Mortgage Underwriting Principles 4 — Questions and Answers
Question 1: What is the maximum seller concession allowed on a conventional loan with an LTV of 75%?
- 3%
- 4%
- 6%
- 9% (Correct answer)
Correct answer: 9%
Fannie Mae allows up to 9% in seller concessions when LTV is 75% or less for a primary or second home purchase.
Question 2: An FHA loan requires a minimum credit score of 580 for maximum financing. What down payment does this correspond to?
- 0%
- 3%
- 3.5% (Correct answer)
- 5%
Correct answer: 3.5%
FHA borrowers with a 580+ credit score qualify for the minimum 3.5% down payment; below 580 requires 10% down.
Question 3: When underwriting an investment property, how is rental income from the subject property typically treated for qualification?
- 100% of market rent is added to income
- 75% of market rent is used, offsetting the PITI payment (Correct answer)
- Rental income is never counted on investment properties
- Rental income is counted only if the borrower has a landlord history
Correct answer: 75% of market rent is used, offsetting the PITI payment
Most guidelines allow 75% of projected or actual rent (a vacancy/maintenance factor) to offset the investment property's housing expense.
Question 4: Which underwriting red flag would most likely trigger a fraud investigation?
- A borrower with two rental properties
- Inflated purchase price with large seller concessions concealing a kickback (Correct answer)
- A high credit score with low income
- A borrower changing jobs within the same field
Correct answer: Inflated purchase price with large seller concessions concealing a kickback
Purchase price inflation combined with excessive seller concessions to conceal undisclosed cash-back arrangements is a classic mortgage fraud pattern.
Question 5: A borrower's credit report shows a collection account for $800. Under most conventional guidelines, what is required?
- The collection must be paid before closing in all cases
- Medical collections are generally excluded from DTI calculation (Correct answer)
- Collections over $500 always require a 12-month payment history
- The account must be disputed and removed from the report
Correct answer: Medical collections are generally excluded from DTI calculation
Fannie Mae and Freddie Mac guidelines generally exclude medical collection accounts from the DTI calculation and do not require payoff.
Question 6: What is the key difference between a full documentation loan and an alternative documentation loan?
- Full doc loans are only for primary residences
- Full doc uses standard income verification; alt doc uses bank statements or asset depletion (Correct answer)
- Alt doc loans have lower interest rates
- Full doc requires a higher down payment
Correct answer: Full doc uses standard income verification; alt doc uses bank statements or asset depletion
Full documentation loans use W-2s and tax returns, while alternative documentation programs verify income through bank statements or asset depletion methods.
Question 7: Under Regulation B (ECOA), an underwriter must notify an applicant of an adverse action within how many days of receiving a completed application?
- 7 days
- 15 days
- 30 days (Correct answer)
- 60 days
Correct answer: 30 days
ECOA/Regulation B requires lenders to provide adverse action notices within 30 days of receiving a completed application.
Mortgage Underwriting Principles 4
What is the maximum seller concession allowed on a conventional loan with an LTV of 75%?