Mortgage Underwriting and Qualification 2 — Questions and Answers
Question 1: A borrower has a front-end DTI of 31% and a back-end DTI of 45%. Which conventional loan guideline does this violate?
- Front-end limit of 28%
- Back-end limit of 43% (Correct answer)
- Front-end limit of 33%
- Back-end limit of 50%
Correct answer: Back-end limit of 43%
Standard conventional loans typically cap the back-end (total) DTI at 43%, so 45% exceeds this threshold.
Question 2: Which income type requires a two-year self-employment history to be considered stable by most underwriters?
- W-2 salary income
- Self-employment income (Correct answer)
- Pension income
- Social Security income
Correct answer: Self-employment income
Underwriters typically require a two-year self-employment history documented by tax returns to verify stability and consistency.
Question 3: What is 'compensating factors' in mortgage underwriting?
- Fees charged to offset underwriting costs
- Positive attributes that offset a borrower's weak credit profile (Correct answer)
- A formula for calculating loan-to-value ratio
- Discount points paid to reduce interest rate
Correct answer: Positive attributes that offset a borrower's weak credit profile
Compensating factors are strengths such as large reserves or low DTI that can offset weaknesses like a borderline credit score.
Question 4: A property appraisal comes in $15,000 below the purchase price. What typically happens to the loan amount?
- The lender automatically raises the loan to match the purchase price
- The loan is based on the appraised value, not the purchase price (Correct answer)
- The borrower can ignore the appraisal gap
- The seller must reduce the price by law
Correct answer: The loan is based on the appraised value, not the purchase price
Lenders base the loan on the lower of the appraised value or purchase price, so the borrower must cover the gap or renegotiate.
Question 5: Which document is used to verify a borrower's employment and income directly with their employer?
- Form 1003
- Verification of Employment (VOE) (Correct answer)
- Form 4506-C
- Closing Disclosure
Correct answer: Verification of Employment (VOE)
A Verification of Employment (VOE) form is sent directly to the employer to confirm job status, tenure, and income.
Question 6: What does 'layered risk' mean in the context of mortgage underwriting?
- Multiple insurance policies on one property
- Several risk factors present simultaneously on a single loan file (Correct answer)
- Stacking discount points on a loan
- Having co-borrowers on the application
Correct answer: Several risk factors present simultaneously on a single loan file
Layered risk refers to multiple risk factors — such as low credit score, high LTV, and high DTI — appearing together, increasing the chance of default.
Question 7: A borrower wants to use gift funds for a down payment on a conventional loan. What is typically required?
- A signed gift letter and documentation showing the funds were transferred (Correct answer)
- Nothing extra — gift funds are always acceptable without documentation
- A notarized deed of gift from the donor
- The donor must be a blood relative only
Correct answer: A signed gift letter and documentation showing the funds were transferred
Conventional guidelines require a gift letter stating no repayment is expected, plus bank statements or wire records confirming the transfer.
Mortgage Underwriting and Qualification 2
A borrower has a front-end DTI of 31% and a back-end DTI of 45%.
Which conventional loan guideline does this violate?