NMLS Loan Application and Qualification 2 — Questions and Answers
Question 1: Under RESPA, a Loan Estimate must be delivered to the borrower within how many business days of receiving a loan application?
- 1 business day
- 3 business days (Correct answer)
- 5 business days
- 7 business days
Correct answer: 3 business days
RESPA requires the Loan Estimate to be provided within 3 business days of receiving a completed loan application.
Question 2: A borrower's gross monthly income is $7,000 and total monthly debt payments are $2,800. What is the debt-to-income (DTI) ratio?
- 28%
- 32%
- 40% (Correct answer)
- 45%
Correct answer: 40%
$2,800 divided by $7,000 equals 0.40, or a 40% DTI ratio.
Question 3: Which credit score model is most commonly used by mortgage lenders to evaluate borrower creditworthiness?
- VantageScore 3.0
- FICO Score (Correct answer)
- TransUnion CreditVision
- Experian PLUS Score
Correct answer: FICO Score
FICO Scores are the industry standard used by the vast majority of mortgage lenders for underwriting decisions.
Question 4: What does the term 'layered risk' mean in mortgage underwriting?
- Multiple borrowers on one application
- Several risk factors present simultaneously that compound overall loan risk (Correct answer)
- A loan secured by multiple properties
- Stacking discount points on a single loan
Correct answer: Several risk factors present simultaneously that compound overall loan risk
Layered risk refers to the combination of multiple risk factors (e.g., low credit score, high LTV, and high DTI) that together increase the probability of default.
Question 5: For a conventional loan, what is the maximum loan-to-value (LTV) ratio that typically avoids requiring private mortgage insurance (PMI)?
- 75%
- 80% (Correct answer)
- 85%
- 90%
Correct answer: 80%
Borrowers with an LTV of 80% or below (20% down payment) generally avoid the PMI requirement on conventional loans.
Question 6: Which document is used to verify a self-employed borrower's income when W-2s are not available?
- Pay stubs from clients
- IRS Form 4506-C (tax transcript) (Correct answer)
- Bank reference letter
- Employment verification from CPA
Correct answer: IRS Form 4506-C (tax transcript)
IRS Form 4506-C allows lenders to obtain official tax transcripts directly from the IRS to verify self-employed borrowers' reported income.
Question 7: What is a 'compensating factor' in mortgage underwriting?
- An additional fee charged when DTI exceeds guidelines
- A borrower strength that offsets a guideline exception (Correct answer)
- A penalty for early payoff of the loan
- A credit score adjustment applied by the lender
Correct answer: A borrower strength that offsets a guideline exception
Compensating factors are positive borrower attributes (e.g., large reserves, low LTV) that allow underwriters to approve loans exceeding standard guideline thresholds.
NMLS Loan Application and Qualification 2
Under RESPA, a Loan Estimate must be delivered to the borrower within how many business days of receiving a loan application?