Chapter 11 — Exercises
Work these with a calculator and a blank worksheet, the way you would work a real file. Items marked with a dagger (†) have worked solutions in the answers appendix. No answers appear in this file.
Round all monthly income figures to the nearest cent and all ratios to two decimal places. Where an item asks you to "verify," say where you would verify it, not just that you would.
Recall and reasoning
11.1 State the three questions an underwriter asks about any dollar of income, in order, and give the commonly stated forward-continuance expectation. For each question, name one income type that most often fails on that specific question.
11.3 A borrower received a raise from \$62,000 to \$71,000 three weeks ago. Their most recent W-2 shows \$61,400. Which figure sets qualifying income, and why does the same file average two years of overtime but not two years of salary? Answer in three sentences.
11.8 A written Verification of Employment comes back showing four years of overtime averaging \$740 a month, and the employer has checked "No" in response to whether the overtime is likely to continue. What overtime income qualifies? Which of the three questions failed, and can the length of the history cure it?
11.12 Distinguish a written Verification of Employment from a verbal Verification of Employment: what does each one prove, roughly when in the file is each obtained, and what would you lose if you had only one of them?
11.14 Explain to a borrower, in language they would repeat correctly to their spouse, why a rental property that produces a net loss becomes a liability on their application rather than simply producing zero income.
11.16 Give two independent reasons a loan officer must never quote a non-taxable gross-up percentage from memory, and name the specific place you would look it up for a conventional file and for an FHA file.
11.19 A borrower changed employers four months ago — same field, same duties, salary up from \$72,000 to \$81,000. What monthly income do you use, what do you document, and what single follow-up question would change your answer?
11.27 What does a wage and income transcript show that a tax return transcript does not, and name one thing a wage and income transcript can reveal that neither the borrower nor the employer told you?
Calculations: base pay
11.2 † A salaried borrower is paid \$2,700.00 bi-weekly.
(a) Compute gross monthly income correctly. (b) Compute the figure a loan officer produces by multiplying by two. (c) State the dollar error and the percentage understatement.
11.4 † A Verification of Employment reports an hourly rate of \$28.75 and a contracted schedule of 36 guaranteed hours per week.
(a) Compute monthly base income. (b) Compute what the figure would have been at 40 hours, and state the difference. (c) Which document controls the hours, and what do you do if the VOE leaves the field blank?
11.7 † A bi-weekly paystub for the period ending August 30 — period 18 of 26 — shows YTD gross of \$52,530.00.
(a) Annualize by pay periods elapsed and convert to a monthly figure. (b) Annualize by calendar months elapsed (treat August 30 as eight months) and convert to a monthly figure. (c) State the difference and explain, using fractions of a year, why the two methods disagree. (d) Which do you use for a bi-weekly earner, and why?
Calculations: variable income
11.5 † Overtime income was \$4,860** two years ago and **\$6,300 last year.
(a) Compute the 24-month average. (b) Compute the year-over-year change as a percentage. (c) State whether the average is usable and why.
11.6 Bonus income was \$12,000** two years ago and **\$9,000 last year.
(a) Compute the 24-month average. (b) Compute the most recent year as a monthly figure. (c) State which governs, by how much they differ, and the one-sentence reason the underwriter is permitted to choose.
11.9 † A commissioned borrower earned \$31,200** in commission two years ago and **\$38,400 last year, on a base salary of \$6,100.00 per month.
(a) Compute the 24-month commission average. (b) Compute the most recent year as a monthly figure and state which governs. (c) Compute total qualifying income. (d) Compute commission as a percentage of this borrower's income, and state why the denominator is the borrower's income rather than the household's.
11.28 † A seasonal borrower's only income is W-2 wages of \$28,600 two years ago and \$30,200 last year, earned across roughly seven months of each year.
(a) Compute the 24-month average. (b) Explain in one sentence why the divisor is 24 and not 14. (c) Name the two documents that answer the continuance question for seasonal work.
11.18 † A borrower's second job began fourteen months ago. Last year's W-2 from that employer shows \$8,400**, and the year-to-date figure across eight months is **\$6,200.
(a) Compute what a 24-month average would produce. (b) State why that number is not the answer. (c) Which of the three questions fails, and what would have to change for the income to count?
Calculations: other income types
11.13 † A borrower owns a rental property. The executed lease is \$2,200.00 per month. The property's PITIA is \$1,975.00 per month. Apply an illustrative 25% vacancy and maintenance factor.
(a) Compute adjusted gross rents. (b) Compute net rental income. (c) State how the result appears on the application and what it does to the back-end ratio of a borrower with \$8,000.00 of other income and \$2,900.00 of other obligations.
11.15 † A retired borrower receives \$1,950.00 per month in verified non-taxable Social Security and \$2,300.00 per month from a fully taxable pension. Total housing expense plus other monthly debts is \$1,900.00.
(a) Compute qualifying income and back-end DTI with no gross-up. (b) Recompute using an illustrative 15% gross-up on the non-taxable portion. (c) Recompute using an illustrative 25% gross-up. (d) State what changed about the household in (a) through (c), and what that implies about how you must handle the percentage.
11.17 A borrower receives \$650.00 per month in child support under a court order with 26 payments remaining, documented by a state disbursement unit payment history covering the last eleven months.
(a) Which of the three questions does this income satisfy? (b) Which does it likely fail, and by how many months? (c) What is the effect on the file, and where would you verify the requirement?
11.21 † A borrower's employment history shows a gap: they left one employer on March 3 and began the next on July 15 of the same year.
(a) Compute the length of the gap in days and in approximate months. (b) State what this commonly triggers. (c) Draft the two sentences you would ask the borrower to include in a letter of explanation, and name one document that would strengthen it.
