McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER8CHAPTER8 CHAPTER8CHAPTER8 Underwriting and Financing Residential Properties

8-2 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Underwriting Default Risk Qualifying the borrower and property  Borrower loan application  Property appraisal Default insurance Payment-to-income ratio  28% test Loan-to-value ratio

8-3 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Classification of Mortgage Loans Conventional Mortgages  Usually 80% loan to value ratio  No government guarantee or insurance  Conforming loans Meet GSE loan limit requirements  Nonconforming “jumbo” loans Large dollar amount loans Higher interest rate

8-4 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Classification of Mortgage Loans Insured Conventional Mortgages  LTV usually > 80%  Private Mortgage Insurance Insurer assumes default risk of the larger loan Covers loan amount > 80% LTV Homeowners Protection Act of 1991 Generally no loan maximum

8-5 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Classification of Mortgage Loans FHA Insured Mortgage loans  Lender completely insured against default loss  Standardized borrower and property qualifying  Lower borrower down payments  Loan maximums  Section 203b most common program

8-6 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Classification of Mortgage Loans VA Guaranteed Mortgage Loans  Qualified veterans meeting length of service requirements  Guarantee usually around 25% of loan  Veteran pays a funding fee  Certificate of reasonable value  Loan entitlement  Residual income qualifying

8-7 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Underwriting Process Borrower Income  Verify employer, wages, expected continuity  Verify other income Will it continue? Is it verifiable on prior tax returns?  Dual income Stability of joint income

8-8 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Underwriting Process Borrower Assets  Verify closing cost and down payment funds  Additional savings and investments Credit History  Credit reports  Credit scoring models

8-9 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Underwriting Process Housing Expenses  Principal & Interest & Taxes & Insurance (PITI) Additional Expenses  Installment loans  Credit cards Compensating Factors

8-10 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Strategic Concepts for Borrowers Lock-in Period Prepayment Penalty Private Mortgage Insurance Buying down interest rates Subprime loans Power Payment Options

8-11 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved The Closing Process Close loan and transfer property  Conveyance occurs when buyer accepts the deed Lender fees for financing Property taxes and prorations Mortgage and hazard insurance Escrow Accounts

8-12 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved The Closing Process Mortgage Cancellation Insurance Title insurance, lawyer’s title opinion Release fees, attorney’s fees Pest inspection Real estate sales commission Recording fees Transfer taxes

8-13 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved RESPA Consumer Information Booklet Advance disclosure of settlement costs  3 day window Title Insurance Placement Kickbacks & Referral Fees Uniform Settlement Statement Advanced Inspection of Settlement Statement Escrow Deposit Limits