Mortgage Loan Origination Process 4 — Questions and Answers
Question 1: A borrower is self-employed. Which documents are typically required during origination to verify their income?
- Last two months of pay stubs and a W-2
- 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 only
- Three months of bank statements showing regular deposits
Correct answer: Two years of personal and business tax returns plus a year-to-date P&L
Self-employed borrowers must typically provide two years of personal and business tax returns plus a year-to-date profit and loss statement.
Question 2: What is the purpose of a 'gift letter' during the mortgage origination process?
- To document that the seller is gifting closing costs to the buyer
- To confirm that down payment funds received as a gift do not require repayment (Correct answer)
- To authorize a gift of equity from a family member seller
- To transfer the interest rate lock as a gift to a co-borrower
Correct answer: To confirm that down payment funds received as a gift do not require repayment
A gift letter certifies that funds given to help with the down payment are a true gift with no repayment obligation, satisfying lender requirements.
Question 3: Under ECOA, within how many days must a lender notify an applicant of adverse action on a mortgage application?
- 7 days
- 15 days
- 30 days (Correct answer)
- 45 days
Correct answer: 30 days
The Equal Credit Opportunity Act requires lenders to provide adverse action notice within 30 days of receiving a completed application.
Question 4: Which origination scenario best illustrates 'steering' under RESPA and CFPB guidelines?
- A loan officer recommending the lowest-rate product available to the borrower
- A loan officer directing a borrower to a higher-cost product to earn a larger commission (Correct answer)
- An underwriter requesting additional documentation before approving a file
- A processor ordering a flood zone determination for a riverfront property
Correct answer: A loan officer directing a borrower to a higher-cost product to earn a larger commission
Steering occurs when a loan originator directs a borrower into a less-suitable, higher-cost loan product for the originator's financial benefit.
Question 5: What is the significance of the 'application date' in the TRID origination timeline?
- It starts the three-day clock for delivering the Closing Disclosure
- It triggers the three-business-day window to deliver the Loan Estimate (Correct answer)
- It sets the rate lock start date automatically
- It is the date the underwriter must render a credit decision
Correct answer: It triggers the three-business-day window to deliver the Loan Estimate
Once all six TRID application triggers are received, the application date starts the three-business-day clock for issuing the Loan Estimate.
Question 6: A borrower's credit report shows a 30-day late payment from 18 months ago. How might an underwriter typically address this during origination?
- Automatically deny the application under federal guidelines
- Require a written explanation (Letter of Explanation) from the borrower (Correct answer)
- Ignore it since it is beyond the 12-month look-back period
- Require the borrower to pay off all existing debt before proceeding
Correct answer: Require a written explanation (Letter of Explanation) from the borrower
Underwriters commonly require a Letter of Explanation (LOX) for derogatory credit events so they can assess whether it represents an ongoing pattern.
Question 7: In a purchase transaction, when does the lender typically order the title search during origination?
- Before the borrower submits an application
- After the purchase contract is executed and the application is received (Correct answer)
- Only after the underwriter issues final approval
- At closing, immediately before funds are disbursed
Correct answer: After the purchase contract is executed and the application is received
The title search is typically ordered during processing, after a signed purchase contract provides the property details needed for the search.
Mortgage Loan Origination Process 4
A borrower is self-employed.
Which documents are typically required during origination to verify their income?