Loan Officer Practice Exam

What type of expense is most likely to be disallowed from a self-employed applicant's income calculation?

1. A cash expense

2. A one-time event expense

3. A business-related expense

4. A deductible expense

The correct answer is: A one-time event expense

When assessing a self-employed applicant's income for loan qualification purposes, certain expenses must be scrutinized to present an accurate financial picture. One-time event expenses typically represent non-recurring costs that do not reflect the ongoing financial health of the business. Lenders focus on consistent, stable income as part of the qualification process, and because one-time expenses can distort the applicant's usual income levels, they are often disallowed from the income calculation. In contrast, cash expenses, business-related expenses, and deductible expenses are often considered as they can directly relate to the applicant's ability to generate income. Business-related expenses, for example, are necessary for the operation of the business and may be accounted for, whereas deductible expenses are indicative of the tax situation and do not necessarily imply a loss of business viability. Understanding these nuances helps in accurately reflecting a self-employed individual's income during the loan application process.