Chapter 3 Mortgage Loan Origination Activites

Chapter 3 Mortgage Loan Origination Activites
MLO Boot Camp Chapter 3 Mortgage Loan Origination Activites

Origination is the process of making or initiating a new loan
Origination is the process of making or initiating a new loan. It may involve tasks such as being the initial contact to a consumer and taking a loan application to ordering a credit report and assembling all of the other forms and documents required by the person or company who is underwriting the loan. Next, a loan processor is typically responsible for verifying the information contained in the file assembled by the originator, such as sending out employment verification forms, and coordinating the various aspects of the loan (such as working with the title company). Underwriting is the process of evaluating and deciding whether to make a new loan. This is done by the funding source (lender), never by a mortgage broker. Underwriting involves evaluating credit scores, credit history, appraisals, job history, and other measures of strength or weakness in the borrower and the collateral. Servicing is the continued maintenance of a loan after the loan has closed.

Introduction Application information and requirements
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Introduction Application information and requirements Qualification, processing, and underwriting Specific program guidelines Closing Financial calculations used in mortgage lending

Key Terms 2-1 Buydown 3-2-1 Buydown Assumption Automated Underwriting
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Key Terms 2-1 Buydown 3-2-1 Buydown Assumption Automated Underwriting Basis Point Closing Co-Mortgagor Credit History Discount Junk Fees Loan-to-Value Ratio (LTV) Mortgage Insurance Premium (MIP) Origination Origination Fee PITI 2-1 Buydown A graduated payment buydown where the payments are subsidized for only two years, usually 2% the first year and 1% the second year. 3-2-1 Buydown A graduated payment buydown where the payments are subsidized for three years, usually 3% the first year, 2% the second year, and 1% the third year. Assumption When one party takes over the responsibility for the loan of another party and the terms of the loan or note remain unchanged. (Usually lender approval is needed. Also, a release is needed or original party remains secondarily liable for the loan.) Automated Underwriting Process where loan applicant information is entered into a computer and an evaluation comes back within minutes advising the lender to accept the loan, or refers the loan application for further review. Basis Point A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument, commonly used for calculating changes in interest rates. The relationship can be summarized as 1% change = 100 basis points. Closing The final stage in a real estate transaction where ownership of real property is transferred from seller to buyer according to the terms and conditions set forth in a sales contract or escrow agreement. Co-Mortgagor A person who signs a mortgage with the primary mortgagor and thus accepts a joint obligation to repay the loan. Also called Co-Borrower or Co-Signer. Credit History A person’s record of debt repayment detailing how a person paid credit accounts in the past. Credit history is used as a guide to how likely the borrower is to pay accounts on time and as agreed in the future. Discount Points An amount paid to a lender when a loan is made to make up the difference between the current market interest rate and the rate a lender gives a borrower on a note. Junk Fees Set dollar amounts charged by a lender, rather than a percentage of the loan amount, that do not show up as points on the loan. Loan-to-Value Ratio (LTV) The amount of money borrowed compared to the value or price of the property. Mortgage Insurance Premium (MIP) The fee charged for FHA mortgage insurance coverage. The initial premium (upfront mortgage insurance premium or UFMIP) can be financed and there may be a renewal premium. Origination The process of making or initiating a new loan. Origination Fee An upfront fee charged by some lenders, usually expressed as a percent of the loan amount. PITI A typical mortgage payment that includes Principle, Interest, Taxes, and Insurance. Points One percent of the loan amount. Points are charged for any reason, but are often used for buydowns (where they may also be called discount points). Points are used to increase the lender’s yield on a loan.

Key Terms Points Pre-Approval Principal
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Key Terms Points Pre-Approval Principal Private Mortgage Insurance (PMI) Processing Qualifying Rate Protection Reserves Secondary Financing Seller-Paid Items Servicing Teaser Rates Underwriter Pre-Approval Process by which a lender determines if potential borrowers can be financed through the lender, and for what amount of money. Principal With regard to a loan, the amount originally borrowed. Private Mortgage Insurance (PMI) Insurance offered by private companies to insure a lender against default on a loan by a borrower. Processing Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. Qualifying The process of determining whether or not a borrower is likely to default on a loan and that the property is worth enough to satisfy the debt if the borrower does default. Rate Protection Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial levels until the loan closes; or a "float-down" where the rates and points cannot rise from their initial levels but they can decline if market rates decline. Reserves Cash on deposit or other highly liquid assets a borrower must have in order to cover two months of PITI mortgage payments, after they make the cash down payment and pays all closing costs. Secondary Financing When a buyer borrows money from another source in addition to the primary lender to pay for part of the purchase price or closing costs. Seller-Paid Items Closing costs paid by the seller instead of the buyer. This usually refers to items normally paid by the buyer, but in some instances are paid by the seller to help close the sale. FHA and VA loans limit this. Servicing The process of collecting payments, keeping records, and handling defaults for loans. Teaser Rates A low initial rate on an ARM. The rate usually returns to normal at the first adjustment date. Underwriter The individual who evaluates a loan application to determine its risk level for a lender or investor. The underwriter is usually the final decision maker on a borrower’s loan application.

