Chapter 14 — Quiz

Twenty-six questions. The multiple-choice items are written in the style of the SAFE MLO test where the material is exam-relevant. Note the standing warning from §14.1: where a question involves a specific guideline value, the correct answer here is the one about structure, because the values themselves change and the exam knows it.

Multiple choice

1. Which entity publishes the Selling Guide?

  • A. Freddie Mac
  • B. Fannie Mae
  • C. The Federal Housing Finance Agency
  • D. The Consumer Financial Protection Bureau

2. A loan meets every requirement in the Fannie Mae Selling Guide. Which of the following is therefore true?

  • A. The loan is legally compliant
  • B. The loan is a Qualified Mortgage
  • C. The loan meets the requirements for Fannie Mae to purchase it
  • D. The lender must approve it

3. A borrower with an 800 credit score, 50% down, and eighteen months of reserves is buying a condominium unit in a project that fails project eligibility. The most accurate description of this file is:

  • A. Approvable with compensating factors
  • B. Creditworthy but ineligible
  • C. Eligible but not creditworthy
  • D. Approvable if the borrower writes a letter of explanation

4. Compensating factors are relevant to:

  • A. Eligibility only
  • B. Creditworthiness only
  • C. Both eligibility and creditworthiness
  • D. Neither; they are a courtesy the underwriter may ignore

5. "Layered risk" most precisely means:

  • A. A file that has more than three risk factors
  • B. Risk factors that compound rather than add
  • C. Risk that is transferred in layers to the investor
  • D. The order in which an underwriter reviews the four Cs

6. A guideline overlay is:

  • A. A federal requirement that supersedes agency guidelines
  • B. A lender's own requirement, stricter than the agency's
  • C. A published agency exception to its own rule
  • D. A mortgage insurer's rate card

7. Which of the following is the single most useful question a loan officer can ask about a declined file?

  • A. "Can we get an exception?"
  • B. "Who was the underwriter?"
  • C. "Is that the agency's rule or ours?"
  • D. "What was the AUS recommendation?"

8. A conventional waiting period following a significant derogatory credit event most commonly runs to which date?

  • A. The application date
  • B. The date the credit report was pulled
  • C. The disbursement or note date of the new loan
  • D. The date the purchase contract was executed

9. For a Chapter 13 bankruptcy, the conventional waiting period is commonly measured from:

  • A. The filing date only
  • B. The discharge date or the dismissal date, and the two produce different periods
  • C. The date the last plan payment was made
  • D. The date the trustee was appointed

10. Which of the following would most commonly be accepted as extenuating circumstances?

  • A. A divorce
  • B. A business that failed after three unprofitable years
  • C. A documented, prolonged loss of income following a serious illness
  • D. A borrower's decision to stop paying a mortgage on an underwater property

11. The Uniform Underwriting and Transmittal Summary is also known as:

  • A. Form 1003
  • B. Form 1004
  • C. Form 1008 / Form 1077
  • D. Form 4506-C

12. Which of the following appears on the 1008?

  • A. Copies of the borrower's paystubs
  • B. The housing expense ratio, total debt ratio, and months of reserves
  • C. The complete tradeline history from the credit report
  • D. The appraiser's photographs

13. Manual underwriting is best described as:

  • A. Underwriting performed without a computer
  • B. A more lenient path used when an automated system declines a file
  • C. Evaluation against the guide's manual requirements, which are generally stricter
  • D. A review performed only after closing

14. A representation and warranty is made by:

  • A. The borrower to the lender
  • B. The lender to the investor
  • C. The appraiser to the lender
  • D. The servicer to the borrower

15. If a representation and warranty is breached, the most significant consequence for the lender is typically:

  • A. A fine assessed by the state regulator
  • B. A repurchase demand — buying the loan back at par
  • C. Suspension of the loan originator's license
  • D. Rescission of the borrower's loan

16. Which of the following is commonly cited as a life-of-loan exclusion that is never relieved by a loan's payment performance?

  • A. A minor arithmetic error in the escrow calculation
  • B. Misrepresentation, misstatement, or omission
  • C. A late-delivered Loan Estimate
  • D. A change in the borrower's employment after closing

17. A file is at 95% loan-to-value on a conventional purchase. How many separate parties must approve it before it can close?

  • A. One — the lender
  • B. Two — the lender and the agency
  • C. At least three — the lender, under agency guidelines, plus the mortgage insurer
  • D. Four — including the servicer

18. On the Linden Street file, qualifying income is \$10,500.00 per month and total obligations are \$4,479.72. Roughly how much additional monthly debt would move the back-end ratio by one percentage point?

  • A. About \$50
  • B. About \$105
  • C. About \$450
  • D. About \$1,050

19. A borrower pays off a \$429.00 monthly auto loan with 19 payments remaining, using verified reserves. Which statement is most accurate?

  • A. The back-end ratio improves and the reserves are unaffected
  • B. The back-end ratio improves and the reserves fall by roughly \$8,151
  • C. The ten-month rule allows the debt to be excluded without paying it
  • D. Neither ratio nor reserves change until closing

20. The debt-to-housing gap ratio on a 1008 is:

  • A. The difference between the front-end and back-end ratios
  • B. The difference between the appraised value and the sales price
  • C. The gap between required and verified funds to close
  • D. The difference between the note rate and the qualifying rate

Short answer

21. In one sentence each, state the question that eligibility asks and the question that creditworthiness asks.

22. A loan officer says: "The Selling Guide says 620, so my borrower at 641 is fine." Name two distinct things that could still stop this file, and say which row of the rule stack each comes from.

