The Mortgage Lending Process

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Mortgage Principles and Practices 4th Edition (02/21/2012)

The Mortgage

Lending Process

Chapter 3

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Chapter 3: The Mortgage Lending Process

Chapter Objectives

• Define the various roles that mortgage professionals play.

• Distinguish between approval and pre-qualification.

• Identify the steps in the loan process.

• Discuss the information necessary to complete a standard loan application.

• Identify criteria for evaluating borrowers. • Calculate income and debt ratios. • Explain credit scoring.

• Discuss the settlement process, including reconciliation.

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Mortgage Functions

• Origination: Making or initiating a new loan – Initial contact with borrower

– Ordering credit report, other required documentation

• Loan Processing: Verifying information contained in the loan file

– Employment and other verification – Coordination of loan process

• Underwriting: Evaluating and deciding whether to make a new loan, and if so, on what terms

– Done by the funding source

– Evaluates credit scores/history, appraisals, job history, collateral, etc. • Servicing: Continued maintenance of loan after closing

– Lender, servicing company, other

– Mortgage and escrow statements, collecting payments, pursuing late payments

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Pre-Qualification or Pre-Approval

• Pre-Qualification: Pre-determining what a potential borrower may be able to borrow

– Does not guarantee approval; not binding

– Done by any MLO (Broker or Lender)

– Does not always require disclosure

• Pre-Approval: Determining if potential borrower can be financed and for what amount

– Rendering a credit decision; may be binding

– Only done by a lender (Broker passes along approval)

– Triggers mandated disclosures, unless specific property not identified

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Traditional Steps in Loan Process

1. Consulting with the mortgage loan

originator

2. Completing a loan application

3. Processing a loan application

4. Analyzing the borrower and property

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Interest Rates

• Amount charged by a lender to a borrower

for the use of assets, expressed as a

percentage of the loan amount (the principal)

• Basis point: 1/100th of a percentage point

• Par rate:

Rate without points/discounts

lenders offer only to mortgage brokers

• Rate lock

: Lender commitment to specific

interest rate for specific period of time

• Float

: Borrower “bets” on interest rate; does

not lock before close

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Generic Mortgage Lender

Rate 30 Day Price 60 Day Price 90 Day Price

4.00 1.00 (1.50) (2.00)

4.50 0 (.5) (1.00) 5.00 1.00 .50 0

“We pay for things we like, and charge for things we don’t”

Credit Score < 720 (.50) LTV < 80% 1.00 Non Owner Occupied Property (2.00)

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Common Fees

• Common fees

– Credit bureau report – Property appraisal report – Inspections

– Title insurance – Recording fees

• Lender’s return: Totalamount lender can make from a loan in relation to amount invested

– No compensation that varies based on loan terms

• Origination fee: Covers administrative costs of making and processing loan

– Must be disclosed on Good Faith Estimate (GFE)

• Points: One percent of the loan amount • Only credit report fee may be collected prior to

delivering Truth in Lending Statement/GFE

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Discount Points

• Points paid upfront to reduce interest rate

– Prepay some interest as upfront out-of-pocket – May qualify for a larger loan

• Must reflect bona fide reduction

• May be paid by seller to make property more

marketable

• Discount pricing based on lender

assumptions and calculations

• Shifts timing of fees to upfront from later in

loan term (through lower interest)

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Yield Spread Premium

• Tool that MLOs can use to lower the upfront

out-of-pocket expense for borrower

• Borrower pays higher interest rate in

exchange for eliminating some closing

costs/fees

• Shifts timing of fees from upfront to later in

loan term (through higher interest)

• Shown as a credit to borrower on GFE

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Qualifying Standards

• Analysis of the current or allowable monthly housing expense based on the borrower’s income and debt

• Housing expense ratio • Total debt-to-income ratio • PITI: Monthly mortgage payment

–Principal

–Interest

–Taxes (property and perhaps special assessment)

–Insurance (homeowners, mortgage, flood if applicable) – Required homeowners association fees must be counted

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Housing Expense Ratio

• Relationship of the borrower’s total monthly

housing expense (PITI) to income,

expressed as a percentage

Total Housing Expense ÷ Gross Income = Ratio%

• Also called the front end ratio

• Should not exceed 28% for conventional

loans

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Case in Point

• Mark has a stable monthly gross income of

$2,900 and the house he wants to buy would

have a monthly mortgage payment of $700:

$700 ÷ $2,900 = 0.24 or 24%

• Housing expense ratio is acceptable for a

conventional loan since it’s below 28%.

