Mortgage Underwriting and Financial Calculations 4 — Questions and Answers
Question 1: What does it mean when a loan is 'underwater' or has 'negative equity'?
- The borrower's DTI exceeds agency guidelines
- The outstanding loan balance exceeds the property's current market value (Correct answer)
- The interest rate is below the current market rate
- The property's assessed tax value exceeds the purchase price
Correct answer: The outstanding loan balance exceeds the property's current market value
Negative equity (being underwater) means the loan balance is higher than what the property is currently worth.
Question 2: When calculating the monthly payment on a $250,000 loan at 6% for 30 years, which component is NOT included in PITI?
- Principal repayment
- Interest charges
- Homeowner's insurance premium
- Utility bills (Correct answer)
Correct answer: Utility bills
PITI stands for Principal, Interest, Taxes, and Insurance — utility bills are not included.
Question 3: A borrower has $50,000 in student loans on income-driven repayment (IDR) showing a $0 monthly payment. Under Fannie Mae guidelines, how is this treated for DTI?
- $0 is used as the monthly payment
- 1% of the balance ($500) is used (Correct answer)
- The standard amortized payment over 10 years is used
- The loan is ignored entirely
Correct answer: 1% of the balance ($500) is used
Fannie Mae requires 1% of the outstanding student loan balance when the payment is $0 or deferred.
Question 4: What is an 'automated underwriting system' (AUS) finding of 'Approve/Eligible' vs. 'Refer'?
- Approve/Eligible means the file is denied; Refer means it needs manual review
- Approve/Eligible means the loan meets guidelines; Refer means a human underwriter must review it (Correct answer)
- Both findings require the same level of documentation
- Refer means the loan is approved with conditions
Correct answer: Approve/Eligible means the loan meets guidelines; Refer means a human underwriter must review it
Approve/Eligible indicates the AUS finds the loan compliant; Refer sends the file to a human underwriter for manual assessment.
Question 5: Which calculation correctly determines the amount of mortgage insurance premium (MIP) on an FHA loan?
- LTV × loan term
- Base loan amount × annual MIP rate / 12 months (Correct answer)
- Purchase price × 0.85%
- Down payment × mortgage insurance factor
Correct answer: Base loan amount × annual MIP rate / 12 months
FHA annual MIP is calculated as the base loan amount times the applicable annual MIP rate, then divided by 12 for the monthly premium.
Question 6: A property's NOI (Net Operating Income) is $36,000 per year and the annual debt service is $30,000. What is the Debt Service Coverage Ratio (DSCR)?
- 0.83
- 1.02
- 1.20 (Correct answer)
- 1.50
Correct answer: 1.20
DSCR = NOI / Annual Debt Service = $36,000 / $30,000 = 1.20.
Question 7: When documenting alimony income for qualifying purposes, lenders typically require evidence that payments will continue for how long?
- 6 months
- 12 months
- 3 years (Correct answer)
- 5 years
Correct answer: 3 years
Agency guidelines require documentation that alimony will continue for at least three years to be counted as qualifying income.
Mortgage Underwriting and Financial Calculations 4
What does it mean when a loan is 'underwater' or has 'negative equity'?