Mortgage Underwriting and Qualification 5 — Questions and Answers
Question 1: What is a 'letter of explanation' (LOE) commonly used for in mortgage underwriting?
- To explain the purpose of a home purchase to the seller
- To clarify derogatory credit events, large deposits, or gaps in employment to the underwriter (Correct answer)
- To justify the appraised value of a property
- To request a rate lock extension
Correct answer: To clarify derogatory credit events, large deposits, or gaps in employment to the underwriter
An LOE provides the underwriter with context for unusual items on the application, such as a credit inquiry, job gap, or large bank deposit.
Question 2: Which loan program allows a debt-to-income ratio above 50% with strong compensating factors via AUS approval?
- USDA Rural Development loan
- FHA loan approved through TOTAL Scorecard (Correct answer)
- Conventional loan with PMI
- Jumbo portfolio loan
Correct answer: FHA loan approved through TOTAL Scorecard
FHA's TOTAL Scorecard can issue an 'Accept' finding allowing DTI above 50% when the borrower has strong compensating factors like high credit score or large reserves.
Question 3: What is the LTV ratio on a $280,000 loan for a property appraised at $350,000?
- 70%
- 75%
- 80% (Correct answer)
- 85%
Correct answer: 80%
$280,000 ÷ $350,000 = 0.80 = 80% LTV.
Question 4: A borrower is purchasing a rental property. How do conventional guidelines typically treat future rental income from that property?
- 100% of projected rent is counted as income immediately
- Generally not counted for qualification unless there is a signed lease and rental history (Correct answer)
- It is always excluded from income calculations
- Rental income is counted at 125% to account for vacancies
Correct answer: Generally not counted for qualification unless there is a signed lease and rental history
For a subject investment property, most conventional guidelines require a signed lease and sometimes rental history before counting rental income toward qualification.
Question 5: What is the difference between a 'hard' credit pull and a 'soft' credit inquiry in the mortgage process?
- Hard pulls affect credit scores and are done with borrower consent; soft pulls do not affect scores (Correct answer)
- Soft pulls are more detailed and used for final underwriting; hard pulls are preliminary
- Hard pulls are free; soft pulls cost a fee
- There is no difference — both affect the credit score equally
Correct answer: Hard pulls affect credit scores and are done with borrower consent; soft pulls do not affect scores
Hard inquiries, like those in a mortgage application, are recorded on the credit report and can slightly lower the score; soft inquiries do not affect scores.
Question 6: A borrower is 60 days delinquent on a student loan. Under FHA guidelines, how must this be handled?
- It can be ignored if the total amount is under $5,000
- The delinquent account must be brought current or placed in a repayment plan before closing (Correct answer)
- The loan is automatically denied with any student loan delinquency
- The borrower must pay off the entire student loan balance
Correct answer: The delinquent account must be brought current or placed in a repayment plan before closing
FHA requires that delinquent federal debts, including student loans, be resolved — either brought current or enrolled in an approved repayment plan — prior to loan approval.
Question 7: What is 'trended credit data' and how does it affect conventional loan underwriting?
- A credit score trend over the past 10 years used only for jumbo loans
- A 24-month history of credit card balance and payment patterns used by Fannie Mae's DU (Correct answer)
- The average credit score across all three bureaus
- A report showing only new credit accounts opened in the last 6 months
Correct answer: A 24-month history of credit card balance and payment patterns used by Fannie Mae's DU
Fannie Mae's Desktop Underwriter uses trended credit data — 24 months of payment and balance history — to identify whether a borrower is paying down or revolving debt.
Mortgage Underwriting and Qualification 5
What is a 'letter of explanation' (LOE) commonly used for in mortgage underwriting?