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Total Debt-to-Income Ratio

• Relationship of the borrower’s total monthly debt obligations (PITI + long-term debts) to income, expressed as a percentage

Total Debt ÷ Gross Income = Ratio %

• Long-term debt: Any installment debt with 10 or more payments left or other debt that will not be cancelled

• Also called: – Back end ratio – DTI

– Total debt service ratio

• Should not exceed 36% for conventional loans

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Case in Point

$2,900 Stable Monthly Gross Income $700 Proposed Mortgage Payment $225 Auto Payment (18 payments left) + $100 Child Support

$1,025 Total

$1,025 ÷ $2,900 = 0.35 or 35%

• Total DTI ratio is acceptable for a conventional loan • Borrower must generally qualify under both ratios

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PROPERTIES

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Determining Maximum Mortgage

• Housing expense (for conventional)

Stable monthly gross income x .28 = Maximum PITI

• Debt-to-income (for conventional)

Stable monthly gross income

x .36

Total amount of long term debts

- Monthly long-term obligations

Maximum PITI

• DTI more realistic measure

• Smaller of the two is the maximum mortgage payment allowable

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Housing Payment (PITI)

Qualifying with Ratios

Housing Expense

Ratio

PITI / Income

Other Debts

Total Debt to

Income

(PITI + Other Debts)/Income

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Case in Point

$3,200 Monthly Gross Income x 0.28 Income Ratio

$ 896 Maximum Mortgage PITI Payment

$3,200 Monthly Gross Income x 0.36 Income Ratio

$1,152 Maximum Debt - $220 Car Payment

- $ 75 Personal Loan Payment

- $ 50 Revolving Charge Card Payment $ 807 Maximum Mortgage PITI Payment

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Completing the Loan Application

• Detail borrower’s

– History – Trends – Attitude

• Attempt to predict future loan repayment

behavior

• Uniform residential loan application

– Fannie Mae Form 1003 – Freddie Mac Form 65

• May be in writing or electronic

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When is an Application an “Application”

”?

• Submission of a borrower‘s financial

information in anticipation of a credit

decision

– Borrower's name, monthly income, and Social Security number to obtain a credit report – Property address and an estimate of the value of

the property

– Mortgage loan amount sought

– Any other information deemed necessary by the loan originator

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Memory Tool

• 6 Key Items trigger disclosure.

• “

PENCIL

in the application”

• P

roperty Address

• E

stimated Value

• N

ame

• C

redit (and info needed to get it)

• I

ncome

• L

oan Amount

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Co-Borrowers

• Someone who signs the note along with

primary borrower

• Accepts joint obligation to repay

• Joint ownership interest in security property

• Co-signor does not have joint ownership

interest

• Must have acceptable credit/assets

• If no joint assets/liabilities, two applications

should be used

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Sections I: Type and Terms

• Type of loan

• Loan amount

• Rates

• Term

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Section II: Property and Purpose

• Do not assume or advise on how title should be held

• Occupancy determines interest rate, available programs, and overall risk • FHA loans require bona fide occupancy as principal residence within 60

days then for at least 12 months

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Section III: Borrower Information

• Marital status: Married, unmarried, separated

• May ask about number of dependents borrower must support • Previous address needed if at current address for 2 years or less

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Section IV: Employment Information

• Current and previous employment over two-year period • Self-employed: Owning 25% or more of the business

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Section V: Income and Expense

• Employment income, overtime, bonuses, commissions, dividends, interest, net rental income, and income from any other sources

• Borrower chooses whether to disclose alimony/child support • Current monthly housing expenses allows comparison to proposed to

gauge payment shock

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Section VI: Assets and Liabilities

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Section VI: Assets and Liabilities

• Assets: Items of value

• Liabilities: Financial obligations • Debts: Any recurring

monetary obligation that will not be cancelled • Installment loan with

> 10 monthly payments left usually disregarded • Pledged assets up to

amount owed • Alimony or child

support required to be paid

• Net worth: Subtract liabilities from total assets

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Section VII: Transaction Details

• Estimate of funds required at closing

• Required borrower disclosure:

– Secondary financing – Seller-paid closing costs – Other credits:

• Equity

• Deposits being held

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Section VIII: Declarations

• Outstanding judgments,

bankruptcies, foreclosures, lawsuits, etc.

