chicagorealtor-12462.kxcdn.com · 2019-06-24 · a large mortgage banker usually services the...

BEHIND THE SCENES OF THE RESIDENTIAL

MORTGAGEHow A Mortgage Is Processed

Behind the Scenes of the Residential Mortgage

2©2019 REALTORS® Real Estate School * ALL RIGHTS RESERVED

BEHIND THE SCENES OF THE RESIDENTIAL MORTGAGE

How A Mortgage Is Processed

Course DescriptionThis course gives agents a strong understanding of what it takes to process a mortgage, what happens behind the scenes that brokers and borrowers do not see, and how the decision to issue the mortgage is made. It looks at the borrower’s first contact/application with a loan officer, the steps that a lender takes to process the loan, and what the mortgage requires to be completed and go to closing. With this education brokers will be better able to assist their clients as the lender processes the mortgage.

Learning Objectives:Objective 1: Knowledge

To identify and define:

• The different roles of mortgage brokers, mortgage bankers and retail banks in the mortgage process.

• The functions of and differences between the primary mortgage market and the secondary mortgage market.

• What information is required in order to create and process a mortgage.

• The various types of loan programs available.

• Why a particular loan program would be more suitable for different borrowers.

• How the loan is processed once the application is submitted.

• What a mortgage needs to close.

• Who is involved the closing of the mortgage and what their duties are.



Objective 2: Comprehension and Analysis

To aid the student in being able to explain and distinguish:

• The individuals and markets involved in the mortgage process, their functions, benefits and disadvantages.

• The criteria on which a borrower is evaluated.

• How a borrower would be placed into a particular mortgage.

• The different types of mortgages available.

• The terms of different mortgage types.

• The duties and obligations of those involved in processing and closing the mortgage.

Objective 3: Application and Evaluation

To prepare the student to be able to interpret and evaluate with a client:

• The characteristics and benefits of the client working with a mortgage broker, mortgage banker or a retail banker.

• Which lender might be more suitable and beneficial for the client.

• Discuss the materials necessary for a loan origination and analyze how they are used.

• How the various mortgage programs apply to the borrowers’ needs.

• What is involved in closing the loan.

• Any questions the client might have in trying to understand what is happening as the mortgage progresses from creation to closing.



The Timed Course Outline:

A. Loan Originators, Different Types Of Lenders 20 mins

B. Primary & Secondary Markets 15 mins

C. Loan Origination, Points, Process Including Credit Report and Application Information 33 mins

D. Loan Programs And Types, PMI, APR 32 mins

E. The Finalization Of The Loan-Who Are They and What Do They Do 30 mins

F. The Closing 20 mins

Total Time 150 mins

E-Book Self-Study ProgramIf you are taking this course via E-book self-study please review the following prior to beginning your program.

Maximum Allowable Time To Complete Your Program: You have 3 Months to complete this Continuing Education Course. No extensions are allowed. Failure to complete your course in the allotted time will result in dismissal from the course and forfeiture of your course tuition. While we grant students three months to complete this course you are responsible for completing your course, taking and passing the final exam prior to your specific required CE renewal cycle deadline date.

Begin your Course: This course consists of Chapters, Lessons or Sections. Begin your course by reading Chapter 1 in the text. At the end of the chapter complete any end of Chapter Review Questions presented. By completing the end of Chapter exams students are able to grade themselves as to how well they comprehend the chapter materials. When you have completed Chapter 1 proceed to the next Chapter.

Instructor Assistance: During your course of study contact our office if you need instructor assistance. We will share your contact information with an instructor, they will contact you. Please allow 24 hours for an instructor to contact you.



Final Examination: Students must take and pass a 25 question final exam in order to receive credit for this course. If you have completed your reading assignments and end of chapter exercises you are eligible to take your Final Exam.

Final Exam Appointments: Final exam appointments can be made locally or with an out-of-town Exam Proctor. To schedule your final exam appointment, please call (312) 803-4900 or email [email protected]. You can also visit http://chicagorealtor.com/realtors-real-estate-school/course-forms/ to obtain the appropriate form.

Course Completion: When you successfully complete your final exam you will receive a transcript. Depending on the number of students testing at any given time we reserve the right to mail the documents to students within 7 – 10 working days after the date of the final exam.

Failed Final Exams: If you fail your final exam you may retake the Final exam within two weeks; follow the instructions outlined above for Final Exam appointments. Students failing a second time need to re-enroll and retake this course at the full course tuition.

