Mortgage Underwriting Principles 3 — Questions and Answers
Question 1: What does a loan-to-value (LTV) ratio of 80% indicate?
- The borrower is putting 80% down
- The loan amount is 80% of the property's value (Correct answer)
- The borrower's credit score meets 80% of requirements
- The property value increased 80% since purchase
Correct answer: The loan amount is 80% of the property's value
An 80% LTV means the mortgage represents 80% of the property's value, implying a 20% down payment or equity stake.
Question 2: An underwriter applies risk layering analysis. What does this concept primarily address?
- Stacking multiple loan programs together
- The cumulative risk of multiple weaknesses in a single file (Correct answer)
- Verifying multiple sources of income simultaneously
- Reviewing both the borrower and co-borrower credit profiles
Correct answer: The cumulative risk of multiple weaknesses in a single file
Risk layering refers to the combined impact of multiple risk factors (e.g., high LTV + low credit score + high DTI) that together increase default probability.
Question 3: Under Fannie Mae guidelines, how many months of reserves are typically required for a second home purchase?
- No reserves required
- Two months (Correct answer)
- Six months
- Twelve months
Correct answer: Two months
Fannie Mae typically requires two months of PITI reserves for second home purchases under standard guidelines.
Question 4: A borrower receives a gift from a parent for the down payment on a primary residence. Which statement is accurate?
- Gift funds are never allowed on conventional loans
- The gift must be repaid within 12 months
- Gift funds are acceptable if properly documented with a gift letter (Correct answer)
- The gift reduces the seller's concession limit
Correct answer: Gift funds are acceptable if properly documented with a gift letter
Gift funds from an acceptable donor are allowed on conventional loans when accompanied by a gift letter stating no repayment is required.
Question 5: What is the primary purpose of requiring mortgage insurance (MI) on loans with LTV above 80%?
- To protect the borrower against job loss
- To compensate the lender if the borrower defaults (Correct answer)
- To ensure the property value does not decline
- To satisfy FHA minimum loan requirements
Correct answer: To compensate the lender if the borrower defaults
Mortgage insurance protects the lender (not the borrower) against losses in the event of borrower default and foreclosure.
Question 6: A borrower's employment gap of 6 months occurred two years ago. How should the underwriter treat this?
- Automatically deny the application
- Evaluate the reason for the gap and current employment stability (Correct answer)
- Exclude all income earned before the gap
- Require a co-borrower regardless of current income
Correct answer: Evaluate the reason for the gap and current employment stability
Underwriters consider the reason for gaps and whether the borrower has re-established stable employment since returning to work.
Question 7: Which of the following is considered a compensating factor that may allow approval above standard DTI limits?
- A recent job change to a higher-paying role
- A history of making large discretionary purchases
- Twelve or more months of reserves after closing (Correct answer)
- A purchase price below the appraised value
Correct answer: Twelve or more months of reserves after closing
Significant cash reserves after closing (12+ months) are a strong compensating factor that can support approval of higher DTI loans.
Mortgage Underwriting Principles 3
What does a loan-to-value (LTV) ratio of 80% indicate?