• Delinquency, defaults on any federal debt, other loan • Alimony/child support

obligations

• Borrowed funds used for any part of down payment • Co-signers on other debts • Citizen/permanent resident • Occupy property as a

primary residence • Ownership interest in other

properties in the past three years

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Section IX: Acknowledgment

• Borrower and any co-borrower must date and sign • Acknowledge:

– Understand and agree to be bound by loan terms – 11 disclosures

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Section X: Government Monitoring

• Monitors compliance with equal credit/housing laws • MLO must note ethnicity, race, sex

– Applicant declines, MLO must note as possible

• MLO must sign application, NMLS unique ID

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Processing the Loan Application

• Gather pertinent information for validation • All aspects of financial situation considered

– Borrower with marginal income may qualify with substantial assets

– Substantial assets may not offset poor credit paying habits

• Co-borrower can help or hurt

– Must have acceptable assets and credit

– Must be able to support self and at least proportionate share of housing expense

• Large down payment can offset marginal credit or income

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Income

• Bonuses

• Commissions above base salary • Part-time earnings • Overtime • Disability payments • Social Security • Pensions

• Retirement payments

• Interest-yielding investments • Rental income • Alimony • Child support • Maintenance

• Unemployment and welfare (if verifiable, continuous, and ongoing)

• Stable monthly income: Monthly income that can

reasonably be expected to continue in the future

• Generally gross base income from primary jobs • Secondary sources include:

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Secondary Income

• Bonuses, commissions, and part-time – Consistent for two years; average may be used – Verify with W-2s, pay stubs, income tax returns • Overtime

– Consistent for two years; average may be used • Disability payments

– Count if permanent

– If expiring, must continue for 3 years • Social Security

– Permanent if retirement age

– If disability, must verify 3-year continuance • Pensions and retirement benefits

– Must be stable and solvent • Interest-yielding investments

– Durable if sound and consistent

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Secondary Income

• Rental income

– Stable pattern of positive cash flow – Use 75% of gross to account for vacancy loss • Alimony, child support, and maintenance – Consistent (written agreement or court decree) – Should continue for minimum of three years • Unemployment and welfare

– Verifiable, continuous, ongoing

–MLOs may not discriminate for receipt of public assistance • Self-employment income

– Must own 25% of business

– Provide personal and entity tax returns – 2 years – May require financial statements

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Evaluating Income

• May add 25% to non-taxable income to develop adjusted gross income

• Each type to be evaluated separately • Stable employment history

– Continuous for 2 years unless explainable • Advancement

• Education and training

• Computing monthly income

– Multiply the hourly wage by the number of hours worked in a week

– Multiply by 52 (weeks in a year) – Divide by 12 (months in a year)

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Case in Point

• Borrower makes $19.50 per hour,

40 hours / week

Hourly Wage: $19.50

Weekly Income: $19.50 x 40 hours = $780 Annual Income: $780 x 52 weeks = $40,560 Monthly Income: $40,560 ÷ 12 months = $3,380

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Verifying Income

• W-2 forms for previous two years

– May be able to get copies from employer

• Payroll stubs for previous 30-day period

– Show borrower and employer

– Include gross earnings for current and YTD

• Verification of Employment (VOE)

• IRS Form 4506-T

– Gives lender permission to request transcript of tax returns

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Reasonable Ability to Repay

• Required by Mortgage Reform and Predatory Lending Act (Title XIV of Dodd-Frank) • Applies to most closed-end consumer credit

secured by dwelling (owner occupied or not) • Requires verified and documented information of

borrower’s ability to repay

• Current or reasonably expected income or assets, • Current employment status, • Monthly payment on the

mortgage (with the calculation based on the fully indexed rate),

• Monthly payment on simultaneous loan, • Monthly payment for

mortgage-related obligations • Current debt obligations, • Monthly DTI or residual, • Credit history.

