Loan Officer Underwriting and Qualification 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?

Accepted Answer

Average the two years' income and divide by 12.

Answer

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?

Accepted Answer

40%

Answer

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)?

Accepted Answer

It analyzes a loan application against investor guidelines and provides a risk assessment and recommendation.

Answer

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?

Accepted Answer

Capital

Answer

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?

Accepted Answer

The middle score (720)

Answer

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.

Loan Officer Exam Practice Test

Loan Officer Exam Practice Test

Loan Officer Underwriting and Qualification Questions and Answers