Presentation on theme: "Chapter 8 Underwriting The Residential Mortgage Loan"— Presentation transcript:
1 Chapter 8 Underwriting The Residential Mortgage Loan
2 Underwriting is an integral part of the mortgage lending process, regardless of the type of loan or the type of property securing the mortgage. Although similarities exist in the underwriting of the different types of residential mortgage loans (conventional, FHA, VA) the differences are more procedural and not of great significance.
3 Understanding Risk:The underwriting involved to determine the risk requires the gathering and analysis of much information about both the applicant and the real estate that will secure the mortgage loan. On any single residential loan, three separate underwriting reviews could occur at various stages of the mortgage lending cycle by the following parties:Mortgage LenderMortgage Insurer (Guarantor)Permanent Investor
4 A Mortgage Lender analyzes the risk and determines whether to lend funds at a certain interest rate to a borrower for a period of time secured by a certain piece of real estate.A Mortgage Insurer determines if mortgage insurance is to be written or a guarantee made based on the loan as submitted.A Permanent Investor determines if the mortgage or mortgages as submitted will be purchased.
5 Underwriting Guidelines: No single uniform set of underwriting guidelines exists for all residential mortgage loans. To a great extent, the underwriting guidelines of both Fannie Mae and Freddie Mac are the core standards that most lenders attempt to follow. Even those lenders who don’t intend to sell loans to theses two secondary mortgage market players should attempt to follow these well-conceived underwriting guidelines.Underwriting is an art not a science.
6 Loan-to-Value Ratios: The lower the LTV ratio the safer the loan is for the lender. The reason is that the lower the LTV ratio, the higher the equity investment the borrower will have in the property and thus the more that borrower has to lose ______Mortgage_Amount___________ =LTV Lesser of Sales Price or Appraised Value
7 Down Payment (Equity): The money for the down payment (equity) can come from any liquid investment sourceThe existence and history of these funds should be established by a Verification of Deposit (VOD).When was the account opened?How long have the funds been there?In what name(s) is it held?
8 Income Ratios:The most important test of whether an applicant can afford a particular mortgage loan is by computing the various income ratios.
9 Borrower Income: Income Sources include these: Regular wagesPart-time employmentWorking spouseRentalsAlimony or child supportCommissionsPublic AssistanceThe underwriter must judge that the income is likely to continue. The income must be verifiable.Self-employmentBonusesDividends or interestRetirement annuitySocial security
10 Estimating Housing Expense: Principal and interest on the mortgage being applied for.Mortgage insurance (if any).Property TaxesHazard InsuranceCondominium or cooperative homeowners association dues (if applicable)
11 Other Obligations:Borrowers will have other obligations, examples include:auto loans,credit card accounts,other mortgage debts,or alimony and child support payments.
12 Housing Expense Ratio. Housing Expenses. Borrower’s Income Housing Expense Ratio Housing Expenses Borrower’s Income < 28% (CONVENTIONAL LOAN)Total Obligations Ratio Total Obligations Borrower’s Income < 36% (CONVENTIONAL LOAN)
13 Higher Ratios may be justified by mitigating factors, such as: Demonstrated ability of an applicant to allocate a higher percent of gross income to housing expensesLarger down payment than normalDemonstrated ability of an applicant to accumulate savings and maintain a good credit ratingA large net worthPotential for increased earnings because of education or profession
14 FHA Ratios are: VA Ratios are: 29 percent for the mortgage payment ratio41 percent for the total debt ratioVA Ratios are:The VA uses a modified residual method in qualifying a veteran for a mortgage loan, and this result is then double-checked against a total debt-to-income ratio of 41 percent.
16 Conventional Mortgages: Not insured or guaranteed by federal agencyMaximum LTV Ratio of 80% (occasionally higher)Private mortgage insurance (PMI) usually required on purchases with down payments <20%PMI enables lenders to settle for low (perhaps as low as 5%) down payments.Most PMI policies cover top 20-25% of the mortgage.
17 Advantages of PMIBorrower can buy house that might not pass VA or FHA inspectionAllows small down paymentPremiums are lower than FHA because it doesn’t cover entire mortgageProcessed quicker than FHAPMI can be canceled when LTV < 80%Rates are determined by marketPMI allows lender to sell mortgage in secondary market
18 Credit History Credit Report: Identifying section Info on age, marital status, dependents, employment, etc... - applicant and co-applicantCredit recordPublic Records data
19 The Closing ProcessThe purpose of the closing is to make final settlement between the buyer and seller for costs, fees, and prorations associated with the real estate transaction prior to the transfer of title, and to finalize the loan agreement between the buyer/borrower and the lender.
20 Fees and Expenses Financing costs: Loan application fee Credit report feeLoan origination feeLender’s attorney’s feesProperty appraisal feeFees for property surveyFees for preparation of loan amortization scheduleLoan discount pointsPrepaid interest
21 Prorations, Escrow Costs, and Payments to Third Parties Property Tax, Prorations, and Escrow AccountsMortgage Insurance and Escrow AccountsHazard Insurance and Escrow AccountsMortgage Cancellation Insurance and Escrow AccountsTitle Insurance, Lawyer’s Title OpinionRelease FeesAttorney’s FeePest Inspection CertificateReal Estate Commission
22 Statutory CostsRecording fees. Fees paid for recording of the mortgage and note in the public records.Transfer tax. A tax usually imposed by the county on all real estate transfers.
23 Requirements under the Real Estate Settlement and Procedures Act (RESPA) The essential aspects of RESPA fall into seven areas that are used here to facilitate discussion:Consumer informationAdvance disclosure of settlement costsTitle insurance placementProhibition of kickbacks and referral feesUniform settlement statementAdvance inspection of uniform settlement statementEscrow deposit
24 Settlement Statement I. Amount Due from Buyer: II. Amount Due to Buyer:(A) Purchase Price$76,700.00Sale PricePlus: Settlement ChargesCounty Tax Proration2,909.69615.76Plus: County tax prorationLess: earnest MoneyMortgage Loan1,000.0061,360.00Less: Payoff of existing loanSettlement charges*21,284.154,607.00Net Amount Due from Buyer$17,865.45Net amount due to seller$51,424.61Buyer’s Share of Settlement Changes:*Seller’s Hare of Settlement Charges:Loan origination fee$614.00*Broker commission$4,602.00Loan Discount614.00*Recording fee5.00Appraisal fee125.00Credit report45.00Mortgage insurance Application fee50.00Interest (7 $15.55)108.85Homeowners insurance552.002 months premium-escrow92.002 months property tax-escrow132.84Title insurance (lender)100.00Recording fee31.00Closing fee75..00Title insurance350.00Pest inspection20.00Total$2,909.60$4,607.00