Mortgage Underwriting and Financial Calculations 3 — Questions and Answers
Question 1: Which type of income is typically NOT usable for qualifying purposes without a two-year history?
- Base salary from W-2 employment
- Overtime income received for less than 12 months (Correct answer)
- Social Security retirement benefits
- Pension income
Correct answer: Overtime income received for less than 12 months
Overtime income generally requires a 12–24 month history to be considered stable and predictable for qualifying.
Question 2: What is the purpose of the residual income analysis in VA loan underwriting?
- To calculate the funding fee amount
- To verify the veteran's assets after closing
- To ensure the borrower has sufficient income after major expenses to meet living costs (Correct answer)
- To determine the maximum loan amount
Correct answer: To ensure the borrower has sufficient income after major expenses to meet living costs
VA residual income analysis measures net income remaining after housing and major expenses to ensure the veteran can maintain daily living.
Question 3: A lender is using the FICO score for mortgage underwriting. Which bureau score is typically used when three bureaus are pulled?
- The highest of the three scores
- The lowest of the three scores
- The middle of the three scores (Correct answer)
- The average of the three scores
Correct answer: The middle of the three scores
Agency guidelines require use of the middle score when all three bureau scores are available.
Question 4: Which asset type is considered a 'liquid asset' acceptable for reserves and closing costs?
- Unvested stock options
- Real estate equity
- Checking and savings account balances (Correct answer)
- A 401(k) with a 10% early withdrawal penalty
Correct answer: Checking and savings account balances
Checking and savings accounts are immediately accessible and qualify as liquid assets without restriction.
Question 5: An interest-only loan allows the borrower to pay only interest for a set period. How does this affect underwriting qualification?
- The borrower qualifies based on the interest-only payment permanently
- The borrower qualifies based on the fully amortized principal and interest payment (Correct answer)
- The qualifying rate is reduced by 1%
- DTI limits are relaxed for interest-only loans
Correct answer: The borrower qualifies based on the fully amortized principal and interest payment
Fannie Mae and Freddie Mac require qualification based on the fully amortized P&I payment, not the lower IO payment.
Question 6: What is 'cash-out refinance' and how does it affect LTV?
- Refinancing with a lower loan balance, which decreases LTV
- Refinancing for more than the current balance to receive funds, which increases LTV (Correct answer)
- Replacing an ARM with a fixed rate, with no change to LTV
- Paying down the principal to eliminate PMI, decreasing LTV
Correct answer: Refinancing for more than the current balance to receive funds, which increases LTV
A cash-out refinance increases the loan balance above the payoff amount, raising the LTV ratio.
Question 7: A borrower's gross monthly income is $8,000. The maximum PITI using a 28% front-end ratio would be:
- $1,920
- $2,080
- $2,240 (Correct answer)
- $2,400
Correct answer: $2,240
$8,000 × 28% = $2,240 maximum allowable housing payment.
Mortgage Underwriting and Financial Calculations 3
Which type of income is typically NOT usable for qualifying purposes without a two-year history?