A self-employed borrower's tax returns show significant depreciation expenses that reduce their net income. How should the loan processor handle this for income calculation purposes?
Correct Answer
B) Add back depreciation expenses to calculate qualifying income
Depreciation is a non-cash expense that reduces taxable income but doesn't represent actual cash outflow. Underwriting guidelines typically allow adding back depreciation, depletion, and amortization expenses to determine the borrower's actual cash flow available for mortgage payments.
Why This Is the Correct Answer
Depreciation is a non-cash expense that reduces taxable income but doesn't represent actual cash outflow. Underwriting guidelines typically allow adding back depreciation, depletion, and amortization expenses to determine the borrower's actual cash flow available for mortgage payments.
More Mortgage Knowledge Questions
A borrower is comparing two loan offers: Loan A has no points and 4.5% interest rate, Loan B has 2 points and 4.0% interest rate. The loan amount is $400,000. How much will the borrower pay upfront for the points on Loan B?
A lender charges a 1% origination fee on all loans. For a borrower obtaining a $250,000 mortgage, what is the maximum origination fee that can be charged without violating the points and fees test under the ATR/QM rule for a first-lien mortgage?
Under what circumstances can a Qualified Mortgage include a prepayment penalty?
A borrower is considering paying discount points to reduce their interest rate. Each point costs 1% of the loan amount and reduces the rate by 0.25%. On a $300,000 loan, how much would the borrower pay for 2 discount points?
A borrower asks about the difference between discount points and origination fees. What is the most accurate explanation?
Under TRID regulations, discount points must be disclosed on the Loan Estimate in which section?
During the draw period of a HELOC, what type of payments are borrowers typically required to make?
A borrower has a credit card with a $10,000 balance and $200 minimum monthly payment. They plan to pay off $8,000 of the balance before closing, leaving a $2,000 balance with a $40 minimum payment. How should this be calculated for DTI purposes?
An ARM uses the 1-year Treasury index, which is currently at 2.1%. The margin is 2.75%, but the loan has a floor rate of 5.5%. What rate will the borrower pay?
Which statement about prepayment penalties is correct under federal regulations?
People Also Study
Federal Mortgage-Related Laws
23% of exam
Mortgage Loan Origination Activities
25% of exam
Ethics, Fraud & Consumer Protection
17% of exam
Uniform State Test Content
12% of exam