Loan Application Standard loan application
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Loan Application Standard loan application Fannie Mae Form 1003 Freddie Mac Form 65 Collects information on both borrower and property Mortgage type, terms Property info, purpose Personal borrower info Employment info (2 years) Monthly income Assets, liabilities Transaction details Government monitoring

Accuracy & Truthfulness
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Accuracy & Truthfulness Borrower declaration about accuracy: Obligations for alimony or child support Outstanding judgments, bankruptcies, foreclosures, etc., Borrowed down payment funds Co-signer on any other debt U.S. citizen, permanent resident Primary residence Sign and date to show understanding Update any material changes before closing

Verification & Documentation
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Verification & Documentation Net worth: Subtract liabilities from total assets to confirm: Sufficient assets for down payment, closing costs Adequate reserves to cover two months PITI Other assets, if needed, to handle emergencies and make mortgage payments

Down Payment Source of funds:
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Down Payment Source of funds: Conventional generally can’t used borrowed funds or gifts for first 5% May require 2 months bank statements or Verification of Deposit (VOD) Gift letter must be signed by donor

Employment Documentation
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Employment Documentation Self-employed needs personal and corporate tax returns for a minimum of 2 years Should have continuous employment for at least 2 years in the same field: Appropriate W-2 forms Original pay stub for the previous 30-day period May require Verification of Employment (VOE) forms Changes for advancement or special education and training can mitigate

Disclosure Review: RESPA
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Disclosure Review: RESPA Within 3 days of loan application: Special Information Booklet Good Faith Estimate (GFE) of Settlement Costs Mortgage Servicing Disclosure Statement

Disclosure Review: TILA
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Disclosure Review: TILA Within 3 days of loan application: Truth in Lending Statement (TIL) to disclose annual percentage rate Guide on reading the TIL Consumer Handbook on Adjustable Rate Mortgages or CHARM booklet (if applicable) ARM Disclosure (if applicable) Balloon Disclosure (if applicable) Prepayment Disclosure When Your Home is on the Line Disclosure (for home equity loans)

Disclosure Review: TILA
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Disclosure Review: TILA TILA’s discrepancy tolerance from APR: 1/8 ( .125%) for a fixed rate note 1/4 ( .25%) for an adjustable rate note Three-year right of rescission if: TIL not given to the consumer or APR is not accurate within this prescribed range

Loan Processing Review data in loan file and verify as necessary
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Loan Processing Review data in loan file and verify as necessary Assemble a loan package: Credit report Verification forms Preliminary title report Appraisal Loan disclosures Pass to underwriter: Evaluates a loan application Determines its risk level Makes final decision; may be automated: Fannie Mae – Desktop Underwriter® (DU®). Freddie Mac – Loan Prospector® (LP®).

Borrower Analysis: Qualifying
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Borrower Analysis: Qualifying Evaluating borrower’s creditworthiness: Assets Liabilities Income Credit report Qualifying ratios Determining the risk of the loan: Sufficient value in the property (collateral) Borrower’s overall financial situation

Assets and Liabilities
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Assets and Liabilities Assets -- Items of value owned by the borrower Liabilities -- Financial obligations or debts owed by a borrower. Debts -- Any recurring monetary obligation that cannot be cancelled (less than ten payments remaining generally not considered)

MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Stable Monthly Income Monthly income that can reasonably be expected to continue Secondary sources may include: Bonuses Commissions Part-time earnings Overtime Disability payments Social Security Pensions Retirement Interest-yielding investments Rental income Alimony Child support (continue 3 years) Maintenance Unemployment / Welfare (if extended pattern)

Other Income Considerations
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Other Income Considerations Alimony, child support, and/or maintenance do not need to be listed as sources of income if a borrower does not want them considered Tax free income may be “grossed up” by 1.25% Cannot discriminate on source of income (ECOA) Only head of household considered (unless co-mortgagor) To convert hourly wages to monthly: Multiply the hourly wage by 40 (hours in a work week) Multiply by 52 (weeks in a year) Divide by 12 (months in a year)

