Mortgage Underwriting and Financial Calculations — Questions and Answers

Question 1: A borrower earns $6,500/month gross income and has a proposed PITI of $1,750 plus monthly debts of $400. What is their back-end DTI ratio?

26.9%
32.3% (Correct answer)
33.1%
33.8%

Correct answer: 32.3%

Back-end DTI = (PITI + monthly debts) / gross income = ($1,750 + $400) / $6,500 = 33.1%.

Question 2: Which factor does NOT directly affect a borrower's Loan-to-Value (LTV) ratio?

Purchase price of the property
Down payment amount
Borrower's credit score (Correct answer)
Appraised value of the property

Correct answer: Borrower's credit score

LTV is calculated as loan amount divided by property value; credit score does not enter that formula.

Question 3: What does a Combined Loan-to-Value (CLTV) ratio measure?

The ratio of only the first mortgage to the appraised value
The ratio of all liens on a property to its appraised value (Correct answer)
The ratio of the down payment to the purchase price
The ratio of monthly debt payments to gross income

Correct answer: The ratio of all liens on a property to its appraised value

CLTV combines all mortgage liens (first, second, HELOCs) and divides them by the appraised value.

Question 4: A property appraises for $320,000 and the borrower puts 10% down. What is the LTV?

80%
85%
90% (Correct answer)
95%

Correct answer: 90%

Down payment = $32,000; loan = $288,000; LTV = $288,000 / $320,000 = 90%.

Question 5: What is the maximum allowable DTI for a Qualified Mortgage (QM) under the general definition?

36%
41%
43% (Correct answer)
50%

Correct answer: 43%

The general QM definition caps the debt-to-income ratio at 43% to ensure the borrower's ability to repay.

Question 6: When calculating qualifying income for a self-employed borrower, underwriters typically average how many years of tax returns?

One year
Two years (Correct answer)
Three years
Five years

Correct answer: Two years

Agency guidelines generally require a two-year average of self-employment income using Schedule C or business returns.

Question 7: A loan with a 75% LTV on a conventional purchase would most likely:

Require FHA mortgage insurance
Require private mortgage insurance (PMI)
Not require PMI (Correct answer)
Require a VA funding fee

Correct answer: Not require PMI

PMI is not required when LTV is 80% or below on conventional loans, so 75% LTV avoids PMI.

Question 8: Which type of income is typically NOT usable for qualifying purposes without a two-year history?

Base salary from W-2 employment
Overtime income received for less than 12 months (Correct answer)
Social Security retirement benefits
Pension income

Correct answer: Overtime income received for less than 12 months

Overtime income generally requires a 12–24 month history to be considered stable and predictable for qualifying.

Question 9: What is the purpose of the residual income analysis in VA loan underwriting?

To calculate the funding fee amount
To verify the veteran's assets after closing
To ensure the borrower has sufficient income after major expenses to meet living costs (Correct answer)
To determine the maximum loan amount

Correct answer: To ensure the borrower has sufficient income after major expenses to meet living costs

VA residual income analysis measures net income remaining after housing and major expenses to ensure the veteran can maintain daily living.

Question 10: A lender is using the FICO score for mortgage underwriting. Which bureau score is typically used when three bureaus are pulled?

The highest of the three scores
The lowest of the three scores
The middle of the three scores (Correct answer)
The average of the three scores

Correct answer: The middle of the three scores

Agency guidelines require use of the middle score when all three bureau scores are available.

Question 11: Which asset type is considered a 'liquid asset' acceptable for reserves and closing costs?

Unvested stock options
Real estate equity
Checking and savings account balances (Correct answer)
A 401(k) with a 10% early withdrawal penalty

Correct answer: Checking and savings account balances

Checking and savings accounts are immediately accessible and qualify as liquid assets without restriction.

Question 12: An interest-only loan allows the borrower to pay only interest for a set period. How does this affect underwriting qualification?