CE Compliance Reporting: IDFPR requires each licensed education provider approved to offer continuing education courses to submit to the licensing agency, on or before the 15th of each month, a report of those licensees who have successfully completed a continuing education course offered by the provider during the preceding calendar month. We will report your compliance to IDFPR on the 15th of the month following your final exam date.

Please call (312) 803-4910 if you have any questions or email [email protected].

Thank you.



BEHIND THE SCENES OF THE RESIDENTIAL MORTGAGE

How A Mortgage Is ProcessedWHAT IS A MORTGAGE?

A mortgage is a temporary, voluntary lien on a piece of real estate that is being pledged as security against the mortgagor’s repayment of a loan to the mortgagee. There are actually two parts to a mortgage, the promissory note or “note” and the mortgage document.

The promissory note is the borrower’s personal promise to repay the loan. It contains:

• The amount of the debt.

• The timing and method of payment.

• The interest rate and whether it is prepaid or paid in arrears.

The promissory note does not address collateral or security for the loan. The mortgage is the document in which the borrower pledges the property as collateral or “security” for the loan. This document makes the mortgage a “secured loan” or “secured lien”. If the borrower does not repay the loan, the lender’s money is secured by the mortgage.

The mortgagor is the borrower/buyer and the mortgagee is the lender.

The actual amount that the borrower needs to repay includes:

• The amount of money borrowed, a.k.a. “the principal.”

• The amount of interest accrued over the life of the loan.

• Any other fees that the lender/bank and the borrower have agreed upon, i.e. Private Mortgage Insurance (PMI), Discount Points, etc.



The process begins with Loan Officers/Loan Originators/Mortgage Originators who are mortgage brokers, mortgage bankers, representatives of banks, credit unions and other financial institutions who help borrowers in acquiring a loan.

The mortgage broker and the mortgage banker:

• Have access to:

wBanks.

wInvestors.

wLenders.

• Are able to “shop” for the best loan program and best rates for the borrower.

• May offer an advantage over the retail bank in that they work on behalf of the borrower, not the bank.

• Are able to seek out the best or lowest mortgage rates currently available.

In contrast, the retail bank loan officer works on behalf of the banking institution by whom he/she is employed and may not have as much flexibility in “shopping” for the best rates for the borrower.



DIFFERENCES BETWEEN A MORTGAGE BROKER AND A MORTGAGE BANKER:

A Mortgage Broker: • “Brokers” a transaction between the borrower and the lender of the mortgage funds.

• Facilitates the loan origination but is not a part of the financial institution supply- ing the money.

• Does not fund the mortgage.

• Collects an origination fee as payment for the work.

• Earns money by charging the borrower closing costs upfront.

• Is not a mortgage banker, but might facilitate the transaction for a mortgage banker by bringing the mortgage banker as an investor and the borrower together.

• Does not retain a portfolio of mortgages.

• Does not close mortgages in its own name.

• Does not service the loan.

A Mortgage Banker: • Is an intermediary, an institution or a company that originates mortgages.

• May use its own funds to close the mortgage in its own name or.

• May choose to broker the loan out, which will be funded directly by the end investor. • May choose to hold the mortgage in its own “portfolio.” • May choose to sell the mortgage to another investor or to the secondary market.

• May opt to service the mortgage. • May opt to sell the rights to service the mortgage to a different financial institution.



DIFFERENCES WHEN SELLING THE LOAN TO AN END INVESTOR:

Mortgage Broker: • Delivers file to end investor.

• End investor underwrites the loan.

• End investor approves or declines loan.

• If declined, broker delivers file to another investor.

• New investor underwrites the loan.

• New investor approves or declines loan.

• New investor might not accept the appraisal that was done for the first investor and might require another appraisal.

• May have additional underwriting restrictions, also known as “overlay” lending requirements because of higher broker loan defaults.

Mortgage Banker: • Underwrites the loan in-house.

• Delivers file to end investor.

• If end investor declines loan, re-writes file in-house to guidelines of next investor.

• Saves time because of in-house underwriting.

• The primary business for a mortgage banker is receiving the fees from originating the loan.

• The majority of mortgage bankers do not hold the mortgages in their own portfolios but sell them into the secondary market.



Traditional retail banks insured by FDIC, credit unions and insurance companies may also offer mortgages, but the borrower’s choices are limited by:

• The bank’s limitations:

w Loan programs.

w Interest rates.

• Bank’s inability to work with more “challenging” loan scenarios.

PORTFOLIO LENDER AND TEMPORARY LENDER

Portfolio lender:

• Originates mortgages.

• Holds/retains its own loans instead of selling them into the secondary market.

