Underwriting Principles Flashcards

What does a loan-to-value (LTV) ratio of 80% indicate?

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.

An underwriter applies risk layering analysis. What does this concept primarily address?

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.

Under Fannie Mae guidelines, how many months of reserves are typically required for a second home purchase?

Answer: Two months

Fannie Mae typically requires two months of PITI reserves for second home purchases under standard guidelines.

A borrower receives a gift from a parent for the down payment on a primary residence. Which statement is accurate?

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.

What is the primary purpose of requiring mortgage insurance (MI) on loans with LTV above 80%?

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.

A borrower's employment gap of 6 months occurred two years ago. How should the underwriter treat this?

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.

Which of the following is considered a compensating factor that may allow approval above standard DTI limits?

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.