Credit Report/Scoring
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Credit Report/Scoring Credit report Record of debt repayment Chapter 7 bankruptcy (liquidation) remains 10 years Chapter 13 bankruptcy (reorganization) remains 7 years Credit scoring Objective means of determining creditworthiness Numeric representation of credit profile Calculated differently by all credit bureaus Credit Bureaus Credit Score Experian FICO (Fair, Isaac & Co.) Equifax BEACON TransUnion EMPIRICA

Borrower must qualify under BOTH housing expense ratio and
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Qualifying Ratios Loan-to-Value Ratio (LTV) Loan Amount / Lesser Sale Price or Appraised Value = LTV % Housing Expense Ratio PITI / Gross Monthly Income = Housing Expense % Total Debt Service Ratio Total Debt / Gross Monthly Income = Total Debt Service Ratio % Borrower must qualify under BOTH housing expense ratio and total debt service ratio

Qualifying Ratios Housing Expense Ratio Total Debt Service Ratio
Conventional 28% 36% FHA Loans 31% 43% VA Loans Not used 41%

Appraisals Opinion of market value as of a certain date, supported by objective data Only an estimate or opinion, not a guarantee of value Only valid as of its effective date, which establishes terms, conditions, and economic circumstances upon which the value is estimated Appraisal approaches independent of the others and performed separately: Sales comparison approach Cost approach Income approach

Appraisals: Sales Comparison
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Appraisals: Sales Comparison Compares subject to similar properties (comparables or comps) recently sold Comps are adjusted for missing or additional features Rooted in market activity Minimum of 3 comps for secondary markets Values of comps reconciled to arrive at subject value Most useful for residential property

Appraisals: Cost Calculates cost of land, site improvement, and construction of structure Most useful for unusual or non-income producing property

Appraisals: Income Analyzes revenue, income property does or could generate Sometimes called capitalization approach Most useful for income-producing commercial and investment property

Appraisal Terminology
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Appraisal Terminology Arm’s Length Transaction--One that occurred under typical conditions in the marketplace, with each party acting in his own best interests. As-Is--A typical appraisal; property value determined based on a complete and thorough examination of the subject property as it currently sits and in its present condition, as opposed to being subject to other hypothetical conditions, extraordinary assumptions, or repairs. Automated Valuation Model (AVM)--Part of an automated underwriting system that is able to provide a probable value range for properties by performing a statistical analysis of available data. While not true appraisals, AVMs can reduce the time and costs necessary to close a loan. Contribution--The concept that a particular item or feature of a home is only worth what it actually contributes in value to that piece of property.

MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Appraisal Terminology Depreciation--The loss in value to property for any reason. Factors contributing to depreciation can be classified as curable, which means that they can be remedied at a reasonable cost, or incurable, which means that the cost to remedy the issue would exceed what it contributes to the value of the property. Desktop Underwriter® (DU®). The AVM component of Fannie Mae’s Automated Underwriting System that uses public information, such as tax records, to determine the reasonableness of the sale price, and whether the property is adequate collateral for the loan. If everything appears within normal parameters, DU recommends the use of Form 2075 Property Inspection Report.

MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Appraisal Terminology External Obsolescence--Something outside the control of the property makes it less desirable; always considered incurable since the property owner cannot remedy it. Also known as economic obsolescence. Functional Obsolescence--Describes a building that is less desirable because of something inherent in the structure itself; may be curable or incurable. Gross Living Area (GLA)--Residential space that’s finished, heated, and above grade. Garages, finished basements, and storage areas don’t count in GLA. Highest and Best Use. The use that is the most physically possible, legally permissible, economically feasible, and maximally profitable or productive.

MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Appraisal Terminology Market Value--The theoretical price a property is most likely to bring in a typical transaction. Recertification of Value (Recert)--Completed to update or confirm the estimate of value of the original appraisal; also sometimes necessary to confirm whether or not certain conditions in the original appraisal have been met, such as when the property was “subject to” some repair or renovation or when the appraisal was performed on a property under construction. Does not change the effective date. This use is also known as a completion report. Uniform Residential Appraisal Report (URAR)--The primary form used for single-family residential property appraisals; must adhere to the standards set forth by USPAP.

