Mortgage loan origination activities

Qualification: Processing & Underwriting

Underwriting questions are loan-file scenarios: which income counts, how to average it, which debts go in the DTI, how assets and gifts are documented, and how the appraisal sets the LTV. Program rules differ, so the question will name Fannie Mae, FHA or VA.

Mortgage loan origination activities4 min read7 sections

Must-know for the exam

The four Cs: capacity (income), capital (assets), credit (history) and collateral (property).
Fannie Mae: a borrower with 25% or more ownership of a business is self-employed; analyze two years of returns.
Declining variable or self-employed income must be analyzed and may limit or exclude the income.
Rental income from a lease: Fannie Mae uses 75% of gross rent before subtracting PITIA.
Fannie Mae large deposit: a single deposit over 50% of monthly qualifying income, sourced on purchases (B3-4.2-02).
Gift letters state no repayment is expected; gifts cannot come from interested parties like the seller or agent.
Representative score: middle of three, lower of two; manual Fannie Mae loans use the lowest borrower's score.
Fannie Mae waits 4 years after Chapter 7 and 7 years after foreclosure; FHA generally 2 and 3 (B3-5.3-07; HUD 4000.1).
FHA student loans with a $0 payment count at 0.5% of the balance (HUD ML 2021-13).
LTV on a purchase uses the lesser of price or appraised value.

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Traps that cost marks

Mixing up capacity (income) with capital (assets).
Listing 'character' as one of the mortgage four Cs instead of credit.
Thinking processors make credit decisions.
Applying an old two-years-on-the-job rule to base salary.
Multiplying the weekly pay by 4 instead of by 52 / 12.
Averaging overtime without noticing it is falling.
Using 50% (control) as the self-employment test.
Using only the higher, most recent year for a self-employed borrower.

Why it matters on the test

Underwriting decides whether the borrower can repay (Regulation Z's ability-to-repay rule) and whether the loan meets investor rules. The test expects you to apply common Fannie Mae and FHA rules to file facts and to know who does what in processing.

The rule: income

Income type	How it is used (program named)
Salary and hourly	Hourly x hours x 52 / 12; two-year history (school can count)
Overtime, bonus, commission	Average over the history; declining trends need analysis
Self-employed (25%+ owner, Fannie Mae)	Two years of tax returns averaged; use the lower recent figure if declining
Rental (Fannie Mae)	75% of lease rent minus PITIA
Non-taxable (Fannie Mae)	May be grossed up 25% if it will continue
Alimony, child support	Only if it continues at least 3 years and the borrower chooses to rely on it
Social Security, pension	Counts if it will continue 3 years; never discount for age (Reg B)

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