Loan Officer Underwriting and Qualification Questions and Answers — Questions and Answers
Question 1: An underwriter is analyzing a self-employed borrower's income for a conventional loan. The borrower's filed tax returns show a net business income of $80,000 two years ago and $100,000 for the most recent year. How will the underwriter MOST likely calculate the borrower's qualifying monthly income?
- Use the most recent year's income of $100,000 and divide by 12.
- Use the lower income of $80,000 and divide by 12.
- Average the two years' income and divide by 24.
- Average the two years' income and divide by 12. (Correct answer)
Correct answer: Average the two years' income and divide by 12.
For self-employed borrowers, lenders typically want to see a history of stable income. When income is increasing, Fannie Mae and other conventional guidelines instruct underwriters to average the net income from the most recent two years to determine a stable monthly income. In this case, ($80,000 + $100,000) / 24 months = $7,500 per month. The correct answer is to average the income over two years and then divide by 12 to get the monthly figure.
Question 2: A borrower has a gross monthly income of $6,000. Their proposed monthly housing expense (PITI) is $1,800. They also have a $400 monthly car payment and a $200 minimum monthly credit card payment. What is the borrower's back-end debt-to-income (DTI) ratio?
- 30%
- 37%
- 40% (Correct answer)
- 45%
Correct answer: 40%
The back-end DTI ratio includes all recurring monthly debt payments plus the proposed housing expense, divided by the gross monthly income. The calculation is: ($1,800 PITI + $400 car payment + $200 credit card payment) / $6,000 gross monthly income = $2,400 / $6,000 = 0.40, or 40%.
Question 3: Which of the following best describes the role of an Automated Underwriting System (AUS) like Fannie Mae's Desktop Underwriter (DU) or Freddie Mac's Loan Product Advisor (LPA)?
- It provides the final and binding approval or denial of a mortgage loan.
- It orders the property appraisal and title report automatically.
- It analyzes a loan application against investor guidelines and provides a risk assessment and recommendation. (Correct answer)
- It generates the final Closing Disclosure and loan documents for the borrower.
Correct answer: It analyzes a loan application against investor guidelines and provides a risk assessment and recommendation.
An Automated Underwriting System (AUS) is a software tool that analyzes a loan application's data, including credit, income, assets, and property details. It compares this information against the specific guidelines of an investor (like Fannie Mae or Freddie Mac) and provides a recommendation (e.g., Approve/Eligible, Refer/Caution). It does not issue a final approval; a human underwriter uses the AUS findings as a guide for their final decision.
Question 4: In the context of the 'Four C's of Underwriting,' which 'C' is most concerned with the borrower's savings, down payment funds, and reserves?
- Credit
- Capacity
- Capital (Correct answer)
- Collateral
Correct answer: Capital
The 'Four C's of Underwriting' are Credit (willingness to repay), Capacity (ability to repay), Capital (financial resources), and Collateral (the property). Capital specifically refers to the borrower's assets, including funds for the down payment and closing costs, as well as cash reserves available to cover payments in case of financial hardship.
Question 5: A loan applicant is applying for a conventional mortgage. They have credit scores of 720 from Equifax, 735 from Experian, and 710 from TransUnion. Which score will the underwriter most likely use to qualify the borrower?
- The highest score (735)
- The average of the three scores (721.67)
- The lowest score (710)
- The middle score (720) (Correct answer)
Correct answer: The middle score (720)
For mortgage qualification, lenders typically pull a credit report from all three major bureaus (Equifax, Experian, and TransUnion). The representative score used for underwriting is the middle of the three scores. If two scores are the same, that score is used.
Question 6: An underwriter is reviewing a loan file and notices several recent, large, non-payroll deposits in the applicant's bank statements. This discovery would be considered a 'red flag' primarily related to which aspect of qualification?
- Credit history
- Undisclosed debt or unacceptable source of funds (Correct answer)
- Property condition
- Employment stability
Correct answer: Undisclosed debt or unacceptable source of funds
Large, undocumented deposits are a significant red flag for underwriters. They raise questions about the source of the funds. The money could be from an unacceptable source (like a cash advance or an unapproved gift) or could be evidence of an undisclosed loan that must be included in the borrower's debt-to-income ratio. The underwriter must source these deposits to ensure they are from an eligible source.
Loan Officer Underwriting and Qualification Questions and Answers
An underwriter is analyzing a self-employed borrower's income for a conventional loan.
The borrower's filed tax returns show a net business income of $80,000 two years ago and $100,000 for the most recent year.
How will the underwriter MOST likely calculate the borrower's qualifying monthly income?