Title Report Marketable title—free and clear from undisclosed encumbrances or defects Title search determines ownership and quality of title Abstract of title—chronological summary of chain of title Preliminary title report—current status of property

Insurance Contract that compensates for loss from designated hazard
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Insurance Contract that compensates for loss from designated hazard Lenders have insurable interest Homeowner’s hazard insurance Flood insurance Mortgage insurance

Homeowner’s Insurance
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Homeowner’s Insurance Covers loss / damage from fire or other disaster Policy sufficient to replace home or reimburse mortgage amount Lenders can place insurance if borrower does not comply Usually require first year premium prior to closing Annual cost placed in escrow, prorated over 12 months, added to monthly principal and interest due and forwarded to insurer

Flood Insurance Homeowner’s hazard insurance doesn’t cover flood damage Homes in designated flood zones generally require flood insurance Must purchase from National Flood Insurance Program (NFIP)

Mortgage Insurance Policy that allows lender to recover part of loss in the event of borrower default Private mortgage insurance required for conventional loans with 80% LTV Homeowners Protection Act of 1998 (HPA) Automatically cancel when LTV < 78% Borrower can request cancellation when LTV is 80% FHA loans require upfront mortgage premium and annual premium on balance

Conforming Loans Meet Fannie Mae / Freddie Mac standards
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Conforming Loans Meet Fannie Mae / Freddie Mac standards Qualifying ratios: Housing expense ratio – 28% Total debt service ratio – 36% 5% or 10% down payment with 2 months reserves on deposit Single family home limit of $417,000 (higher in designated areas)

FHA Loans Insured by federal government through HUD with lenders approved by FHA Qualifying ratios: Housing expense ratio – 31% Total debt service ratio – 43% MIP required regardless of down payment Upfront, 1.75% of loan Annual premium, .25% or .55% of balance

FHA Loans Loan limits based on median home price in community
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities FHA Loans Loan limits based on median home price in community Minimum down payment of 3.5% of purchase price or appraisal, whichever is less Fees not directly benefiting buyer prohibited Seller contribution limited to 6% Loan assumption allowed if buyer is qualified and approved Prepayment penalties prohibited

FHA Loans Programs Section 203(b), Standard FHA--owner-occupied property Section 203(i), Rural Properties--up to 2.5 acres of land Section 203(k), Rehabilitation Loans--extra cash for repairs Section 234(c), Condominiums--must meet FHA standards Section 251, FHA ARM Loans--limited to one- to four-family dwellings and condominium units. FHA Energy Efficient Mortgage Loans--finance the cost of adding energy efficient improvements

VA Loans Guaranteed by Veterans Benefits Administration with lenders approved by VA Veteran eligibility based on length of service Required documentation DD-214 discharge papers Certificate of Eligibility Qualifying ratios: Total debt service ratio – 41% Residual income considers size of family No mortgage insurance required

VA Loans Loan limit set by Certificate of Reasonable Value (CRV)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities VA Loans Loan limit set by Certificate of Reasonable Value (CRV) No down payment required Variable funding fee 1.25% - 3.3% at closing May be waived for disabled veterans Seller contribution Limited to 4% closing costs No limits on discount points Loan assumption allowed if buyer is qualified and approved Prepayment penalties prohibited

VA Loan Programs Primary purchase loan
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities VA Loan Programs Primary purchase loan Fixed rate Fully amortized 10 – 30 years VA Interest Rate Reduction Refinance Loan (IRRRL or VA Streamline) Cash-out refinancing loan

USDA Loans Administered by U.S. Department of Agriculture Rural Development via Housing and Community Facilities Programs (HCFP) Loan assistance in rural communities Section 502 loans Guarantees loans from approved lenders Makes direct loans if no lender available No down payment required No mortgage insurance of any kind required

USDA Loans Income requirements based on area median income (AMI)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities USDA Loans Income requirements based on area median income (AMI) Guaranteed Rural Housing (GRH) Loans Made by approved lenders Income up to 115% of AMI Direct Loans Funded by USDA Very low (below 50%) or low (50%-80%) income

Closing Agent Follows instructions of buyer and seller
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Closing Agent Follows instructions of buyer and seller Gathers necessary documents; ensures proper signatures Documents the various adjustments and fees charged to each party: Debits (like debts) are sums of money owed Credits are sums of money received Calculates the various prorations Completes the HUD-1 Settlement Statement Compares GFE to the HUD-1

Title and Title Insurance
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Title and Title Insurance Seller expected to deliver marketable title Title search of public records determines quality of title Chain of title--clear and unbroken chronological record of ownership Cloud on the title--gap in the chain of title Suit to quiet title--closes any missing links; removes clouds Title insurance protects lenders against loss due to disputes, defects in title Mortgagee policy generally paid with one-time premium Coverage runs from purchase to subsequent conveyance

Origination Fee Charged on loans that close
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Origination Fee Charged on loans that close Covers administrative costs to close / service loan Sometimes called loan service fee Usually based on percent of loan amount (1% = 1 point) Usually paid out of closing funds

