A self-employed borrower's tax returns show significant depreciation expenses that reduce their adjusted gross income. For mortgage qualification purposes, the MLO should:
Correct Answer
B) Add back depreciation expenses to the net income since depreciation is a non-cash expense
Depreciation is a non-cash expense that reduces taxable income but doesn't represent actual cash outflow. GSE guidelines allow adding back depreciation expenses to determine cash flow available for mortgage payments, as this better reflects the borrower's actual financial capacity.
Why This Is the Correct Answer
Depreciation is a non-cash expense that reduces taxable income but doesn't represent actual cash outflow. GSE guidelines allow adding back depreciation expenses to determine cash flow available for mortgage payments, as this better reflects the borrower's actual financial capacity.
More Origination Questions
A borrower has a construction-to-permanent loan with a 12-month construction phase. At month 10, construction is only 60% complete due to delays. What is the most likely outcome?
For a construction-to-permanent loan, when must the initial Closing Disclosure be provided for the construction phase?
During a refinance transaction, the appraiser determines that significant unpermitted additions were made to the property. The appraiser wants to discuss this with the MLO before finalizing the report. What should the MLO do?
An appraiser discovers that a property has significant foundation issues that were not disclosed. The appraiser reduces the property value by $25,000 and includes detailed comments about the structural problems. The loan officer is upset because this will kill the deal. Under AIR, the loan officer:
An MLO's compensation structure includes higher payments for certain loan products. When is it acceptable to recommend these higher-compensated products?
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