• Can often offer the borrower more flexibility in the qualifying process because the loan is not being sold.

• Can be a good choice for a borrower who does not meet Fannie Mae, Freddie Mac or FHA loan requirements.

• Likely to be privately held community banks or savings and loans.

• Requires the bank/lender to hold a large amount of reserves in order to cover any non-performing loans that result in a loss of reserves.

There are also “Private Money Funds”, a.k.a. “hard money”, that usually come from private investors or private loan institutions who loan to homebuyers. This may be an opportunity for a



borrower who is unable to qualify for a mortgage from any other source because of bad credit, self-employment, etc. Private money lenders focus more on the viability/value of the property (potential profitability) rather than the person borrowing the money. Generally, interest rates will be significantly higher than through a conventional lender.

Temporary lender:

• After the loan is closed, sells the loans it has originated into the secondary market.

• May opt to sell its loans to its own trust.

A large mortgage banker usually services the mortgages that it originates, while smaller mortgage bankers tend to sell their right to service the mortgages to another institution.

Servicing a loan would generally include:

• Collecting the payment, including PITI (Principal, Interest, Taxes and Insurance).

• Bookkeeping.

• Accounting.

• Preparing and recording the property’s taxes.

• Preparing and paying the hazard insurance for the property.

• Processing the tax and insurance payments.

• Monitoring payments.

• Monitoring delinquencies.



PRIMARY MORTGAGE MARKET AND SECONDARY MORTGAGE MARKET

The Primary Mortgage Market works directly with the public to originate mortgage loans and is made up of several large firms that originate the majority of all mortgages, and a great number of small firms and individual investors who originate mortgages as well.

The lenders in the Primary Mortgage Market make money for mortgage loans available directly to the borrowers.

The Primary Mortgage Market is essentially made up of:

• Mortgage brokers.

• Mortgage bankers.

• Credit unions.

• Retail banks.

After the mortgage is originated, in order to keep money flowing and coming in to initiate new mortgages, a large percentage of the mortgages are immediately sold into the secondary mortgage market.

The Secondary Mortgage Market purchases mortgages from the primary mortgage market and does not work directly with the public. It:

• Gives the Primary Mortgage Market the liquidity of money they need to continue issuing new mortgages.

• Buys and sells mortgages and the rights to service them.

• Operates between mortgage originators, investors and those who securitize mortgages.



• Consists of investors who might be:

wPension funds.

wInsurance companies.

wHedge funds.

The major purchasers in the secondary mortgage market are:

• FANNIE MAE - The Federal National Mortgage Association (FNMA) Works with Conventional loans, VA guaranteed loans and FHA insured loans. Fannie Mae does not offer loans, but purchases and guarantees mortgages which meet its criteria. Fannie Mae is the largest source of home mortgage funding in the USA.

• FREDDIE MAC - The Federal Home Loan Mortgage Corp. (FHLMC) Works with Conventional loans and is sometimes referred to as Fannie Mae’s “Little Brother”.

LOAN ORIGINATION, LOAN ORIGINATION FEES, DISCOUNT POINTS

Loan Origination refers to the processing of a borrower’s mortgage application to secure the mortgage and to legally bind together the lender and the borrower. In the loan origination, the borrower may be paying “points”.

There are two types of mortgage points: Origination Points/Loan Origination Fees and Discount Points:



Origination Points/Loan Origination Fees

• Are an up-front fee to pay the cost of originating or processing a new loan (pay the loan officer, the processor, and the underwriter).

• May include third-party costs of appraisal, notary public, attorney fees, inspection fees, credit report and the like.

• May be negotiable.

• Do not lower the rate of interest.

• Do not go toward pre-paid interest.

A common amount to pay for an origination fee is 1% of the loan amount, but it can be more than that. This is usually paid at closing and may be paid by the borrower or by the seller.

The actual amount the borrower will pay is based upon the borrower’s credit history as well as other factors, such as:

• Credit score.

• Loan to value ratio.

• Type of property being purchased (single family, condominium, 2- to 4-unit home).

• Owner occupancy (owner-occupied, second home, investment property).

• Amount of the loan.

The amount of the origination fee:

• Is negotiable.

• Usually not as flexible with banks as with mortgage brokers and mortgage bankers.



• Is dependent on the terms of the loan.

• May be waived.

• Must be disclosed on the Loan Estimate form.

Discount Points:

• Are interest that is pre-paid to lower or “buy down” the loan’s interest rate.

• Can be paid by the purchaser/borrower or by the seller.

• Are expressed as a percentage of the loan amount.

• The interest rate reduction from paying discount points fluctuates with market conditions.

