Underwriting and Qualification Flashcards

A borrower has a front-end DTI of 31% and a back-end DTI of 45%. Which conventional loan guideline does this violate?

Answer: Back-end limit of 43%

Standard conventional loans typically cap the back-end (total) DTI at 43%, so 45% exceeds this threshold.

Which income type requires a two-year self-employment history to be considered stable by most underwriters?

Answer: Self-employment income

Underwriters typically require a two-year self-employment history documented by tax returns to verify stability and consistency.

What is 'compensating factors' in mortgage underwriting?

Answer: Positive attributes that offset a borrower's weak credit profile

Compensating factors are strengths such as large reserves or low DTI that can offset weaknesses like a borderline credit score.

A property appraisal comes in $15,000 below the purchase price. What typically happens to the loan amount?

Answer: The loan is based on the appraised value, not the purchase price

Lenders base the loan on the lower of the appraised value or purchase price, so the borrower must cover the gap or renegotiate.

Which document is used to verify a borrower's employment and income directly with their employer?

Answer: Verification of Employment (VOE)

A Verification of Employment (VOE) form is sent directly to the employer to confirm job status, tenure, and income.

What does 'layered risk' mean in the context of mortgage underwriting?

Answer: Several risk factors present simultaneously on a single loan file

Layered risk refers to multiple risk factors — such as low credit score, high LTV, and high DTI — appearing together, increasing the chance of default.

A borrower wants to use gift funds for a down payment on a conventional loan. What is typically required?

Answer: A signed gift letter and documentation showing the funds were transferred

Conventional guidelines require a gift letter stating no repayment is expected, plus bank statements or wire records confirming the transfer.

Which credit score model is most commonly used by mortgage lenders in the U.S.?

Answer: FICO Mortgage Score (Versions 2, 4, 5)

Mortgage lenders typically use FICO Score versions 2, 4, and 5 from the three major bureaus, which are mortgage-specific scoring models.

What is the minimum credit score generally required for an FHA loan with a 3.5% down payment?

Answer: 580

FHA requires a minimum 580 credit score for the 3.5% down payment option; scores between 500–579 require 10% down.

In underwriting, what does 'seasoning' of funds refer to?

Answer: How long funds have been in the borrower's account

Seasoning refers to how long assets have been in the borrower's account — typically 60 days — proving they are not borrowed funds.

Which of the following is NOT counted in a borrower's monthly debt obligations for DTI calculation?

Answer: Car insurance premiums

Insurance premiums are not installment or revolving debts, so they are excluded from the back-end DTI calculation.

What triggers an automated underwriting system (AUS) to require manual underwriting?

Answer: A 'Refer' or 'Caution' finding from the AUS

When AUS returns a 'Refer' (Fannie Mae) or 'Caution' (Freddie Mac) finding, the file must be manually reviewed by an underwriter.

A borrower earns $6,000/month and pays $1,800/month toward all debts including the proposed mortgage. What is their back-end DTI?

Answer: 30%

$1,800 ÷ $6,000 = 0.30, or 30% back-end DTI.

What is the purpose of the 4506-C form in the mortgage underwriting process?

Answer: To authorize the IRS to release tax transcripts to the lender

Form 4506-C allows the lender to obtain tax return transcripts directly from the IRS to verify the borrower's reported income.

A borrower has two mortgage late payments in the past 12 months. How does this typically affect FHA loan eligibility?

Answer: It may result in a downgrade to manual underwriting or denial

Recent mortgage lates are a significant red flag; FHA guidelines may require manual underwriting and increase scrutiny or result in denial.

What is the standard waiting period after a Chapter 7 bankruptcy before a borrower can qualify for a conventional loan?

Answer: 4 years

Fannie Mae and Freddie Mac require a 4-year waiting period after Chapter 7 bankruptcy discharge before conventional loan eligibility.

Which of the following best describes 'reserves' in mortgage underwriting?

Answer: Assets remaining after closing that could cover future mortgage payments

Reserves are liquid assets remaining after the down payment and closing costs that demonstrate the borrower's ability to weather financial disruptions.

What is a 'non-arm's length transaction' and why do underwriters scrutinize it?

Answer: A sale between related parties or those with a personal connection that could affect the price

Non-arm's length transactions (e.g., family sales) may have inflated or deflated prices, so underwriters apply extra scrutiny to ensure fair market value.

For a VA loan, what replaces the traditional PMI requirement?

Answer: A VA Funding Fee paid upfront or financed

VA loans charge a one-time VA Funding Fee (which can be financed) instead of ongoing monthly mortgage insurance.

What does a 'conditional approval' mean in the underwriting process?

Answer: The loan is approved pending receipt of specific additional documents or clarifications

A conditional approval means the underwriter approves the loan in principle but requires certain conditions — like updated pay stubs or a letter of explanation — before final clearance.