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 Lender
Mortgage 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 source
The 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 wages
Part-time employment
Working spouse
Rentals
Alimony or child support
Commissions
Public Assistance
The underwriter must judge that the income is likely to continue. The income must be verifiable.
Self-employment
Bonuses
Dividends or interest
Retirement annuity
Social security

10. Estimating Housing Expense:
Principal and interest on the mortgage being applied for.
Mortgage insurance (if any).
Property Taxes
Hazard Insurance
Condominium 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 expenses
Larger down payment than normal
Demonstrated ability of an applicant to accumulate savings and maintain a good credit rating
A large net worth
Potential for increased earnings because of education or profession

14. FHA Ratios are: VA Ratios are:
29 percent for the mortgage payment ratio
41 percent for the total debt ratio
VA 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.

15. Loan Classifications Conventional Mortgages
Insured conventional mortgages
FHA insured mortgages
VA guaranteed mortgages “Sharing Default Risk”

16. Conventional Mortgages:
Not insured or guaranteed by federal agency
Maximum 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 PMI
Borrower can buy house that might not pass VA or FHA inspection
Allows small down payment
Premiums are lower than FHA because it doesn’t cover entire mortgage
Processed quicker than FHA
PMI can be canceled when LTV < 80%
Rates are determined by market
PMI 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-applicant
Credit record
Public Records data

19. The Closing Process
The 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 fee
Loan origination fee
Lender’s attorney’s fees
Property appraisal fee
Fees for property survey
Fees for preparation of loan amortization schedule
Loan discount points
Prepaid interest

21. Prorations, Escrow Costs, and Payments to Third Parties
Property Tax, Prorations, and Escrow Accounts
Mortgage Insurance and Escrow Accounts
Hazard Insurance and Escrow Accounts
Mortgage Cancellation Insurance and Escrow Accounts
Title Insurance, Lawyer’s Title Opinion
Release Fees
Attorney’s Fee
Pest Inspection Certificate
Real Estate Commission

22. Statutory Costs
Recording 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 information
Advance disclosure of settlement costs
Title insurance placement
Prohibition of kickbacks and referral fees
Uniform settlement statement
Advance inspection of uniform settlement statement
Escrow deposit

24. Settlement Statement I. Amount Due from Buyer:
II. Amount Due to Buyer:
(A) Purchase Price
$76,700.00
Sale Price
Plus: Settlement Charges
County Tax Proration
2,909.69
615.76
Plus: County tax proration
Less: earnest Money
Mortgage Loan
1,000.00
61,360.00
Less: Payoff of existing loan
Settlement charges*
21,284.15
4,607.00
Net Amount Due from Buyer
$17,865.45
Net amount due to seller
$51,424.61
Buyer’s Share of Settlement Changes:
*Seller’s Hare of Settlement Charges:
Loan origination fee
$614.00
*Broker commission
$4,602.00
Loan Discount
614.00
*Recording fee
5.00
Appraisal fee
125.00
Credit report
45.00
Mortgage insurance Application fee
50.00
Interest (7 $15.55)
108.85
Homeowners insurance
552.00
2 months premium-escrow
92.00
2 months property tax-escrow
132.84
Title insurance (lender)
100.00
Recording fee
31.00
Closing fee
75..00
Title insurance
350.00
Pest inspection
20.00
Total
$2,909.60
$4,607.00