11.33 † A borrower has accepted a written offer for a new position at \$6,900.00 per month base, non-contingent, with a start date 21 days after the scheduled closing. They ask whether they can qualify on it.
(a) List the facts you must establish before you can even answer the question. (b) Assuming the program permits it, name the two additional file requirements you should expect. (c) Write the one-sentence answer you give on the phone today.
Ratios and the Loan File
11.11 † Using the Linden Street file's total monthly obligations of \$4,479.72:
(a) Compute the back-end ratio at the correct qualifying income of \$10,500.00. (b) Compute the back-end ratio at \$10,060.00 — the figure produced by multiplying Borrower 1's bi-weekly gross by two. (c) State the change in percentage points and explain, in one sentence, why an arithmetic error is more dangerous than a guideline you do not know.
11.23 † (Loan File extension.) Suppose Borrower 2's commissions had been \$23,400 two years ago and \$19,800 last year — the same two figures, reversed.
(a) Compute the year-over-year change and state which method now governs. (b) Compute Borrower 2's qualifying income and the household total. (c) Recompute the housing ratio and the back-end ratio using PITI + MI of \$3,033.72 and other monthly debts of \$1,446.00. (d) State, in two sentences, what you would have said differently on the very first phone call.
11.31 (Loan File extension.) Without looking at the chapter's worksheet, rebuild the Linden Street income worksheet from the source facts: four components, four amounts, and for each one the document that supports it and the rule that governs it. Then check that it foots to \$10,500.00. Finally, write the single sentence you would say to each borrower explaining their own two lines.
Read the document
11.22 A borrower has told you their base income is \$5,200.00 per month. Their paystub, for the period ending September 6 — period 18 of 26 — reads:
EARNINGS RATE HOURS CURRENT YTD HOURS YTD
Regular 26.00 80.00 2,080.00 1,080.00 28,080.00
Overtime 39.00 12.00 468.00 60.00 2,340.00
-------------------------------------------------------------------------
GROSS 2,548.00 30,420.00
(a) Compute base monthly income from the rate and the contracted schedule. (b) Compute what hourly rate the borrower's stated \$5,200.00 implies. (c) Compare the year-to-date regular hours against what eighteen periods at eighty hours would produce, and state what the difference is in weeks. (d) Name the two conditions an underwriter will write, and the two questions you will ask the borrower before submission.
11.34 Classify each of the following against the three questions — for each, name the question it most likely fails, or state that it passes all three:
(a) \$450 a month a borrower's mother deposits toward the borrower's car payment. (b) \$1,100 a month in tips, all cash, none reported on the borrower's W-2. (c) \$1,100 a month in tips, all reported on the borrower's W-2 for the last two years. (d) A \$14,000 bonus received once, eleven months ago, from a plan the employer confirms is ongoing. (e) \$3,200 a month in VA disability compensation, documented by an award letter with no end date.
Clear the condition, write the document
11.20 (Clear the condition.) The underwriter has issued: "Provide Verification of Employment reflecting breakdown of base, overtime, bonus, and commission earnings for the current and prior two years." The employer's HR department has already returned a VOE showing only total gross earnings by year. Write the email you send — to whom, asking for what, with what deadline, and what you do in parallel so the file does not stop.
11.29 (Write the borrower letter.) A borrower with a \$70,000 salary received bonuses of \$20,000** two years ago and **\$28,000 last year. They have told their real estate agent they "make ninety-eight thousand." Write the short, kind, specific message you send them explaining what qualifying income the file will use, showing the arithmetic, and telling them what it means for the price range. Do not use the words "unfortunately" or "guidelines."
11.30 (Judgment.) The automated findings return an approval with a message permitting reduced income documentation — fewer paystubs, no W-2s. Your borrower has commission income that made up more than a third of last year's earnings. Do you collect the reduced documentation set? Argue both sides in one paragraph each, then state what you actually do and why.
Structure and judgment
11.26 (Structure the deal.) A borrower's overtime declined from \$11,400 to \$9,600. Base salary is \$5,400.00 a month. They are pre-approved at a payment that assumed the 24-month average.
(a) Compute both candidate overtime figures and state which governs. (b) Compute the reduction in qualifying income against the assumption. (c) Name three structural levers that could keep the transaction alive, and state the cost of each to the borrower.
11.10 (Judgment.) On a first call, a borrower says: "My base is seventy but I always clear ninety-five with the bonus, so let's work off ninety-five." Write what you say next — the actual words — and explain what you are protecting by saying it.
11.24 (Ethics.) A borrower's bonus fell from \$18,000 to \$13,000. Their real estate agent calls you and says, "Can't you just use the two-year average? That's what the other lender did." Draft your response to the agent, then state plainly what would be wrong with doing it, including who besides the borrower is harmed.
NMLS-style exam questions
11.25 A borrower is paid semi-monthly and grosses \$2,750.00 per pay period. Gross monthly income is:
- A. \$5,500.00
- B. \$5,958.33
- C. \$6,875.00
- D. \$33,000.00
11.32 An underwriter reviews bonus income of \$14,400** in the most recent year and **\$18,000 in the prior year. The bonus income that may be used to qualify is:
- A. \$1,350.00
- B. \$1,200.00
- C. \$1,500.00
- D. \$0.00
Answers to daggered (†) and odd-numbered items appear in the answers appendix. Every guideline threshold referenced in these exercises is stated as "commonly" for a reason — confirm the current requirement in the applicable Selling Guide, Seller/Servicer Guide, HUD Handbook 4000.1, or VA/USDA handbook, and against your employer's overlays, before applying any of it to a live file.