Mortgage Underwriting Principles Questions and Answers

Question 1

An underwriter is analyzing a loan application where the borrower's debt-to-income (DTI) ratio is slightly above the standard guidelines for a conventional loan. However, the borrower has a high credit score, significant cash reserves, and is making a large down payment. These positive factors are known in underwriting as:

Accepted Answer

Compensating factors

Answer

Compensating factors are positive elements of a loan file that can offset negative aspects, such as a high DTI ratio. Strong credit, significant reserves, and a large down payment are all common examples of compensating factors that an underwriter can use to justify approving a loan that might otherwise be denied.

Question 2

A loan officer submits an application to an Automated Underwriting System (AUS), and the finding is 'Refer/Eligible.' What is the most accurate interpretation of this result?

Accepted Answer

The AUS cannot issue a decision, and the loan must be reviewed by a human underwriter.

Answer

A 'Refer/Eligible' finding from an AUS, like Fannie Mae's DU or Freddie Mac's LP, means the system cannot issue an automated approval based on the data submitted. The 'Refer' indicates that the loan requires manual underwriting by a human underwriter to make a final decision, while 'Eligible' signifies that the loan appears to meet the basic eligibility requirements of the loan program.

Question 3

When underwriting a loan for a self-employed borrower who is a sole proprietor, which IRS form is most critical for verifying their business income and expenses?

Accepted Answer

Schedule C (Profit or Loss from Business)

Answer

Schedule C, which is filed with the personal Form 1040, is used to report income or loss from a business operated as a sole proprietorship. Underwriters use this form to analyze the business's revenue, expenses, and ultimately the net profit that can be considered for qualifying income.

Question 4

Which of the following would an underwriter consider the riskiest loan scenario, likely requiring a higher down payment and stricter qualifying criteria?

Accepted Answer

A purchase loan for a single-family investment property.

Answer

Lenders view investment properties as the highest risk because borrowers are more likely to default on a rental property than their own home during financial hardship. Consequently, underwriting guidelines for investment properties are the strictest, typically requiring larger down payments (often 15-25%), higher credit scores, and more cash reserves compared to primary residences or second homes.

Question 5

Fannie Mae's Collateral Underwriter (CU) is a tool used in the underwriting process primarily to:

Accepted Answer

Assess the risk associated with the property appraisal.

Answer

Collateral Underwriter (CU) is an automated risk assessment tool from Fannie Mae that specifically analyzes appraisal reports. It uses a large database to evaluate the appraisal for potential over or undervaluation, quality issues, and compliance with eligibility policies, assigning a risk score to help lenders manage collateral risk.

Mortgage Practice Test

Mortgage Practice Test

Mortgage Underwriting Principles Questions and Answers