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Qualified Mortgage

• Defines a safe harbor for compliance • Loan may not contain

– Negative amortization – Interest-only payments – Balloon payments – Term longer than 30 years

• Points and fees may not exceed 3% of loan • Income and assets must be verified/documented • Underwriting considers maximum interest rate for

1st_{5 years, uses fully amortizing payment,}

considers mortgage-related obligations

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Other Provisions of Proposed

Rule

• Limit prepayment penalties to prime qualified mortgages with fixed rate

• Requires maintenance of ability to pay evidence for three years

• Prohibits evasion of the rule by structuring closed-end credit as an open-closed-end plan

• Rule will eventually be finalized by Consumer Financial Protection Bureau

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Mortgage Exercise 3-1

Two months ago, Lisa Zorn was honorably

discharged from the Air Force, where she

spent four years training as an airplane

mechanic. After discharge, she moved to

take a 40 hour/week apprentice mechanic

job with a major airline company where she

earns $18/hour. Last month, her husband

Dave, who has worked the past two years as

registered nurse, found a nursing job with a

local hospital making $625 per week. They

just bought a new car and pay $400 each

month on that loan.

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Mortgage Exercise 3-1

1. What is the maximum mortgage payment (PITI) a lender would allow for a conventional loan based on the housing expense ratio?

– $18 hourly wage x 40 hours in a week x 52 weeks = $37,440 annual income

– $37,440 annual income ÷ 12 months = $3,120 Mrs. Zorn’s monthly income

– $625 weekly income x 52 weeks = $32,500 annual income

– $32,500 annual income ÷ 12 months = $2,708.33 Mr. Zorn’s monthly income

– $3,120 + $2,708.33 = $5,828.33 total stable monthly income

– $5,828.33 x 0.28 = $1,631.93 maximum housing expense

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Mortgage Exercise 3-1

2. What is their total debt-to-income? What is

the maximum mortgage amount (PITI) a

lender would likely approve?

– $5,828.33 x 0.36 = $2,098.20 maximum debt-to-income allowed

– $2,098.20 - $400 (car loan) = $1,698.20 maximum housing expense

– Remember to use the lower monthly payment allowable, which is $1,631.93.

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Mortgage Exercise 3-1

3. Can the Zorns get approved for a loan even

though they’ve only been at their jobs a

short time? Explain.

Yes, although Lisa and Dave have only been at their jobs a short time, Lisa had special training in the Air Force, and Dave is a vocational nurse, which also implies special training.

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Credit History

• Record of debt repayment

– How credit accounts were paid in the past

– Likelihood of paying accounts on time and as agreed in the future

• Borrower must inform lender of all debts • Credit report from national reporting company

– Experian, Equifax, TransUnion – Derogatory ratings must be explained

• ECOA prohibits discrimination in lending based on age, sex, race, marital status, color, religion, national origin, receipt of public assistance

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Credit Scoring

• Objective means of determining creditworthiness of potential borrowers based on a number system

– Correlation between mortgage performance and credit scores • Credit scoring system calculations consider:

– Number of open accounts – Total credit limit

– Types of credit (e.g., credit cards, installment loans) – Length of credit history (e.g., when opened, latest activity) – Total amount of debt outstanding

– Number of late payments in the past 30-60-90 days – Presence of adverse public records Number of recent credit

inquiries

– Re-establishment of positive credit history after past problems • Scores range from 300 to 850

– Fannie Mae/Freddie Mac consider above 720 acceptable; 620-660 marginal; below 620 generally unacceptable

– FHA requires 10% down on scores between 500-579

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Derogatory Credit

• Credit Score Information Disclosure (FACTA)

– Score credit that reporting agency distributed to the lender – Key factors affecting the credit scores

– Credit agency contact information • Bankruptcy (Title 11 of U.S. Code)

– Chapter 7

• Liquidation proceeding • All debts discharged

• Generally appear on credit report for 10 years – Chapter 13

• Individual

• Debts paid off over period of 3-5 years • Generally appear on credit report for 7 years • Other negative information stays on credit report 7 years • Frequent bill consolidation and refinancing could be marginal risk • Encourage borrowers to get annual free copy of credit report

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Assets

• Checking, savings • Gift funds

• Certificates of deposit • Money market funds • Mutual funds • Stocks and bonds

• Secured borrowed funds • Bridge loans

• Retirement accounts • Trust funds

• Expected cash from properties pending sale

• Above average assets offset marginal debt-to-income • Liquid assets quickly converted to cash

• Non-liquid assets include:

– Cash deposits on the sales contract – Cash value of life insurance policies – Net worth of businesses owned – Automobiles

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Down Payment

• Sufficient liquid assets needed for

– Down payment – Closing costs

– Other incidental expenses

• Most programs require 5% down from own funds • Verify source of down payment

• Borrowed funds must be included in total DTI ratio • Gifts may be acceptable for down payment

