Mortgage Underwriting and Financial Calculations Questions and Answers — Questions and Answers
Question 1: A borrower has a gross monthly income of $7,000. Their proposed monthly housing expense (PITI) is $2,100. They also have a $500 monthly car payment and a $250 monthly student loan payment. What is the borrower's back-end debt-to-income (DTI) ratio?
- 30%
- 37%
- 41% (Correct answer)
- 45%
Correct answer: 41%
The back-end DTI ratio is calculated by adding all monthly debt obligations (PITI + other debts) and dividing by the gross monthly income. In this case, ($2,100 PITI + $500 car + $250 student loan) = $2,850. Then, $2,850 / $7,000 = 0.407, which rounds to 41%.
Question 2: When an underwriter is calculating the qualifying income for a self-employed borrower, which method is most commonly used?
- Using the net profit from the most recent quarter's P&L statement.
- Averaging the net income shown on their federal tax returns over the most recent 24-month period. (Correct answer)
- Using the gross deposits from the last 12 months of business bank statements.
- Taking the gross revenue from the most recent year and subtracting a standard 50% expense factor.
Correct answer: Averaging the net income shown on their federal tax returns over the most recent 24-month period.
The standard industry practice for qualifying self-employed borrowers for most conventional and government loans is to analyze the previous two years of filed federal tax returns to determine a stable and continuous monthly income. This approach provides a historical average and accounts for fluctuations inherent in business income.
Question 3: A home is under contract for a purchase price of $500,000, and the borrower intends to make a down payment of $100,000. The property's appraisal comes back with a value of $480,000. What is the loan-to-value (LTV) ratio that the lender will use for underwriting?
- 80.0%
- 83.3% (Correct answer)
- 85.0%
- 90.0%
Correct answer: 83.3%
Lenders calculate the LTV based on the lesser of the purchase price or the appraised value. The loan amount is $400,000 ($500,000 price - $100,000 down payment). The LTV is calculated as: $400,000 (Loan Amount) / $480,000 (Appraised Value) = 83.3%.
Question 4: Which of the following calculations specifically measures the percentage of a borrower's gross monthly income that would be used for the proposed PITI (Principal, Interest, Taxes, and Insurance)?
- Combined Loan-to-Value (CLTV) Ratio
- Back-End Debt-to-Income (DTI) Ratio
- Housing Expense Ratio (Front-End Ratio) (Correct answer)
- Net Tangible Benefit Calculation
Correct answer: Housing Expense Ratio (Front-End Ratio)
The housing expense ratio, also known as the front-end ratio, specifically compares the total monthly housing payment (PITI) to the borrower's gross monthly income. This is distinct from the back-end ratio, which includes all other monthly debts.
Question 5: An underwriter is evaluating a borrower who receives $1,500 per month in non-taxable Social Security benefits. To better reflect the borrower's purchasing power, the underwriter applies a 25% 'gross up' to this income. What is the resulting monthly qualifying income from this source?
- $1,500
- $1,875 (Correct answer)
- $1,750
- $2,000
Correct answer: $1,875
To 'gross up' non-taxable income, it is multiplied by a certain percentage (commonly 125% for conventional loans) to make it comparable to gross, taxable earnings. The calculation is $1,500 * 1.25 = $1,875.
Question 6: A borrower has a primary mortgage with a balance of $300,000 and is applying for a home equity line of credit (HELOC) for $50,000. The property's appraised value is $450,000. Which financial calculation is used to assess the total debt secured by the property against its value?
- Loan-to-Value (LTV) Ratio
- Total Debt-to-Income (DTI) Ratio
- Combined Loan-to-Value (CLTV) Ratio (Correct answer)
- Housing Expense Ratio
Correct answer: Combined Loan-to-Value (CLTV) Ratio
The Combined Loan-to-Value (CLTV) ratio is used when there are multiple loans on a property. It is calculated by adding the balances of all loans ($300,000 + $50,000 = $350,000) and dividing by the property's value ($350,000 / $450,000 = 77.8%). This metric assesses the total encumbrance on the property.
Mortgage Underwriting and Financial Calculations Questions and Answers
A borrower has a gross monthly income of $7,000.
Their proposed monthly housing expense (PITI) is $2,100.
They also have a $500 monthly car payment and a $250 monthly student loan payment.
What is the borrower's back-end debt-to-income (DTI) ratio?