SAFE Processing and Underwriting 3 — Questions and Answers
Question 1: What is the primary purpose of Private Mortgage Insurance (PMI) on a conventional loan?
- To protect the borrower if they lose their job
- To protect the lender against borrower default when LTV exceeds 80% (Correct answer)
- To guarantee the appraisal is accurate
- To insure the property against damage
Correct answer: To protect the lender against borrower default when LTV exceeds 80%
PMI protects the lender—not the borrower—from loss if the borrower defaults when the down payment is less than 20%.
Question 2: Under the Homeowners Protection Act, when can a borrower request cancellation of PMI?
- When the loan balance reaches 80% LTV based on original value (Correct answer)
- After 7 years of on-time payments
- Only at the time of refinance
- When the credit score improves above 740
Correct answer: When the loan balance reaches 80% LTV based on original value
The HPA allows borrowers to request PMI cancellation when the principal balance reaches 80% of the original purchase price or appraised value.
Question 3: In underwriting, what does 'seasoning' of funds refer to?
- The length of time funds have been in the borrower's account (Correct answer)
- The process of verifying employment seasonality
- Adjusting income for seasonal workers
- Determining how long a property has been listed
Correct answer: The length of time funds have been in the borrower's account
Seasoning refers to funds that have been in a borrower's account long enough (typically 60 days) that they don't require source documentation.
Question 4: Which automated underwriting system is primarily used by Freddie Mac?
- Desktop Underwriter (DU)
- Loan Prospector (LP) / Loan Product Advisor (LPA) (Correct answer)
- TOTAL Scorecard
- GUS (Guaranteed Underwriting System)
Correct answer: Loan Prospector (LP) / Loan Product Advisor (LPA)
Freddie Mac's automated underwriting system is called Loan Product Advisor (LPA), formerly known as Loan Prospector (LP).
Question 5: What is the maximum seller concession allowed on a conventional loan with an LTV above 90%?
- 2%
- 3% (Correct answer)
- 6%
- 9%
Correct answer: 3%
For conventional loans with LTV above 90%, Fannie Mae and Freddie Mac limit seller concessions to 3% of the purchase price.
Question 6: A processor receives the appraisal and notices the value is lower than the contract price. What is the term for this situation?
- Value gap
- Low appraisal / appraisal shortfall (Correct answer)
- Negative equity
- Purchase price discrepancy
Correct answer: Low appraisal / appraisal shortfall
When the appraised value comes in below the agreed purchase price, it is called a low appraisal or appraisal shortfall, requiring renegotiation or additional cash from the buyer.
Question 7: What is the purpose of a flood zone determination in mortgage processing?
- To set the property tax amount
- To determine if the property requires flood insurance under NFIP rules (Correct answer)
- To calculate hazard insurance premiums
- To verify the property's legal description
Correct answer: To determine if the property requires flood insurance under NFIP rules
Lenders must determine whether a property is in a Special Flood Hazard Area (SFHA); if so, federal law requires flood insurance as a condition of the loan.
SAFE Processing and Underwriting 3
What is the primary purpose of Private Mortgage Insurance (PMI) on a conventional loan?