– Donor gift letter showing funds don’t need to be repaid – Usually from immediate family member

– Fannie Mae/Freddie Mac require at least 5% from own funds unless gift is 20% or more of purchase price

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Reserves and Other Assets

• Reserves: Cash on deposit or other highly liquid assets a borrower will have available after the loan funds

– Prefer at least 2 months PITI – Non-owner occupied require 6 months

– Property converted to investment with less than 30% equity, 6 months for both (conventional)

• Other assets

– Shows ability to manage money – Resources for emergencies

– Real estate equity: Difference between the market value of the property and the sum of the mortgages and other liens against the property

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Verification of Deposits

• One to two months of bank statements

• Verification of Deposit (VOD) current and

average balance

– Does the verified information conform to

statements in the loan application?

– Is there enough money in the bank to pay

costs of buying the property?

– Has the bank account been opened

recently (within the last few months)?

– Is the present balance notably higher than

the average balance?

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Verification of Deposits

• Seasoned funds preferred

– In account for entire period covered by

bank statements

• Red flags that funds may be borrowed:

– Recently opened accounts

– Higher-than-normal balances

• Document source of any large and unusual

deposit

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Insurance and Escrow

• Covers loss or damage to property in the

event of fire or other disaster

• Sufficient to replace home or reimburse

mortgage amount

• Lenders may place insurance to cover loan

value

• 1 year of premiums required before closing

• Usually put in escrow (as with property tax)

• Lender/servicer forwards payments to

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Flood Insurance

• Covers the peril of flood for property in

federally designated special flood hazard

area (SFHA)

• Required by lender for life of loan

• Purchased from:

– National Flood Insurance Program (NFIP)

– Write Your Own program

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Mortgage Exercise 3-2

Sam Able wants to buy a home, and it’s estimated that an 80% conventional loan will have a mortgage payment of $878. He has an automobile payment of $212 a month with 14 installments remaining. He earns $700 per week. His down payment and closing costs are estimated at $18,400. Sam is selling a home with equity of $14,000. He has a checking and savings account with a local bank, and plans to draw on that account to close the transaction. The Verification of Deposit came back showing that Sam’s savings account has an average monthly balance of $1,000 and a current balance of $3,600.

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Mortgage Exercise 3-2

1. What is Sam’s housing expense ratio?

– $700 weekly income x 52 weeks = $36,400 annual income

– $36,400 annual income ÷ 12 months = $3,033.33 monthly income

– $878 mortgage payment ÷ $3,033.33 monthly income = 0.29 (29% housing expense ratio)

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Mortgage Exercise 3-2

2. What is Sam’s total debt-to-income

ratio?

– $878 mortgage payment + $212 auto payment = $1,090 total debt service

– $1,090 total debt service ÷ $3,033.33 monthly income = 0.36 (36% total debt-to-income ratio)

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Mortgage Exercise 3-2

3. Will Sam have any problems closing this

transaction? Explain.

Yes, Mr. Able will have a few problems closing this transaction. The equity in his home ($14,000) plus money in the bank ($3,600) equals only $17,600, but his down payment plus estimated closing costs = $18,400. He needs to show two additional months of cash reserves, and his housing expense ratio of 29% exceeds guidelines.

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Mortgage Exercise 3-2

4. Do you see any problems with Sam’s

Verification of Deposit? Explain.

Yes, Mr. Able’s Verification of Deposit is a problem because his current balance of $3,600 is significantly higher than his average balance of $1,000. He will need to have a good explanation of where the funds came from so the lender knows that he did not borrow the down payment.

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Underwriting: “Art, Not Science”

• Underwriter evaluates:

– Documentation – Borrower information – Various risk factors

• Decision resulting from underwriting process: – Reject loan as applied for (bad risk or

incomplete file)

– Make loan on terms applied for – Make loan on different terms

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Underwriting: Loan File

• MLO should:

– Take ownership of loan file – Review application carefully

– Ensure all documentation is included – Ensure all information is accurate – Identify issues that may be problematic • Underwriter will evaluate:

– Sufficient value in collateral property? – Is borrower likely to be able to make

proposed monthly payments?