• Payment can be rolled into the mortgage.

• Are paid at closing.

• Are optional on the part of the borrower.

Payment of Origination Fees Compared to Payment of Discount Points

Some lenders might offer no origination fees but charge discount points to secure a certain rate of interest. Some might charge origination fees but give the same rate of interest to the borrower without discount points. The borrower should compare lenders’ offers to see which is the best choice.

The cost of discount points is expressed as a percentage (usually 1%) of the loan amount, so the amount paid will vary depending on the loan amount.

The interest rate reduction the borrower will receive as a result of paying discount points will fluctuate with market conditions. A



discount point is pre-paid interest on the loan that is collected at the closing/settlement. Each point purchased typically lowers the interest rate by ⅛% (0.125%) to ¼% (0.25%). A buyer may pay cash for the discount points or finance them into the mortgage itself.

FOR EXAMPLE:Assume each discount point paid reduces the interest rate by 0.125% or ⅛%. If the lender were issuing a loan of $100,000 at 5% interest and the borrower chose to pay two discount points to reduce or “buy down” the interest rate, it would drop from 5% to 4.75%. (one discount point = ⅛% or .0125 of a percentage point. Two discount points = ¼% or .25 of a percentage point. 5% - .25% = 4.75%)

Each of those points would cost the borrower $1,000 or 1% of the loan amount, therefore, the borrower would pay $2,000 total for the two points necessary to bring the interest rate from 5% to 4.75%

NOW YOU:

One discount point will lower the interest rate by ⅛% or .125%. The lender is offering an interest rate of 6%, but the borrower needs the interest rate to be 5 ½% or 5.5%. How many points would the borrower need to purchase to bring the 6% to 5.5%?

The loan amount is $300,000. How much would each point cost and how much money would the borrower need to pay for these points?

Two main advantages for a borrower to buy down the interest rate are: • Monthly payment will be lower. • The borrower can borrow more for the same monthly payment than would be possible with a higher rate of interest.



A borrower should compare the offers that different lenders make regarding origination fees and discount points to see where they might actually save more money.

FOR EXAMPLE:Assume one discount point costs 1% of the loan amount. Two lenders offer the same interest rate, one with zero (0) origination fees but the borrower paying one discount point or 1% of the loan up front and one charging 1.5 origination points or 1.5% of the loan but no discount points. Which lender is the better choice?

Lender A: A $100,000 loan, buyer pays one discount point but no origination fees. Borrower pays $1,000 to secure that loan. ($100,000 x 1% = $1,000.)

Lender B: A $100,000 loan, no discount points but charging 1.5 points or 1.5% of the loan as origination fees. Borrower pays $1,500 to secure that loan. ($100,000 x 1.5% = $1,500.)

Lender A is the better choice enabling the borrower to secure the loan at a lower actual cost.

Although saving money is a good thing, the borrower should consider the lender’s:

• Interest rate.

• Origination points.

• Possible discount points.

• Experience.

• Ability to explain various loan options.

• Ability to close the loan.



THE LOAN PROCESS BEGINS

Pre-qualification:

• Often the initial step to ascertain how much borrower can afford.

• Verbal only, not verified.

• Based on borrower’s “stated” employment, income, assets, and debts.

• Generally, does not include a credit report.

• Does not state lender is ready to originate the loan.

• Can signify the potential buyer’s seriousness in the purchasing process.

Pre-approval:

• Usually runs a credit report.

• Letter of pre-approval.

• Is a written, conditional commitment that the lender is ready to issue a mortgage.

• Gives the purchaser strength in making an offer.

Caution: Some mortgage companies will issue a “pre-approval” letter without having run a credit report or having verified the borrower’s information. Note what qualifications a loan officer has stated in a pre-approval.



THE CREDIT REPORT AND CREDIT SCORE

THE CREDIT REPORT

While the FICO score is a significant factor in securing a loan and in determining the interest rate, a lender looks at many other factors in assessing a borrower’s creditworthiness, such as:

• Work history.

• Current job.

• Income.

• Overall debt ratio.

• The type of loan for which the borrower is applying.

The credit report shows:

• Employment history.

• Credit history including.

wQuantity of accounts.

wTypes of accounts.

wIf these accounts are current or past due.

• Types and number of inquiries on the applicant’s credit report.

• Accounts turned over to a collection agency.

• Wages garnished, liens, etc.

• Judgments, such as bankruptcy or foreclosure.

• Credit or FICO scores from three different credit-reporting agencies:

wExperian.

wEquifax.

wTransUnion.



