Difficulty: Medium

Average Score: 50%

A borrower informs a mortgage loan originator (MLO) that he will receive an annual raise of $2,400 just prior to the loan closing. The MLO should:

Rationale

List the borrower's current income.

The mortgage loan originator (MLO) should list the borrower's current income as it is the most accurate reflection of the borrower's financial situation at the time of loan closing. Future raises are not guaranteed and should not influence the current assessment of the borrower's ability to repay the loan.

A (list the borrower's current income.) CORRECT

This choice is correct because the MLO must base the loan application on verified income rather than anticipated future earnings. Current income provides a reliable measure of the borrower’s financial capability to handle mortgage payments, ensuring responsible lending practices.

B (prorate the raise through the end of the year.) YOUR ANSWER

Prorating the raise assumes that the borrower will definitely receive the raise, which is not guaranteed until it occurs. Lenders typically require confirmed income, making this approach speculative and potentially misleading for loan eligibility assessments.

C (add $200 per month to the borrower's income.) YOUR ANSWER

Adding $200 per month based on the expected raise is inappropriate, as it does not represent the borrower's actual income at the time of application. Lenders require documented income; speculative increases can lead to miscalculations of debt-to-income ratios and may affect loan approval.

D (review last year's tax returns to verify if raises are given annually.) YOUR ANSWER

While reviewing tax returns can provide some insight into the borrower's earnings history, it does not directly address the current income to be listed for the loan application. This choice does not fulfill the requirement of documenting current income and relies on historical data rather than present circumstances.

Conclusion

In mortgage lending, it is crucial to use verified and current financial information when assessing a borrower's ability to repay. By listing the borrower's current income, the mortgage loan originator ensures compliance with lending standards and protects both the borrower and lender from the risks associated with overestimating future income. This practice fosters responsible lending and minimizes the potential for default.

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