Underwriting Principles Flashcards

A borrower has a back-end DTI of 48% and is applying for a conventional loan. What is the most likely outcome?

Answer: Denial unless compensating factors exist

Conventional loans typically require a back-end DTI of 43-45%; 48% requires strong compensating factors or DU/LP approval.

Which asset type is generally NOT acceptable as reserves for mortgage qualification purposes?

Answer: Borrowed funds from a personal loan

Borrowed funds cannot be counted as reserves because they create an additional liability rather than representing owned assets.

An underwriter is reviewing a self-employed borrower's income. Which document is the primary source for calculating qualifying income?

Answer: Two years of federal tax returns (1040s)

Two years of federal tax returns are the standard requirement for self-employed borrowers to establish stable, ongoing income.

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

Answer: To request tax transcripts directly from the IRS

Form 4506-C authorizes lenders to obtain tax transcripts from the IRS to verify the income reported on a borrower's application.

When calculating qualifying income for a salaried borrower with regular overtime, what documentation is typically required?

Answer: Two-year history and evidence the overtime is likely to continue

Overtime income requires a two-year history and a reasonable expectation of continuance to be included in qualifying income.

A property appraises for $290,000 but the purchase price is $310,000. The lender uses which value to calculate LTV?

Answer: The appraised value of $290,000

Lenders use the lesser of the purchase price or appraised value when calculating LTV for a purchase transaction.

Which credit event has the longest standard waiting period before a borrower can qualify for a conventional conforming loan?

Answer: Foreclosure

A foreclosure on a conventional loan typically carries a 7-year waiting period, the longest of common derogatory events.