CMA Underwriting and Risk Assessment 2 — Questions and Answers
Question 1: A borrower has a 43% back-end DTI ratio. Under conventional Fannie Mae guidelines, what is the most likely outcome?
- Automatic approval with no conditions
- Approval may require compensating factors or DU approval (Correct answer)
- Automatic denial regardless of other factors
- The loan must be restructured to a 15-year term
Correct answer: Approval may require compensating factors or DU approval
Fannie Mae allows DTI up to 45–50% with DU approval or strong compensating factors, but 43% may require scrutiny beyond the standard 36% guideline.
Question 2: Which documentation is typically required to verify self-employment income for a mortgage application?
- One year of W-2s and a recent pay stub
- Two years of personal and business tax returns plus a year-to-date P&L (Correct answer)
- A signed letter from the borrower's accountant
- Six months of bank statements only
Correct answer: Two years of personal and business tax returns plus a year-to-date P&L
Self-employed borrowers generally must provide two years of personal and business tax returns along with a year-to-date profit and loss statement.
Question 3: In mortgage underwriting, what does the term 'layered risk' refer to?
- Multiple lenders participating in a single loan
- The combination of several risk factors that together increase default probability (Correct answer)
- A tiered pricing structure based on credit score
- The process of splitting a loan into senior and junior tranches
Correct answer: The combination of several risk factors that together increase default probability
Layered risk occurs when a borrower presents multiple marginal risk factors simultaneously, such as high LTV combined with low credit score and high DTI.
Question 4: A property appraises for $280,000 but the purchase price is $300,000. The borrower is putting 10% down based on purchase price. What is the LTV the lender will use?
- 90% based on purchase price ($270,000 loan)
- 96.4% based on appraised value ($270,000 loan / $280,000) (Correct answer)
- 93.3% based on appraised value
- 100% because the loan exceeds appraised value
Correct answer: 96.4% based on appraised value ($270,000 loan / $280,000)
Lenders use the lesser of appraised value or purchase price; the loan of $270,000 divided by the appraised value of $280,000 yields ~96.4% LTV.
Question 5: What is the primary purpose of a Verification of Employment (VOE) in underwriting?
- To confirm the borrower's educational credentials
- To verify current employment status, position, and income accuracy (Correct answer)
- To check for criminal background at the workplace
- To establish the borrower's net worth
Correct answer: To verify current employment status, position, and income accuracy
A VOE confirms that the borrower is actively employed, validates their stated position, and verifies income figures provided on the application.
Question 6: A borrower's credit report shows a mortgage late payment 18 months ago. Under standard conventional guidelines, how is this typically treated?
- It is ignored if the borrower provides a letter of explanation
- It may result in a risk overlay, rate adjustment, or denial depending on severity and lender guidelines (Correct answer)
- It automatically disqualifies the borrower for 7 years
- It only matters if it occurred within the past 12 months
Correct answer: It may result in a risk overlay, rate adjustment, or denial depending on severity and lender guidelines
Mortgage lates carry significant weight; most lenders impose overlays, and a recent mortgage delinquency within 12–24 months can trigger pricing hits or denial.
Question 7: Which of the following best describes a 'full documentation' loan?
- A loan requiring only a credit report and application
- A loan requiring complete income, asset, and employment verification with supporting documents (Correct answer)
- A loan where the borrower's stated income is accepted without verification
- A loan insured by a government agency
Correct answer: A loan requiring complete income, asset, and employment verification with supporting documents
Full documentation loans require borrowers to provide verifiable proof of income, employment, and assets, giving lenders the most complete risk picture.
CMA Underwriting and Risk Assessment 2
A borrower has a 43% back-end DTI ratio.
Under conventional Fannie Mae guidelines, what is the most likely outcome?