Mortgage Underwriting Principles 5 — Questions and Answers
Question 1: A borrower applies for a VA loan and has no remaining entitlement. What option is available to obtain a VA loan?
- VA loans are unavailable without remaining entitlement
- The borrower can pay down existing VA loan principal
- The borrower may use a bonus entitlement or restore entitlement by selling the prior property (Correct answer)
- The lender may waive the entitlement requirement
Correct answer: The borrower may use a bonus entitlement or restore entitlement by selling the prior property
Veterans can restore entitlement by selling the home secured by the prior VA loan or, in some cases, use remaining bonus (second-tier) entitlement.
Question 2: Which automated underwriting system (AUS) is used primarily by Freddie Mac?
- Desktop Underwriter (DU)
- Loan Prospector / Loan Product Advisor (LPA) (Correct answer)
- Total Mortgage Scorecard
- CLUES
Correct answer: Loan Prospector / Loan Product Advisor (LPA)
Freddie Mac uses Loan Product Advisor (LPA), while Fannie Mae uses Desktop Underwriter (DU) as their respective AUS platforms.
Question 3: A borrower receives child support income. What documentation is needed for it to be used as qualifying income?
- A notarized letter from the paying parent
- Court order or divorce decree and 12 months of receipt history with evidence of continuance for 3 years (Correct answer)
- Three months of bank statements only
- No documentation is required for court-ordered support
Correct answer: Court order or divorce decree and 12 months of receipt history with evidence of continuance for 3 years
Child support income requires a court order, evidence it has been received consistently for 12 months, and at least 3 years of continuance remaining.
Question 4: What does the term 'ability to repay' (ATR) require lenders to do under the Dodd-Frank Act?
- Guarantee that the borrower will repay the loan
- Make a reasonable, good-faith determination that the borrower can repay the loan (Correct answer)
- Deny loans to borrowers with DTI above 43%
- Offer only fixed-rate qualified mortgages
Correct answer: Make a reasonable, good-faith determination that the borrower can repay the loan
ATR requires lenders to make a good-faith, documented determination that borrowers have the financial ability to repay the loan before consummation.
Question 5: An underwriter conditions a file for 'satisfactory completion' of a new roof. Which appraisal report type is most appropriate for this situation?
- As-is appraisal with no conditions
- Subject-to appraisal conditioned on completion of repairs (Correct answer)
- Drive-by (exterior-only) appraisal
- Desk review of the original appraisal
Correct answer: Subject-to appraisal conditioned on completion of repairs
A subject-to appraisal values the property as if the specified repairs have been completed, allowing the loan to close contingent on that work.
Question 6: Which scenario would most likely result in a 'refer with caution' finding from an FHA AUS (Total Scorecard)?
- A borrower with a 720 credit score and 35% DTI
- A borrower with a 580 credit score, 55% DTI, and minimal reserves (Correct answer)
- A borrower with a 640 credit score and 12 months of rental history
- A borrower refinancing with 20% equity and stable employment
Correct answer: A borrower with a 580 credit score, 55% DTI, and minimal reserves
A low credit score combined with high DTI and minimal reserves presents multiple risk layers that Total Scorecard will flag for manual review.
Question 7: What is the primary function of a mortgage underwriter's 'conditions prior to closing' (CTC) list?
- To list all disclosures the borrower must sign at closing
- To specify outstanding items the borrower must satisfy before the loan can fund (Correct answer)
- To document the underwriter's final approval decision
- To communicate the loan amount to the title company
Correct answer: To specify outstanding items the borrower must satisfy before the loan can fund
Prior-to-closing conditions are specific items (documents, verifications, or actions) the borrower must satisfy before the lender will allow the loan to fund.
Mortgage Underwriting Principles 5
A borrower applies for a VA loan and has no remaining entitlement.
What option is available to obtain a VA loan?