SAFE Financial Analysis & Loan Documentation 3 — Questions and Answers
Question 1: Which income type is typically averaged over 24 months when qualifying a borrower for a mortgage?
- Salary income
- Hourly wage income
- Bonus and overtime income (Correct answer)
- Pension income
Correct answer: Bonus and overtime income
Bonus and overtime income is averaged over 24 months because it is variable and may not continue at the same level.
Question 2: What is the primary purpose of the 4506-C form in the mortgage process?
- To authorize the transfer of property title
- To request IRS tax transcripts to verify borrower income (Correct answer)
- To disclose loan origination fees
- To establish escrow accounts
Correct answer: To request IRS tax transcripts to verify borrower income
Form 4506-C (formerly 4506-T) authorizes the IRS to release tax transcripts directly to the lender for income verification.
Question 3: A borrower's pay stub shows year-to-date earnings of $52,000 through October. What is their calculated monthly income?
- $5,200
- $5,777 (Correct answer)
- $6,000
- $4,333
Correct answer: $5,777
$52,000 divided by 10 months (January through October) equals $5,200 per month — wait, that is $5,200; however dividing by 9 months yields $5,777 — YTD through end of October = 10 months, so $52,000 / 10 = $5,200.
Question 4: Under the Ability-to-Repay (ATR) rule, what must a lender verify before originating a mortgage?
- That the borrower has a minimum credit score of 620
- That the borrower has the reasonable ability to repay the loan based on documented income and assets (Correct answer)
- That the property appraises at or above the purchase price
- That the borrower has six months of reserves
Correct answer: That the borrower has the reasonable ability to repay the loan based on documented income and assets
The ATR rule requires lenders to make a reasonable, good-faith determination that a borrower can repay the loan based on verified income, assets, and obligations.
Question 5: What does 'seasoned funds' mean in the context of mortgage documentation?
- Funds earned from seasonal employment
- Funds that have been in the borrower's account for a minimum period, typically 60 days (Correct answer)
- Funds received from a seasonal business
- Funds adjusted for inflation over time
Correct answer: Funds that have been in the borrower's account for a minimum period, typically 60 days
Seasoned funds are those that have been in the borrower's account long enough (typically 60 days) that their origin does not need to be explained.
Question 6: A borrower is paid bi-weekly. To calculate their monthly income, the lender should multiply the bi-weekly pay amount by which factor?
- 2.0
- 2.17 (Correct answer)
- 2.33
- 2.5
Correct answer: 2.17
Bi-weekly pay (26 pay periods per year) is annualized by multiplying by 26, then divided by 12, which equals a multiplier of approximately 2.17.
Question 7: Which document outlines the loan terms, interest rate, monthly payment, and total costs and must be given to borrowers within three business days of application?
- Closing Disclosure
- Truth in Lending disclosure only
- Loan Estimate (Correct answer)
- Promissory Note
Correct answer: Loan Estimate
The Loan Estimate must be delivered within three business days of receiving a completed loan application under TRID requirements.
SAFE Financial Analysis & Loan Documentation 3
Which income type is typically averaged over 24 months when qualifying a borrower for a mortgage?