1. Chapter 10 The Borrower

2. Learning Objectives Describe the borrower characteristics that are important to loan qualification Describe the steps involved in borrower qualification and loan underwriting List the data that must be collected and analyzed and the guidelines that must be observed in loan qualification and loan underwriting 10-1

3. Borrower Qualification and Loan Underwriting Determine loan amount Estimate settlement costs Analyze credit history Calculate borrower’s effective income Estimate housing expense Assess borrower’s ability to pay the mortgage 10-2

4. Theories of Default Ability-to-Pay Theory –Default occurs when borrower cannot make payments Equity Theory –Borrower will default when negative equity is present Deficiency Judgement 10-3

5. Loan Application and Financial Statements Determine borrower’s ability to make mortgage payments Financial statement of assets and liabilities Payment-to-Income Ratios –Conventional Loans 28% PITI 36% PITI + Other Expenses –FHA Loans 29% PITI 41% PITI + Other Expenses 10-4

6. HUD/FHA Borrower Guidelines Mortgage Insurance Premium (MIP) Defining Housing Expenses –Includes PITI plus monthly mortgage insurance premium and homeowner association fees Defining Income –Effective income is gross income from all sources for the first five years of mortgage 10-5

7. Borrower’s Guidelines Con’t Accept/Reject Decision Based on: –Credit –Income stability –Adequacy of effective income –Adequacy of wealth or assets 10-6

8. VA Borrower Qualification Purpose is to help veterans to finance home purchases CharacteristicsCharacteristics –no down payment –limits of closing costs –no prepayment penalty RequirementsRequirements –Eligibility –Owner-occupied –Meet income requirements –Have good credit 10-7

9. VA Qualifications Con’t To Qualify –90 days active duty for “ hot war” –181 days of continuous peacetime active duty –six years for reservists and national guardsmen 10-8

10. Conforming Conventional Loan Qualification Fannie Mae and Freddie Mae have guidelines For loans with LTV <95%, the payment-to- income ratio limits are 28% and 36% Fannie Mae will not purchase ARMs with negative amortization Both agencies set loan limits Lenders rate loans (A,B,C) based on credit history of borrower Prime Loans vs. Sub-Prime Loans 10-9