Fees May be taken out of closing funds or paid upfront and credited at closing RESPA prohibits any fee that was not properly disclosed on the GFE Other typical fees: Application fee Credit bureau report Property appraisal report Preliminary title report Inspection fees Title insurance Recording fees

Closing: Promissory Note
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Closing: Promissory Note Evidence of promise to pay Typically includes: Date Names of the parties Amount of the debt How and when the money is to be paid What happens in the event of default Prepayment penalties, if any Signature of the maker

Closing: Mortgage Security instrument
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Closing: Mortgage Security instrument Creates voluntary lien on property Gives lender right to sell property upon default Hypothecation--pledge property as collateral for loan while maintaining possession

Closing: Other Documents
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Closing: Other Documents HUD-1 Settlement Statement--shows all fees, credits, debits, and costs associated with loan Final Truth in Lending Statement--discloses finance charge expressed as APR (annual percentage rate) Initial Escrow Statement--itemizes 12-months of escrow funds: Insurance premiums Estimated property tax

Funding the Loan Conditional approval--additional items required
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Funding the Loan Conditional approval--additional items required Clear to close--issued by lender when all conditions are met and loan papers ready to be signed Funds disbursed 3-day right of rescission: Loans secured by a primary residence Section 32 loans (high-cost loans)

Principal and Interest
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Principal and Interest Interest--the cost of borrowing money Principal--the balance of the loan Principal x Interest Rate = Annual Interest

Example: Principal and Interest
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example: Principal and Interest Loan Balance: $135,000 Interest Rate: 7.5% Monthly Mortgage Payment (P&I): $985 .075 x $135,000 = $10,125 (annual interest) $10,125 / 12 = $ (monthly interest) $985 - $ = $ (applied to principal)

Interest Per Diem Mortgage loan interest paid for previous month
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Interest Per Diem Mortgage loan interest paid for previous month Seller debited daily interest amount Principal x Interest Rate / 365 = Per Diem Rate Closing Day x Per Diem Rate = Debit to Seller

Example 1: Interest Per Diem
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example 1: Interest Per Diem Existing Loan: $40,000 Interest Rate: 5% Close Date: June 10 $40,000 x .05 = $2,000 (annual interest) $2,000 / 365 = $5.48 (per diem interest) 10 Days x $5.48 = $54.80 (debit to seller)

Example 2: Prepaid Interest
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example 2: Prepaid Interest $100,000 new loan Interest rate of 6% Loan closes on June 10 $100,000 x .06 = $6,000 (annual interest) $6,000 / 365 = $16.44 (per diem interest) Closing Day + 20 days left in June = 21 days 21 x $16.44 = $ (debit to buyer)

Loan-to-Value Amount borrowed for first mortgage compared to value of property Used by lenders to determine how much willing to loan Use the lower of appraised value or sale price Loan Amount / Property Value = LTV

Example 1: LTV Sale Price: $120,000 Appraised Value: $125,000
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example 1: LTV Sale Price: $120,000 Appraised Value: $125,000 Down Payment: $ 24,000 Loan Amount: $ 96,000 $96,000 / $120,000 = .80 or 80% LTV

Example 2: LTV, Down Payment
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example 2: LTV, Down Payment Sale Price: $148,000 Appraised Value: $150,000 Required LTV: 85% $148,000 x .85 = $125,800 (loan) $148,000 - $125,800 = $22,200 (down)

Example 3: LTV, Down Payment
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example 3: LTV, Down Payment Sale Price: $220,000 Appraised Value: $218,000 Required LTV: 80% $218,000 x .80 = $174,400 (loan) $220,000 - $175,400 = $45,600 (down)

Combined Loan-to-Value
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Combined Loan-to-Value Percentage of property value through multiple loans Sometimes called total loan-to-value (TLTV) Use the lower of appraised value or sale price Loan Amount + Loan Amount = Total Loan Amt. Total Loan Amount / Property Value = CLTV

Example: CLTV Appraised Value: $100,000 First Mortgage: $80,000
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example: CLTV Appraised Value: $100,000 First Mortgage: $80,000 Second Mortgage: $10,000 $80,000 + $10,000 = $90,000 $90,000 / $100,000 = 90% CLTV

Qualifying Ratios Housing Expense Ratio
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Qualifying Ratios Housing Expense Ratio Total Housing Expense (PITI) / Income = Ratio % Total Debt Service Ratio Total Debt Service (PITI + all recurring monthly debts) / Income = Ratio % Borrowers must qualify under both Different programs have different ratios

