Mortgage Mortgage Underwriting Principles Questions and Answers 3 — Questions and Answers
Question 1: What is the purpose of the three-day right of rescission under TILA for refinance transactions?
- To allow borrowers time to cancel the transaction after closing (Correct answer)
- To give the lender time to verify employment
- To provide an appraisal review period
- To allow the title company to record the deed
Correct answer: To allow borrowers time to cancel the transaction after closing
The Truth in Lending Act grants borrowers three business days to rescind a refinance on their primary residence after closing.
Question 2: An underwriter discovers that a borrower's credit report shows a recent collection account. What is the most appropriate next step?
- Request a letter of explanation from the borrower (Correct answer)
- Immediately deny the loan application
- Ignore it if the balance is under $500
- Approve the loan with a higher interest rate
Correct answer: Request a letter of explanation from the borrower
Underwriters typically request a written explanation for derogatory credit items before making a final decision.
Question 3: Which loan feature is prohibited under the Ability-to-Repay (ATR) rule for Qualified Mortgages?
- Interest-only payment periods (Correct answer)
- Fixed interest rates
- Fully amortizing payment schedules
- Monthly escrow requirements
Correct answer: Interest-only payment periods
Qualified Mortgages cannot include interest-only periods, negative amortization, or balloon payments under ATR rules.
Question 4: When calculating income for underwriting, how is overtime pay typically treated?
- It is averaged over two years and included if likely to continue (Correct answer)
- It is always excluded from qualifying income
- It is counted at full value regardless of history
- It is only included for government-backed loans
Correct answer: It is averaged over two years and included if likely to continue
Overtime income is generally averaged over 24 months and included only if the underwriter determines it is likely to continue.
Question 5: What is the significance of the loan-to-value (LTV) ratio in underwriting decisions?
- It measures the loan amount relative to the property value and affects risk assessment (Correct answer)
- It determines the borrower's monthly payment amount
- It calculates the total closing costs for the transaction
- It establishes the minimum credit score required for approval
Correct answer: It measures the loan amount relative to the property value and affects risk assessment
The LTV ratio compares the mortgage amount to the appraised property value, with higher ratios indicating greater lender risk.
Question 6: Which type of mortgage fraud involves inflating the property's value to obtain a larger loan?
- Property flipping scheme with inflated appraisals (Correct answer)
- Straw buyer fraud
- Occupancy fraud
- Income misrepresentation
Correct answer: Property flipping scheme with inflated appraisals
Illegal property flipping schemes use fraudulently inflated appraisals to make the property appear worth more than its actual value.
Mortgage Mortgage Underwriting Principles Questions and Answers 3
What is the purpose of the three-day right of rescission under TILA for refinance transactions?