SAFE - Certified Secure and Fair Enforcement Mortgage Loan Originator Loan Processing and Underwriting Questions and Answers 1 — Questions and Answers
Question 1: A borrower has a gross monthly income of $7,000. Their proposed PITI is $2,100. They also have a $500 monthly car payment, a $300 student loan payment, and a $100 minimum credit card payment. What is their total (back-end) debt-to-income ratio?
- 30%
- 42.9% (Correct answer)
- 35.7%
- 50%
Correct answer: 42.9%
The total or back-end debt-to-income (DTI) ratio is calculated by adding all of the borrower's monthly debt obligations (including the proposed housing payment) and dividing that sum by the gross monthly income. In this case: ($2,100 PITI + $500 car + $300 student loan + $100 credit card) / $7,000 = $3,000 / $7,000 = 0.4285, or 42.9%.
Question 2: When an underwriter is reviewing a property appraisal for a purchase transaction, what is their primary objective?
- To verify the accuracy of the square footage listed in the public records.
- To ensure the appraiser has included at least three comparable sales from the last 90 days.
- To determine if the property represents acceptable collateral for the loan amount requested. (Correct answer)
- To confirm that the borrower was charged a fair price for the appraisal service.
Correct answer: To determine if the property represents acceptable collateral for the loan amount requested.
The underwriter's main goal in reviewing the appraisal is to assess the risk to the lender by confirming that the property's market value is sufficient to secure the loan. While they check for compliance and accuracy, the core purpose is to validate the collateral.
Question 3: An underwriter reviewing a borrower's bank statements notices a single, uncharacteristic cash deposit of $25,000 made last week. Which of the following actions is the underwriter most likely to take?
- Request a signed letter of explanation from the borrower and documentation to source the funds. (Correct answer)
- Disregard the deposit since the funds have been in the account for more than three business days.
- Immediately deny the loan due to a violation of anti-money laundering regulations.
- Approve the loan but reduce the borrower's verified assets by $25,000.
Correct answer: Request a signed letter of explanation from the borrower and documentation to source the funds.
Underwriters must source and season all large, non-payroll deposits to ensure they are from an acceptable source and not an undisclosed loan. The standard procedure is to issue a loan condition requiring the borrower to explain the deposit in writing and provide supporting documentation (e.g., a gift letter, bill of sale for an asset).
Question 4: Which of the following BEST describes the function of an Automated Underwriting System (AUS) such as Fannie Mae's Desktop Underwriter (DU) or Freddie Mac's Loan Product Advisor (LPA)?
- It provides a legally binding loan approval that cannot be overturned by a human underwriter.
- It automatically orders all necessary third-party services like the appraisal and title search.
- It guarantees the accuracy of all information submitted on the loan application.
- It analyzes a loan application against investor guidelines to provide a preliminary risk assessment and credit recommendation. (Correct answer)
Correct answer: It analyzes a loan application against investor guidelines to provide a preliminary risk assessment and credit recommendation.
An AUS is a software tool that provides an initial evaluation of a loan file's risk by comparing the borrower's data to the investor's (e.g., Fannie Mae, Freddie Mac) guidelines. It returns a recommendation, such as 'Approve/Eligible,' but it does not constitute a final loan approval, which still requires verification and review by a human underwriter.
Question 5: A loan processor receives the Standard Flood Hazard Determination Form (SFHDF) for a property, which indicates it is located in a Special Flood Hazard Area (SFHA). What does this finding require?
- The loan application must be automatically denied.
- The borrower must purchase and maintain flood insurance for the life of the loan. (Correct answer)
- An additional in-person property inspection by a FEMA representative.
- The lender must increase the interest rate by 0.25% to cover the additional risk.
Correct answer: The borrower must purchase and maintain flood insurance for the life of the loan.
The Flood Disaster Protection Act mandates that for any property located in a Special Flood Hazard Area (SFHA) securing a federally related mortgage, the borrower must obtain and maintain flood insurance coverage throughout the term of the loan.
Question 6: An underwriter is calculating the qualifying income for a self-employed borrower with a stable business for the past five years. The borrower's tax returns show a net profit of $90,000 two years ago and $110,000 last year. What is the standard method for calculating the borrower's qualifying monthly income?
- Use the most recent year's income ($110,000) and divide by 12.
- Use the lower of the two years' income ($90,000) and divide by 12.
- Add the net profit from the two years and divide the total by 24. (Correct answer)
- Request a current year-to-date Profit & Loss statement and use that figure.
Correct answer: Add the net profit from the two years and divide the total by 24.
For self-employed borrowers with stable or increasing income, the standard practice is to average the net income from the most recent two years of filed tax returns to determine a reliable monthly qualifying income. ($90,000 + $110,000) = $200,000 / 24 months = $8,333.33 per month.
SAFE - Certified Secure and Fair Enforcement Mortgage Loan Originator Loan Processing and Underwriting Questions and Answers 1
A borrower has a gross monthly income of $7,000.
Their proposed PITI is $2,100.
They also have a $500 monthly car payment, a $300 student loan payment, and a $100 minimum credit card payment.
What is their total (back-end) debt-to-income ratio?