Example: Qualifying Ratio
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example: Qualifying Ratio Gross Monthly Income: $3,400.00 Loan: $120, at 5.5% Principal & Interest: $681.35 1/12 Annual Taxes: 1/12 Insurance: PITI: $819.75 $ (PITI) / $3,400 (Income) = 24.1% Housing Expense Ratio

Example: Qualifying Ratio
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example: Qualifying Ratio Monthly Debt: $ (Car Payment) 35.00 (Revolving Credit) (Child Support) Total Monthly Debt: $ $1, (PITI + Debt) / $3,400 (Income) = 35.9% Total Debt Service Ratio

Discount Points Additional funds paid to lender at beginning of loan to lower interest rate and monthly payment 1 point = 1% of loan Also called a buydown May be paid by buyer, seller, builder, etc. Permanent (fixed for life of loan) Temporary (early in loan; interest rates rise later)

Example 1: Discount Points
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example 1: Discount Points Loan: $100, at 6% for 30 years P&I: $599.55 PITI: $ (P&I + taxes and insurance) Discount: 3/4% = six points (lender determined) $100,000 x .01 = $1,000 (price of 1 point) $1,000 x 6 = $6,000 (debit to the seller)

Example 2: Graduated Buydown
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example 2: Graduated Buydown

Closing Costs Proration--division of expenses between buyer and seller in proportion to the actual usage Represented by a particular expense as of the day the loan is funded Expenses either accrued (paid in arrears) or prepaid (paid in advance): Accrued expenses--cost has been incurred, but the expense has not yet been paid ; prorated on the settlement statement as a debit to the seller and a credit to the buyer Prepaid expenses--costs have already been paid; prorated on the settlement statement as a credit to the seller and a debit to the buyer

Proration Calculation
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Proration Calculation Expenses may be prorated using: 360-day year, 12 months of 30 days each 365-day year, counting the exact number of days in each month (taking leap years into account) Local custom dictates which factor is used

Proration Calculation
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Proration Calculation Determine if the expense is accrued or prepaid. Divide the expense by the appropriate period to find a monthly (daily) rate. Determine how many months (days) are affected by the expense. Multiply the monthly (daily) rate by the number of affected months (days). Determine which party is credited and which is debited.

Example: Proration Assume that property taxes of $1,234.42 are paid on
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Example: Proration Assume that property taxes of $1, are paid on June 30 for the first six months of the year (paid in arrears). The transaction closes on March 31. The buyer pays on June 30, so the expense is accrued. The $1, tax bill is for 181 days (Jan. 1 to June 30), for a daily rate of $6.82. The seller lived in the house for 89 days (Jan. 1 to March 30). The portion of the tax bill owed by the seller is $ (89 days x $6.82). Accrued expenses are a debit to the seller and a credit to the buyer.

Adjustable Rate Mortgages
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Adjustable Rate Mortgages Periodic adjustments to interest rate Index + Margin = Fully Indexed ARM Interest Rate

ARM Examples Initial ARM rates are usually discounted:
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities ARM Examples Initial Index Value: % Margin: % Fully Indexed Rate: % Initial ARM rates are usually discounted: Discount Rate: % Initial Interest Rate: % If the index rate does not change at the first adjustment period: If the index rate increases to 6.25% at the first adjustment period: Current Index Value: % Current Index Rate: %

ARM Caps Limit interest rates and mortgage payments
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities ARM Caps Limit interest rates and mortgage payments 2/6 cap is maximum 2% increase at any adjustment with a lifetime cap of 6% above the initial rate Initial Rate: % Lifetime Cap: % Max. Interest Rate: %

Key Term Review 2-1 Buydown A graduated payment buydown where the payments are subsidized for only two years, usually 2% the first year and 1% the second year. 3-2-1 Buydown A graduated payment buydown where the payments are subsidized for three years, usually 3% the first year, 2% the second year, and 1% the third year. Assumption When one party takes over the responsibility for the loan of another party and the terms of the loan or note remain unchanged. (Usually lender approval is needed. Also, a release is needed or original party remains secondarily liable for the loan.) Automated Underwriting Process where loan applicant information is entered into a computer and an evaluation comes back within minutes advising the lender to accept the loan, or refers the loan application for further review.

Key Term Review Basis Point A unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument, commonly used for calculating changes in interest rates; 1% change = 100 basis points. Closing The final stage in a real estate transaction where ownership of real property is transferred from seller to buyer according to the terms and conditions set forth in a sales contract or escrow agreement. Co-Mortgagor A person who signs a mortgage with the primary mortgagor and thus accepts a joint obligation to repay the loan. Credit History A person’s record of debt repayment detailing how a person paid credit accounts in the past; used as a guide to how likely the borrower is to pay accounts on time and as agreed in the future.