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Automated Underwriting Systems

• Reduce cost/time of examining loan package • Provide consistent underwriting decisions • Uses statistical computer models based on

traditional underwriting factors

• Does not consider race, ethnicity, age, other prohibited characteristics

• Recommends approval or refer for manual underwrite

• Fannie Mae’s Desktop Underwriter® and Freddie Mac’s Loan Prospector®

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Real Success

• No standard order for assembling loan

package for lender approval

• Consider including “Dear Underwriter” letter

to acknowledge special circumstances

• Keep borrowers informed throughout

process

• Lender has 30 days to communicate credit

decision

– Approval – Counteroffer – Adverse action

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Closing

(Settlement or Loan Consummation)

• Lender issues clear to close when

conditions met

• Managed by escrow / title agent or attorney

• Follows sales contract / escrow instructions

• Gathers required documents

• Calculates adjustments / prorations

• Compares Good Faith Estimate with HUD-1

• Loan documentation signed and recorded

• Funds disbursed according to settlement

statement

• If sale, also involves transfer of ownership

• Procedures may differ by state/region

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Settlement Statement Reconciliation

• RESPA procedures for closing (HUD-1)

– Reflects total costs

– Debits (like debts): Sums of money owed – Credits: Sums of money received

• Borrower/buyer side:

– Debits owed by borrower added to loan amount/ purchase price

– Mortgage amount is credit to borrower

– Credits – total debits = amount needed to pay at closing – Acquisition cost: Total amount necessary to purchase

property • Sales price

• Charges necessary to close

• Seller side:

– Credits due seller added to purchase price – Total credits – total debits = seller’s net

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Proration

• Division of expenses between buyer and seller in proportion to the actual usage of the item as of day loan is funded

• Accrued expenses

– Items for which the cost has been incurred, but the expense has not yet been paid

– Show as a debit to the seller and a credit to the buyer

• Prepaid expenses

– Items the seller has already paid

– Show as a credit to the seller and a debit to the buyer

• Proration calendars (may be determined by local custom)

– A 360-day year, 12 months of 30 days each. – A 365-day year, counting the exact number of days in

each month (taking leap years into account)

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Proration Steps

1. Determine if the expense is accrued or

prepaid

2. Divide the expense by the appropriate

period to find a monthly (daily) rate

3. Determine how many months (days) are

affected by the expense

4. Multiply the monthly (daily) rate by the

number of affected months (days)

5. Determine which party is credited and which

is debited

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Key Term Review

• Assets

• Bankruptcy • Credit History • Credit Scoring • Debts

• Debt-to-Income Ratio • Discount Points • FICO Score • Float

• Housing Expense Ratio • Liabilities

• Loan Processor

• Mortgage Loan Originator • PITI

• Point • Pre-Approval • Pre-Qualification • Rate Lock • Reserves • Servicer • Stable Income • Underwriter

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Summary

1. Common areas of work:

– Mortgage loan originator takes applications, pulls credit reports, orders appraisals, and assembles documents for mortgage loans

– Loan processor works on the file assembled by the originator, verifies information in the file, coordinates other aspects of the loan and closing

– Underwriter reviews file and arrives at a credit decision—including any conditions—for the lender or investor, based on the credit risk associated with a particular loan

– Servicer oversees the collection of mortgage payments and pursues late payments on behalf of the mortgagee

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Summary

2. Lender’s return is total amount a lender or

broker makes on a loan.

– Loan fees, discount points

– Points are 1% of loan amount, increase lender’s yield, paid for many reasons

– Discount points used to buy down the interest rate – Yield spread premium is a tool MLOs can use to reduce

a borrower’s settlement costs

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Summary

3. Borrowers can get qualified or

pre-approved.

– Pre-qualification. MLO reviews borrower

history to determine if they’re likely to get approved for a loan, and the approximate amount; Not binding on the lender.

– Pre-approval. Lender uses application to

determine that potential borrowers can be financed for a certain amount for a specific property; done only by lender

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Summary

4. The loan process consists of four steps:

1. Consulting with a MLO

2. Completing the application

3. Processing the application

4. Analyzing the borrower and the property

Common fees include credit report, appraisal, title work, inspections, etc. The loan application asks a number of personal and financial questions, along with information about the property the borrower wishes to purchase.

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Summary

5. Borrower data:

– Address and employment information-2-3 years – Income should be stable and verifiable

– Income from alimony/child support may be excluded if borrower chooses

– Self-employed (at least 25% ownership) may need personal, company tax returns and financial statements – Disclose assets, liabilities (alimony, child support

obligations)

– Liquid assets can be quickly converted to cash – Net worth is assets minus liabilities

– Borrowers must answer all declarations truthfully

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Summary

6. Bankruptcy is a court process that cancels debt

and provides some relief for creditors.

