Underwriting and Qualification Flashcards

A borrower has a front-end DTI of 31% and a back-end DTI of 45%. Which conventional loan guideline does this violate?

Answer: Back-end limit of 43%

Standard conventional loans typically cap the back-end (total) DTI at 43%, so 45% exceeds this threshold.

Which income type requires a two-year self-employment history to be considered stable by most underwriters?

Answer: Self-employment income

Underwriters typically require a two-year self-employment history documented by tax returns to verify stability and consistency.

What is 'compensating factors' in mortgage underwriting?

Answer: Positive attributes that offset a borrower's weak credit profile

Compensating factors are strengths such as large reserves or low DTI that can offset weaknesses like a borderline credit score.

A property appraisal comes in $15,000 below the purchase price. What typically happens to the loan amount?

Answer: The loan is based on the appraised value, not the purchase price

Lenders base the loan on the lower of the appraised value or purchase price, so the borrower must cover the gap or renegotiate.

Which document is used to verify a borrower's employment and income directly with their employer?

Answer: Verification of Employment (VOE)

A Verification of Employment (VOE) form is sent directly to the employer to confirm job status, tenure, and income.

What does 'layered risk' mean in the context of mortgage underwriting?

Answer: Several risk factors present simultaneously on a single loan file

Layered risk refers to multiple risk factors — such as low credit score, high LTV, and high DTI — appearing together, increasing the chance of default.

A borrower wants to use gift funds for a down payment on a conventional loan. What is typically required?

Answer: A signed gift letter and documentation showing the funds were transferred

Conventional guidelines require a gift letter stating no repayment is expected, plus bank statements or wire records confirming the transfer.