Key Term Review Discount Points Amount paid to a lender when a loan is made to make up the difference between the current market interest rate and the rate a lender gives a borrower on a note. Junk Fees Set dollar amounts charged by a lender, rather than a percentage of the loan amount, that do not show up as points on the loan. Loan-to-Value Ratio (LTV) The amount of money borrowed compared to the value or price of the property. Mortgage Insurance Premium (MIP) Fee charged for FHA mortgage insurance coverage; initial premium (upfront mortgage insurance premium or UFMIP) can be financed and there may be a renewal premium.

Key Term Review Origination Process of making or initiating a new loan. Origination Fee Upfront fee charged by some lenders, usually expressed as a percent of the loan amount. PITI Typical mortgage payment that includes Principle, Interest, Taxes, and Insurance. Points One percent of the loan amount, charged for any reason, but often used for buydowns (also be called discount points); used to increase the lender’s yield on a loan. Pre-Approval Process by which a lender determines if potential borrowers can be financed through the lender, and for what amount of money. Principal With regard to a loan, the amount originally borrowed.

Key Term Review Private Mortgage Insurance (PMI) Insurance offered by private companies to insure a lender against default on a loan by a borrower. Processing Compiling and maintaining the file of information about a mortgage transaction, including the credit report, appraisal, verification of employment and assets, and so on. Qualifying Process of determining whether or not a borrower is likely to default on a loan and that the property is worth enough to satisfy the debt if the borrower does default. Rate Protection Protection for a borrower against the danger that rates will rise between the time the borrower applies for a loan and the time the loan closes. This protection can take the form of a "lock" where the rate and points are frozen at their initial levels until the loan closes; or a "float-down" where the rates and points cannot rise from their initial levels but they can decline if market rates decline.

Key Term Review Reserve Cash on deposit or other highly liquid assets a borrower must have in order to cover two months of PITI mortgage payments, after they make the cash down payment and pays all closing costs. Secondary Financing When a buyer borrows money from another source in addition to the primary lender to pay for part of the purchase price or closing costs. Seller-Paid Items Closing costs paid by the seller instead of the buyer. This usually refers to items normally paid by the buyer, but in some instances are paid by the seller to help close the sale. FHA and VA loans limit this.

Key Term Review Servicing The process of collecting payments, keeping records, and handling defaults for loans. Teaser Rates Low initial rate on an ARM. The rate usually returns to normal at the first adjustment date. Underwriter Individual who evaluates a loan application to determine its risk level for a lender or investor. The underwriter is usually the final decision maker on a borrower’s loan application.

Chapter Quiz 1. The lender usually does not allow the source of a borrower’s down payment to be borrowed funds. a gift from a relative. proceeds from the sale of a house. savings. A Savings, the previous sale of a home, or gifts are all acceptable sources of down payment, but the buyer is usually not allowed to use borrowed funds.

Chapter Quiz 2. When calculating the debt ratio, the calculation that best represents the front ratio is monthly debt divided by gross monthly income. debt divided by net monthly income. housing debt divided by gross monthly income. housing debt divided by net monthly income. C The front ratio is calculated by dividing the total monthly housing (PITI, homeowners dues, PMI) by gross monthly income (before taxes).

Chapter Quiz 3. A unique property, such as a geodesic home, being purchased as a primary residence would most logically employ what method of appraisal? cost approach income approach salability approach sales comparison approach A The cost approach is the most logical, since only a geodesic dome is comparable and the property is not being purchased as an investment property. There is no appraisal approach called the salability approach.

Chapter Quiz 4. What is the loan-to-value if the loan amount is $118,000, the appraised value is $131,000 and the sales price is $135,000? 88% 90% 95% 100% B To determine the loan-to-value ratio, you need to divide 118,000 by 131,000 (the lowest of the sales price or appraised value) to get an LTV of 90%.

Chapter Quiz 5. Market value can best be defined as a property’s
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Chapter Quiz 5. Market value can best be defined as a property’s appraised value for property tax purposes. listing price. most probable selling price. most recent selling price. C Market value is the theoretical price that a piece of real estate is most likely to bring in a typical transaction.

Chapter Quiz 6. A borrower with a gross income of $3,000 per month would qualify for a housing payment of what amount—including taxes and insurance—using the housing expense ratio for a conventional mortgage? $840 $870 $1,080 $1,230 A Conventional ratios are 28/36, with 28% of the gross monthly income allowed for the total housing payment.

