Loan Application and Qualification Flashcards

A borrower earns a significant portion of their income from commissions. To consider this income as stable and qualifying, what is the standard minimum history of receipt that conventional underwriting guidelines, such as Fannie Mae's, generally require?

Answer: A 24-month history, which can then be averaged.

Conventional mortgage guidelines, such as those from Fannie Mae and Freddie Mac, generally require a two-year (24-month) history for variable income types like commissions to demonstrate that the income is stable and predictable. While a shorter history of 12-24 months may be acceptable with strong compensating factors, 24 months is the standard requirement for averaging the income.

A loan applicant has a gross monthly income of $7,500. Their proposed monthly housing payment (principal, interest, taxes, and insurance) is $2,100. They also have a $450 monthly car payment and a $200 student loan payment. What is their housing expense ratio, also known as the front-end DTI?

Answer: 28.0%

The housing expense ratio (front-end DTI) is calculated by dividing the total monthly housing payment (PITI) by the gross monthly income. In this scenario, $2,100 / $7,500 = 0.28, or 28.0%. The other monthly debts are used to calculate the total debt-to-income (back-end) ratio, not the housing expense ratio.

An underwriter reviewing a credit report sees that a non-medical collection account with a balance of $1,500 is marked as "In Dispute" by the consumer. Which of the following actions will most likely be required to proceed with the loan?

Answer: The dispute must be removed so the credit score can be accurately recalculated without the dispute notation.

When an account is in dispute, credit scoring models may ignore that account, potentially inflating the credit score. Lenders require an accurate representation of the borrower's credit risk. Therefore, for most non-medical derogatory accounts in dispute, especially those over a certain threshold (like $1,000 cumulative for FHA), the underwriter will require the borrower to have the dispute notation removed from the credit report so it can be re-evaluated accurately.

In the "Declarations" section of the Uniform Residential Loan Application (URLA), a borrower answers "Yes" to the question, "Are you a party to a lawsuit in which you potentially have any personal financial liability?" What is the most appropriate next step for the mortgage loan originator?

Answer: Obtain detailed documentation about the lawsuit to determine its potential impact on the borrower's financial standing.

A "Yes" answer in the declarations section of the URLA triggers the need for further due diligence. The MLO must obtain documentation, such as court filings or a letter from the borrower's attorney, to assess the nature of the lawsuit and the potential financial liability. This information is crucial for the underwriter to determine the risk and its effect on the borrower's ability to repay the loan.

A borrower plans to use funds received from a parent as part of their down payment. Which of the following is a critical piece of documentation the lender will require to verify these funds?

Answer: A signed gift letter stating there is no expectation of repayment.

When a borrower uses gift funds for a down payment, the lender must verify that the funds are a true gift and not a disguised loan. The primary document required is a signed gift letter from the donor which specifies the amount, the donor's relationship to the borrower, and explicitly states that no repayment is expected.

During a loan application for an unmarried individual applying for a mortgage on their own, which of the following inquiries by a mortgage loan originator is generally prohibited under the Equal Credit Opportunity Act (ECOA)?

Answer: Asking about the borrower's plans for having children.

The Equal Credit Opportunity Act (ECOA) prohibits discrimination based on protected classes, including sex and familial status. Asking about childbearing intentions is a prohibited inquiry as it could be used to discriminate. While asking about marital status is generally restricted, it is permissible in certain situations (e.g., for a joint application or in a community property state). Asking if a borrower will rely on alimony or child support is permissible, as long as the MLO first informs the applicant that they are not required to disclose this income if they are not using it to qualify.