (Correct answer)
- When the borrower has managed rental properties for at least one year
Correct answer: When 75% of the gross rents exceed the PITIA of the subject property
Agency guidelines allow 75% of the gross rental income to offset the PITIA if it exceeds that payment, reducing or eliminating the net rental obligation.
Question 3: Which of the following income types is NOT typically stable enough to include in qualifying income under standard agency guidelines?
- Part-time employment income with a two-year history
- Social Security retirement benefits
- A one-time insurance settlement payment (Correct answer)
- Long-term disability benefits
Correct answer: A one-time insurance settlement payment
One-time or non-recurring income such as an insurance settlement is not considered stable and cannot be used for qualifying purposes.
Question 4: For a borrower with a two-year history of overtime income, the underwriter should:
- Exclude overtime because it is not guaranteed
- Average the overtime over two years and add it to base income (Correct answer)
- Use only the current year's overtime to be conservative
- Apply a 25% reduction to overtime before including it
Correct answer: Average the overtime over two years and add it to base income
Overtime income with a documented two-year history may be averaged and added to base qualifying income per agency guidelines.
Question 5: A verbal verification of employment (VVOE) is typically required:
- At application, before processing begins
- At underwriting, to confirm current employment status
- Within 10 business days before loan closing (Correct answer)
- After the appraisal is ordered
Correct answer: Within 10 business days before loan closing
A VVOE is generally required within 10 business days before closing to confirm the borrower is still employed and the income source is valid.
Question 6: When analyzing self-employed borrower income using Schedule C (sole proprietor), the underwriter adds back which of the following to net profit?
- Health insurance premiums paid by the employer
- Depreciation and depletion deductions (Correct answer)
- Cost of goods sold (COGS)
- Estimated tax payments
Correct answer: Depreciation and depletion deductions
Non-cash deductions such as depreciation and depletion are added back to net profit when calculating self-employed qualifying income.
Question 7: A borrower receives child support income. What documentation is required to use it for qualification?
- A signed affidavit from the paying party confirming future payments
- Court order or divorce decree plus 12 months of receipt history (Correct answer)
- One bank statement showing a child support deposit
- Child support income can never be used for mortgage qualification
Correct answer: Court order or divorce decree plus 12 months of receipt history
To use child support income, underwriters require a court order establishing the amount and at least 12 months of documented receipt, typically verified through bank statements.
CRU Income & Employment Verification 2
What IRS form does an underwriter typically use to verify a borrower's reported income directly with the IRS?