Chapter Quiz 7. What is the correct calculation used to determine gross monthly income, for a borrower paid by the hour? hourly rate x hours worked weekly x 4 hourly rate x hours worked weekly x 4.33 hourly rate x hours worked weekly x 4 x 52 / 12 hourly rate x hours worked weekly x 52 / 12 D The correct calculation is hourly rate x number of hours worked weekly x 52 (weeks in a year) ÷ 12 (number of months). Always calculate the income to the year and divide by 12. This will allow for the months that have more or less than exactly 4 weeks. Any other calculation will not give you the correct amount.

Chapter Quiz 8. What is the minimum number of comps required by most secondary lenders to ensure an accurate estimate of value when performing the sales comparison approach? two three four five B A minimum of three comparables is required by most secondary market lenders to ensure an accurate appraisal from sufficient data.

Chapter Quiz 9. When qualifying a borrower, an installment debt does not need to be included in the debt ratio when the balance of the term of repayment is less than how many months? 5 10 15 20 B Consumer debts that have less than 10 months of payments remaining do not need to be included for the purpose of calculating debt ratios.

Chapter Quiz 10. Qualifying guidelines on an FHA loan are
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Chapter Quiz 10. Qualifying guidelines on an FHA loan are 28% housing ratio and 36% total debt ratio. 29% housing ratio and 41% total debt ratio. 31% housing ratio and 43% total debt ratio. 36% housing ratio and 41% total debt ratio. C FHA loans require income ratios of 31% for housing expense and 43% for debt service.

Chapter Quiz 11. Section 502 loans are a program of which government entity? Federal Housing Administration Housing and Urban Development USDA Rural Development Veterans Administration C The USDA Section 502 loan program either guarantees loans made by approved private lenders or makes direct loans.

Chapter Quiz 12. A borrower offers $105,000 for a house that was appraised for $112,000. If the seller accepts the offer, what is the minimum down payment required for an FHA loan? $3,675 $3,920 $5,250 $5,600 A An FHA loan requires at least a down payment of 3.5% of the home’s purchase price or appraised value, whichever is less.

Chapter Quiz 13. A Chapter 7 bankruptcy could show on a credit report for a maximum of how many years? five seven eight ten D A Chapter 7 bankruptcy stays on a credit report for ten years.

Chapter Quiz 14. The loan amount (principal) is $50,000 and the annual interest paid is $5,500. What is the annual interest rate? 9% 10% 11% 12% C To calculate the interest rate, you take the annual interest amount paid ($5,500) and divide by the loan amount ($50,000).

Chapter Quiz 15. An closing agent is responsible for all of these tasks EXCEPT following instructions according to the sales contract. gathering all necessary documentation to close. issuing the final loan approval. preparing the settlement statement. C The mechanics of closing are normally the responsibility of a closing or escrow agent or attorney, who simultaneously follows the instructions of both buyer and seller, as per the sales contract.

Chapter Quiz 16. What is used the VA to determine the maximum mortgage amount? appraisal Certificate of Reasonable Value tax assessment roll URAR B The CRV, which is issued by the VA, states the value of the subject property based on an approved appraisal. The CRV (or the sale price, whichever is less) establishes the maximum mortgage amount that a veteran may have on a VA-guaranteed loan for that property.

Chapter Quiz 17. A borrower is buying a house for $150,000 at 6.5%. He provides a down payment of $15,000. How much would he have to pay for three discount points? $2,925 $3,000 $4,050 $4,500 C A point is 1% of the loan amount, so $135,000 x .01 = $1,350 per point. Three points is $4,050.

Chapter Quiz 18. The UFMIP is charged on what type of mortgage loans?
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities Chapter Quiz 18. The UFMIP is charged on what type of mortgage loans? conforming loans sold to GNMA FHA loans subprime loans sold to FNMA VA loans B The Upfront Mortgage Insurance Premium is charged on all FHA loans and paid to HUD after the loan closing.

Chapter Quiz 19. In a loan closing, hypothecation occurs. This is described as assigning the mortgage from the broker to the lender. the transfer of title through the deed. using property as collateral without surrendering use or possession of it. D When you purchase a house or car, you hypothecate it. You use it as collateral but keep possession of it.

Chapter Quiz 20. A borrower is purchasing a home for $120,000 and closing costs total 4% of the purchase price. The seller has agreed to contribute 2% of the purchase price toward the buyer's closing costs. How much cash would the borrower need at closing in order to obtain an LTV of 85%? $18,360 $18,720 $20,400 $20,800 C The borrower would need 15% of the $120,000 purchase price, or $18,000 plus the additional 2%, or $2,400 for closing costs that the seller is not providing.

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