– Chapter 7 bankruptcy is a liquidation proceeding where the debtor receives a discharge of all dischargeable debts.

– Chapter 13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. Chapter 13 bankruptcy usually appears on a credit report for 7 years.

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Summary

7. The underwriting process may evaluate:

– Capacity (ability to pay)

– Collateral (down payment, home value) – Credit (good payment history) – Character (job stability, reserves)

– Some elements may be automated to reduce time and costs for lenders. Automated underwriting systems (AUSs) offer computerized analysis to recommend accepting the loan or refer it to a human underwriter for further consideration.

• Fannie Mae—Desktop Underwriter® (DU®) • Freddie Mac—Loan Prospector® (LP®)

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Summary

8. Credit and income:

– Monthly income—stability, quality, and durability – Bonuses, commission, part-time earnings, and

overtime count if consistent; temporary income not usually counted

– Credit history is a record of debt repayment; credit scoring is an objective means of evaluating credit – Lenders verify assets and may require financial

statements

– The three main credit bureaus produce similar credit scores, which range from about 300 to 850

– Gift letter can show part of the down payment/closing costs are a non-repayable gift

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Summary

10. Conforming loans sold on the secondary market (e.g., Fannie Mae and Freddie Mac) require income ratios of

28% for housing expense and 36% for debt-to-income (DTI)

– Housing expense ratio—relationship of borrower’s total monthly housing expense (Principal, Interest, Taxes, Insurance or PITI) to gross stable monthly income, as %

– PITI also includes required homeowners association fees

– Total debt-to-income ratio—relationship of total monthly debt (housing and un-cancelled debts with 10 or more payments left) to gross stable monthly income, as %

(28)

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Summary

11. Closing

– Also called settlement, culmination of the loan process

– Papers are signed and funds disbursed

– In sales transaction, also the transfer of ownership from seller to buyer, per terms of the sales contract (seller receives value for property—cash,

mortgage, etc.—and buyer gets title)

– Proration—division of expenses between buyer and seller in proportion to the actual usage as of day loan is funded

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Chapter 3 Quiz

1.

Bob is buying a house. It was appraised at

$236,000, the sales price is $228,000, and the loan amount is $216,000. In order to buy down his interest rate, Bob is willing to pay 2 points in addition to the 1 point in loan origination fees. What is the price of Bob’s discount points?

A. $4,320 B. $4,720 C. $6,840 D. $7,080

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Chapter 3 Quiz

2. Non-taxable child support income

A. cannot be considered as stable

income.

B. may be counted at 75%.

C. may be counted at 100%.

D. may be counted at 125%.

(29)

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Chapter 3 Quiz

3. If the borrower is self-employed, he or

she should provide

A. average monthly income amount earned over the previous two years.

B. employment verification from the last employer.

C. profit and loss statements for the previous six years.

D. tax returns for the previous two or three years.

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Chapter 3 Quiz

4. A gift letter

A. can come from a borrower’s parent or

guardian only.

B. cannot be used for part of the down

payment.

C. must be signed by the donor.

D. must state when the gift is to be repaid.

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Chapter 3 Quiz

5. To be classified as self-employment

income, the borrower must own at least

what percent of the business used for

qualifying?

A. 5%

B. 10%

C. 25%

D. 50%

(30)

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Chapter 3 Quiz

6. Conforming loans follow guidelines of

A.ECOA.

B.Fannie Mae and Freddie Mac.

C.the FHA.

D.RESPA.

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Chapter 3 Quiz

7. When qualifying for a conventional loan,

stable gross monthly income can

include

A. alimony received (that a borrower

chooses to reveal).

B. bonus received for the first time last

year.

C. erratic unemployment earnings.

D. income from other family members.

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Chapter 3 Quiz

8. If the lender wants the borrower's

permission to get copies of his income

tax returns, the borrower must sign what

form?

A. 1003

B. 4506-T

C. 95-IRS

D. URAR

(31)

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Chapter 3 Quiz

9. Joe wants to get a loan to buy a house.

When evaluating his credit obligations,

which would LEAST LIKELY be

considered as debt?

A.car loan payment

B.cell phone service payment

C.child support payments

D.credit card payments

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