Mortgage Underwriting and Financial Calculations 5 — Questions and Answers
Question 1: A borrower refinances from a 30-year loan with 20 years remaining to a new 30-year loan. What is the primary financial risk of this strategy?
- The new interest rate will always be higher
- The borrower restarts the amortization clock, paying more total interest over time (Correct answer)
- The LTV will automatically exceed 80%
- The borrower will owe a prepayment penalty on the new loan
Correct answer: The borrower restarts the amortization clock, paying more total interest over time
Resetting to a new 30-year term extends the loan horizon, resulting in more total interest paid even if the rate is lower.
Question 2: What is 'compensating factors' in mortgage underwriting?
- Negative items in a borrower's credit report
- Positive attributes that offset a borrower's risk factors and may allow exception approvals (Correct answer)
- Additional fees charged when DTI exceeds limits
- The lender's internal rate adjustment for risk
Correct answer: Positive attributes that offset a borrower's risk factors and may allow exception approvals
Compensating factors are positive elements (large reserves, low LTV, strong credit) that justify approving a loan that exceeds a standard guideline.
Question 3: On an adjustable-rate mortgage (ARM), the 'fully indexed rate' is calculated as:
- The initial teaser rate plus margin
- The index rate plus the margin (Correct answer)
- The cap rate minus the start rate
- The margin minus the index
Correct answer: The index rate plus the margin
The fully indexed rate = current index value + the loan's margin, representing the rate if fully adjusted today.
Question 4: What is 'seasoning' in the context of mortgage underwriting?
- Adding flavoring to a loan's marketing materials
- The length of time an asset or credit event has been established or on record (Correct answer)
- The process of adjusting a loan's interest rate over time
- The lender's internal review period before funding
Correct answer: The length of time an asset or credit event has been established or on record
Seasoning refers to the passage of time, such as how long funds have been in an account or how old a derogatory credit event is.
Question 5: A borrower has a monthly gross income of $7,000. Their front-end ratio is 25% and back-end ratio is 40%. What are the maximum PITI and total debt payments?
- PITI $1,750 / Total debts $2,800 (Correct answer)
- PITI $2,100 / Total debts $3,200
- PITI $1,500 / Total debts $2,500
- PITI $1,750 / Total debts $3,000
Correct answer: PITI $1,750 / Total debts $2,800
PITI = $7,000 × 25% = $1,750; total debts = $7,000 × 40% = $2,800.
Question 6: Which statement best describes a 'rate and term refinance'?
- Refinancing to receive cash above the payoff amount
- Refinancing solely to change the interest rate, term, or both without taking cash out (Correct answer)
- Refinancing from a conventional to an FHA loan with cash back
- Adding a co-borrower to an existing mortgage
Correct answer: Refinancing solely to change the interest rate, term, or both without taking cash out
A rate and term refinance replaces the existing loan with new terms (rate or length) without the borrower receiving cash at closing.
Question 7: An underwriter calculates a borrower's effective income by averaging two years of W-2s: $58,000 and $64,000. What monthly income is used for qualifying?
- $4,833
- $5,083 (Correct answer)
- $5,333
- $5,500
Correct answer: $5,083
Average annual income = ($58,000 + $64,000) / 2 = $61,000; monthly = $61,000 / 12 = $5,083.
Mortgage Underwriting and Financial Calculations 5
A borrower refinances from a 30-year loan with 20 years remaining to a new 30-year loan.
What is the primary financial risk of this strategy?