Financial Analysis & Planning Flashcards

A borrower's gross monthly income is $7,500 and total monthly debt obligations are $2,850. What is the total debt-to-income (DTI) ratio?

Answer: 38%

DTI = $2,850 / $7,500 = 0.38, or 38%.

Which document is the primary source used to verify a self-employed borrower's net income for underwriting purposes?

Answer: Federal tax returns (Form 1040)

Federal tax returns are the standard documentation used to verify self-employed income because they reflect IRS-reported figures.

What is 'compensating factors' in residential underwriting?

Answer: Positive elements that offset risk when a borrower exceeds standard guidelines

Compensating factors are strengths such as large reserves or low LTV that allow approval despite guideline exceptions.

When calculating qualifying income for a salaried borrower who also receives overtime, underwriters typically require overtime to be documented for at least how long?

Answer: Two years

Fannie Mae and Freddie Mac generally require a two-year history of overtime before it can be counted as qualifying income.

A property's net operating income (NOI) is $18,000 per year and the annual debt service is $15,000. What is the debt service coverage ratio (DSCR)?

Answer: 1.20

DSCR = NOI / Debt Service = $18,000 / $15,000 = 1.20.

In the context of residential mortgage underwriting, what does 'liquid assets' refer to?

Answer: Cash and assets easily convertible to cash within a short period

Liquid assets are funds in checking, savings, or money market accounts readily available without penalty.

Which of the following best describes 'gift funds' in residential mortgage underwriting?

Answer: Money given to the borrower with no expectation of repayment, used toward down payment

Gift funds are non-repayable monetary contributions from acceptable donors that borrowers may use for down payment or closing costs.