23. Give the three-line version of layered risk you would use with a real estate agent who has never heard the term.

24. Name the four moving parts of a credit-event waiting period, and say which one loan officers get wrong most often.

25. List four compensating factors that carry real weight and, for each, the specific weakness it is aimed at. Then list two things loan officers routinely offer that carry no weight at all, and say why.

26. Explain in three sentences why the credit refresh shortly before closing exists, connecting it to the representation and warranty.

Answer key **1. B.** Fannie Mae publishes the *Selling Guide*; Freddie Mac publishes the *Seller/Servicer Guide*. FHFA regulates both and is their conservator, but does not publish the guides. (§14.1) **2. C.** The guides are purchase contracts, not law. Meeting them makes a loan saleable to that buyer. Legal compliance (TILA/Reg Z, ECOA, RESPA, and the rest) is a separate question, and the lender's own credit policy is a third. (§14.1, §14.7) **3. B.** Creditworthy but ineligible. Project eligibility is a gate-one question and no amount of borrower strength reaches it. (§14.3) **4. B.** Creditworthiness only. This is the single most testable point in the chapter. (§14.3, §14.9) **5. B.** Compounding, not addition. "More than three risk factors" (A) is the common wrong paraphrase. (§14.6) **6. B.** A lender's own stricter rule. Note that overlays are legal, common, and not published publicly. (§14.7) **7. C.** "Is that the agency's rule or ours?" — because the answer determines whether another lender could reach a different result. (§14.7) **8. C.** Commonly the disbursement or note date, not the application date. A closing delay can un-clear a period that was clear at application. (§14.4) **9. B.** Discharge and dismissal are different events with different periods, and the borrower's recollection is unreliable. Get the document. (§14.4) **10. C.** Extenuating circumstances is defined around a *nonrecurring* event outside the borrower's control. Divorce and business failure are commonly not accepted on their own. (D) is not a hardship at all — it is a strategic default. (§14.4) **11. C.** Fannie Mae Form 1008 / Freddie Mac Form 1077. Form 1003 is the loan application, Form 1004 is the appraisal report, Form 4506-C is the IRS transcript request. (§14.5) **12. B.** The 1008 carries conclusions, not documents — income, payment, ratios, funds, reserves, score, and the underwriter's comments. (§14.5) **13. C.** A different and generally stricter standard, not a lenient fallback. (§14.8) **14. B.** The lender, to the investor, at delivery. (§14.10) **15. B.** Repurchase at par — and typically on a loan that has already defaulted, which is what makes it expensive. (§14.10) **16. B.** Misrepresentation, misstatement, or omission is the commonly cited life-of-loan exclusion that matters most to an originator, because it never ages off. (§14.10) **17. C.** At least three: the lender's own decision, made against the agency's guidelines, plus the mortgage insurer's separate approval above 80% loan-to-value. Forgetting the third is a classic way to lose a file. (§14.7) **18. B.** About \$105. One percentage point of \$10,500.00 is \$105.00; put differently, every \$100 of new monthly debt costs about 0.95 points of back-end ratio. (§14.5) **19. B.** $19 \times \$429.00 = \$8{,}151.00$. The ratio falls from 42.66% to 38.58%; reserves fall from \$12,623.66 (4.16 months) to \$4,472.66 (1.47 months). The ten-month rule does not reach a debt with 19 payments left. (§14.5, and Chapter 4 for the rule) **20. A.** Total debt ratio minus housing expense ratio — on the Linden Street file, $42.66\% - 28.89\% = 13.77\%$. It tells the underwriter how much of the burden is the house and how much is everything else. (§14.5) **21.** *Eligibility:* is this loan — this property, occupancy, purpose, product, amount — of a kind the investor will buy at all? *Creditworthiness:* will this particular borrower repay this particular loan? The first is close to binary; the second is a gradient. (§14.3) **22.** Any two of: a **lender overlay** setting a higher floor (row: your lender); a **mortgage insurer** requirement if the loan is above 80% loan-to-value (row: the MI company); an **aggregator's** requirement if the loan is not sold to the agency directly (row: the investor above your lender); an **eligibility** failure elsewhere in the file that has nothing to do with score (row: the agency guide). A minimum score is a floor, not a pass. (§14.1, §14.7) **23.** Something like: "Each of those things by itself is fine. Together they are not four small problems, they are one bigger one — because low equity, a modest score, a tight ratio, and thin savings all make each other worse. The underwriter is looking at the combination, not the list." (§14.6) **24.** The event type; the measuring date; the ending date; and the extenuating-circumstances path. The **measuring date** is the one loan officers get wrong — discharge versus dismissal, the date the deed transferred versus the date the borrower moved out. (§14.4) **25.** Any four, correctly aimed — for example: reserves beyond requirement → payment shock and variable income; minimal payment shock → ability to sustain the new payment; long verified housing history → the first-time-buyer flag; low housing ratio → a back-end ratio driven by consumer debt; low loan-to-value → nearly everything. Two that carry nothing: "they're good people" (not documentable) and "they're getting a raise" (future income is not qualifying income). Also worthless: unverified assets, and a strength the guide already required, which is double-counting. (§14.9) **26.** The lender warrants at delivery that the loan met the guidelines — including the borrower's obligations. Undisclosed debt taken on between approval and closing would make that representation untrue, and misrepresentation and data-integrity findings do not age off. So the refresh is not suspicion of the borrower; it is the lender confirming a fact it is about to promise. (§14.10)