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Default risk –LTV –PI ratio –Mortgage insurance PMI (up to 97%) FHA (up to 100%) VA
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FHA –Established in 1934 –For stabilizing housing market after GD –For making housing affordable –By providing insurance –Programs Section 203b – FRM Section 251 – ARM Section 245 – GPM –Loan maximum
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VA –Guarantees ≥ 25% of loan –CRV (certificate of reasonable value) Loan ≤ 90% of CRV
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Process –Borrow income Must be likely to continue (bonus) Must be verifiable (self employment, tip) –Assets Must be verifiable (gift) –Credit history –Housing expenses (PI ratio) –Other misc.
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Exhibit 1 - Underwriting Standards: Conventional Loan Monthly Yearly Income $ 3,542.00 $42,504.00 Debts Installment $ 181.00 $ 2,172.00 Credit card $ 50.00 $ 600.00 Sales price $76,700.00 Appraisal value $77,000.00 Property tax $ 797.00 Hazard insurance $ 552.00 Net $38,383.00
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Exhibit 3 ConventionalExhibit 3 Exhibit 4 FHAExhibit 4 Exhibit 5 VAExhibit 5
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Closing Process –Fees and Expenses 9 costs in book –Prorations, Escrow costs, Others Property tax PMI Hazard ins Mortgage cancellation ins Title insurance Release fees, attorney fees, pest inspection, commissions, recording fees, transfer tax
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RESPA Act –A uniform set of procedures and documents –7 pieces of information
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Settlement costs –Truth in lending requirement Since 1968 Require lenders disclose to borrowers financial information contained in loan agreements in a uniform manner For borrower to compare different loans Not applicable to commercial lending E.g. APR (Exhibit 11)Exhibit 11 –APR is an effective rate, but under a specific compounding frequency (monthly here).
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Settlement costs –Truth in lending requirement ARM requires more than FRM APR is more difficulty to compute Exhibit 12
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