Mortgage Mortgage Underwriting Principles Questions and Answers 3

Question 1

What is the purpose of the three-day right of rescission under TILA for refinance transactions?

Accepted Answer

To allow borrowers time to cancel the transaction after closing

Answer

The Truth in Lending Act grants borrowers three business days to rescind a refinance on their primary residence after closing.

Question 2

An underwriter discovers that a borrower's credit report shows a recent collection account. What is the most appropriate next step?

Accepted Answer

Request a letter of explanation from the borrower

Answer

Underwriters typically request a written explanation for derogatory credit items before making a final decision.

Question 3

Which loan feature is prohibited under the Ability-to-Repay (ATR) rule for Qualified Mortgages?

Accepted Answer

Interest-only payment periods

Answer

Qualified Mortgages cannot include interest-only periods, negative amortization, or balloon payments under ATR rules.

Question 4

When calculating income for underwriting, how is overtime pay typically treated?

Accepted Answer

It is averaged over two years and included if likely to continue

Answer

Overtime income is generally averaged over 24 months and included only if the underwriter determines it is likely to continue.

Question 5

What is the significance of the loan-to-value (LTV) ratio in underwriting decisions?

Accepted Answer

It measures the loan amount relative to the property value and affects risk assessment

Answer

The LTV ratio compares the mortgage amount to the appraised property value, with higher ratios indicating greater lender risk.

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