The borrower qualifies based on the interest-only payment permanently
The borrower qualifies based on the fully amortized principal and interest payment (Correct answer)
The qualifying rate is reduced by 1%
DTI limits are relaxed for interest-only loans

Correct answer: The borrower qualifies based on the fully amortized principal and interest payment

Fannie Mae and Freddie Mac require qualification based on the fully amortized P&I payment, not the lower IO payment.

Question 13: What is 'cash-out refinance' and how does it affect LTV?

Refinancing with a lower loan balance, which decreases LTV
Refinancing for more than the current balance to receive funds, which increases LTV (Correct answer)
Replacing an ARM with a fixed rate, with no change to LTV
Paying down the principal to eliminate PMI, decreasing LTV

Correct answer: Refinancing for more than the current balance to receive funds, which increases LTV

A cash-out refinance increases the loan balance above the payoff amount, raising the LTV ratio.

Question 14: A borrower's gross monthly income is $8,000. The maximum PITI using a 28% front-end ratio would be:

$1,920
$2,080
$2,240 (Correct answer)
$2,400

Correct answer: $2,240

$8,000 × 28% = $2,240 maximum allowable housing payment.

Question 15: What does it mean when a loan is 'underwater' or has 'negative equity'?

The borrower's DTI exceeds agency guidelines
The outstanding loan balance exceeds the property's current market value (Correct answer)
The interest rate is below the current market rate
The property's assessed tax value exceeds the purchase price

Correct answer: The outstanding loan balance exceeds the property's current market value

Negative equity (being underwater) means the loan balance is higher than what the property is currently worth.

Question 16: When calculating the monthly payment on a $250,000 loan at 6% for 30 years, which component is NOT included in PITI?

Principal repayment
Interest charges
Homeowner's insurance premium
Utility bills (Correct answer)

Correct answer: Utility bills

PITI stands for Principal, Interest, Taxes, and Insurance — utility bills are not included.

Question 17: A borrower has $50,000 in student loans on income-driven repayment (IDR) showing a $0 monthly payment. Under Fannie Mae guidelines, how is this treated for DTI?

$0 is used as the monthly payment
1% of the balance ($500) is used (Correct answer)
The standard amortized payment over 10 years is used
The loan is ignored entirely

Correct answer: 1% of the balance ($500) is used

Fannie Mae requires 1% of the outstanding student loan balance when the payment is $0 or deferred.

Question 18: What is an 'automated underwriting system' (AUS) finding of 'Approve/Eligible' vs. 'Refer'?

Approve/Eligible means the file is denied; Refer means it needs manual review
Approve/Eligible means the loan meets guidelines; Refer means a human underwriter must review it (Correct answer)
Both findings require the same level of documentation
Refer means the loan is approved with conditions

Correct answer: Approve/Eligible means the loan meets guidelines; Refer means a human underwriter must review it

Approve/Eligible indicates the AUS finds the loan compliant; Refer sends the file to a human underwriter for manual assessment.

Question 19: Which calculation correctly determines the amount of mortgage insurance premium (MIP) on an FHA loan?

LTV × loan term
Base loan amount × annual MIP rate / 12 months (Correct answer)
Purchase price × 0.85%
Down payment × mortgage insurance factor

Correct answer: Base loan amount × annual MIP rate / 12 months

FHA annual MIP is calculated as the base loan amount times the applicable annual MIP rate, then divided by 12 for the monthly premium.

Question 20: A property's NOI (Net Operating Income) is $36,000 per year and the annual debt service is $30,000. What is the Debt Service Coverage Ratio (DSCR)?

0.83
1.02
1.20 (Correct answer)
1.50

Correct answer: 1.20

DSCR = NOI / Annual Debt Service = $36,000 / $30,000 = 1.20.

Question 21: When documenting alimony income for qualifying purposes, lenders typically require evidence that payments will continue for how long?

6 months
12 months
3 years (Correct answer)
5 years

Correct answer: 3 years

Agency guidelines require documentation that alimony will continue for at least three years to be counted as qualifying income.

Mortgage Underwriting and Financial Calculations

A borrower earns $6,500/month gross income and has a proposed PITI of $1,750 plus monthly debts of $400.
What is their back-end DTI ratio?

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