Mortgage Underwriting and Qualification 4 — Questions and Answers
Question 1: A borrower has two mortgage late payments in the past 12 months. How does this typically affect FHA loan eligibility?
- No impact — FHA ignores recent lates
- It may result in a downgrade to manual underwriting or denial (Correct answer)
- It automatically disqualifies the borrower permanently
- It only affects the interest rate, not eligibility
Correct answer: It may result in a downgrade to manual underwriting or denial
Recent mortgage lates are a significant red flag; FHA guidelines may require manual underwriting and increase scrutiny or result in denial.
Question 2: What is the standard waiting period after a Chapter 7 bankruptcy before a borrower can qualify for a conventional loan?
- 1 year
- 2 years
- 4 years (Correct answer)
- 7 years
Correct answer: 4 years
Fannie Mae and Freddie Mac require a 4-year waiting period after Chapter 7 bankruptcy discharge before conventional loan eligibility.
Question 3: Which of the following best describes 'reserves' in mortgage underwriting?
- The lender's capital set aside for loan losses
- Assets remaining after closing that could cover future mortgage payments (Correct answer)
- The escrow account balance
- The appraisal contingency fund
Correct answer: Assets remaining after closing that could cover future mortgage payments
Reserves are liquid assets remaining after the down payment and closing costs that demonstrate the borrower's ability to weather financial disruptions.
Question 4: What is a 'non-arm's length transaction' and why do underwriters scrutinize it?
- A sale between strangers with no prior relationship
- A sale between related parties or those with a personal connection that could affect the price (Correct answer)
- A loan without a co-borrower
- A transaction with no seller concessions
Correct answer: A sale between related parties or those with a personal connection that could affect the price
Non-arm's length transactions (e.g., family sales) may have inflated or deflated prices, so underwriters apply extra scrutiny to ensure fair market value.
Question 5: For a VA loan, what replaces the traditional PMI requirement?
- A VA Funding Fee paid upfront or financed (Correct answer)
- Monthly MIP like FHA
- A separate VA insurance premium
- There is no cost — VA loans have no insurance requirement
Correct answer: A VA Funding Fee paid upfront or financed
VA loans charge a one-time VA Funding Fee (which can be financed) instead of ongoing monthly mortgage insurance.
Question 6: What does a 'conditional approval' mean in the underwriting process?
- The loan is fully approved and ready to close
- The loan is approved pending receipt of specific additional documents or clarifications (Correct answer)
- The loan is denied but can be appealed
- The borrower must find a new property
Correct answer: The loan is approved pending receipt of specific additional documents or clarifications
A conditional approval means the underwriter approves the loan in principle but requires certain conditions — like updated pay stubs or a letter of explanation — before final clearance.
Question 7: A self-employed borrower shows $120,000 gross income on their business return but takes $40,000 in deductions. What income does the underwriter typically use?
- $120,000 — gross business revenue
- $80,000 — net after business deductions (Correct answer)
- $40,000 — only the deduction amount
- $160,000 — gross plus add-backs
Correct answer: $80,000 — net after business deductions
Underwriters generally use net income from Schedule C after deductions, though some non-cash deductions like depreciation may be added back.
Mortgage Underwriting and Qualification 4
A borrower has two mortgage late payments in the past 12 months.
How does this typically affect FHA loan eligibility?