FICO stands for Fair Isaac and Company, the developer of the software used in scoring.

The credit report must be issued by professional consumer-reporting agencies and generally shows a history of up to seven years. The data used to determine a FICO score are:

• The borrower’s payment history (approximately 35% of the score).

• The amount of money the borrower already owes to various creditors (approximately 30% of the score).

• The length of time the borrower has had a credit history (approximately 15% of the score).

• Any new credit which the borrower has received (approximately 10% of the score).

• The types of credit that the borrower has used (approximately 10% of the score).

FICO evaluates the borrower’s credit history in three ways:

• How old is the borrower’s oldest account?

• How old is the borrower’s newest account?

• What is the average age of all of the borrower’s accounts?

Generally, in order to generate a FICO score, a borrower should have at least one credit account that has been open for a minimum of six months. This could be a car loan, a credit card, a mortgage, etc.



THE CREDIT SCORE

THE CREDIT REPORT

Credit scores are generally classified in levels as follows: 720 or higher 680-720 660-680 640-660 620-639

A credit score of 720 or above is very good and may mean the lender will offer a lower rate to this borrower than to a borrower with a lower credit score.

A borrower with a credit score of 660 to 620 will usually have difficulty securing financing and will most likely be required to pay a higher rate of interest to offset the lender’s risk.

FOR EXAMPLE: FICO Score Interest Rate For Same Loan 760-850 3.75% 700-759 4.00% 680-699 4.25% 660-679 4.375% 640-659 4.875% 620-639 5.25%

The interest rate that a lender might offer will also be based on the loan amount. A conforming loan (under Fannie/Freddie limits) will be less costly because it will be easier for the lender to sell it into the secondary market.



In Addition To The Credit Score

The lender considers other factors in determining risk, i.e.:

• The amount of the loan being applied for:

wConforming loan, easily sold into the secondary mortgage market.

wJumbo loan, not easily sold into the secondary mortgage market.

wLoan held in the lender’s own portfolio.

• The borrower’s debt-to-income ratio:

wAllowable ratio can vary from lender to lender:

n Assess ratio of housing debt-to-income for the purchase (referred to as the “front- end” ratio).

n Assess Total monthly required payouts by the borrower’s gross monthly income (referred to as the “back-end” ratio).

• The type of property being purchased.

• Owner occupant or investor.

• The purpose of the loan (new purchase, refinance, investment).

• The loan-to-value ratio.

In assessing the borrower’s overall debt, installment loans (car loan, student loan) that have fewer than 10 payments remaining, can be excluded from the debt. The only way to have a credit card debt excluded would be to pay the complete amount of the balance owed.

While FICO scores are the norm, VantageScore is also in use. Developed in 2006 by Experian, TransUnion and Equifax, it uses the same point scale as FICO. However, VantageScore ignores debt collection accounts that have been paid in full and forgives late payments that occurred due to a natural disaster. VantageScore



focuses on overall payment history, the length of time credit has been held, the type of credit, and the percentage of credit the borrower uses rather than focusing on more recent credit history.

INCOME, ASSETS, LIABILITIES, CREDIT REPORT

A full documentation loan needs:

• For the last two years:

wEmployer information.

wBorrower’s home address(es).

wW-2 forms for all jobs.

wSigned personal tax returns with all schedules.

• Most recent one-month’s per 30 days’ pay stub, including year-to-date earnings.

• The borrower’s most recent two months of bank and investment statements for all accounts-ALL PAGES.

• Most recent statements for any stocks, bonds, mutual funds, IRAs, 401Ks, etc.

• Picture ID.

• The purchase contract.

• Earnest money deposit receipt.

• Loan application fee.

If applicable:

• Homeowner Association information.

• Fully executed gift letter.

• Divorce decree.

• Evidence of alimony or child support.

• For any property owned: Address, current market value, recent mortgage statement, home owner’s insurance declarations page, property’s tax bill, lease.

• Bankruptcy discharge papers.



If the borrower is self-employed and/or paid by commission, the lender needs:

• The two most recent years of federal tax returns, but not the state income tax returns.

• If the borrower owns a business, the lender needs the two most recent years of the borrower’s personal tax returns as well as any business tax returns that the borrower filed on behalf of the company. (i.e. 1120, 1120S, 1065)

• If the borrower filed electronically, a copy of the returns from the tax software that was used or a copy from the borrower’s tax preparer.

• Depending on the borrower’s business, Year-To-Date Profit and Loss Statement.

DOWN PAYMENT MONEY

Lenders require a paper trail for assets to protect themselves against fraud and to determine the source of the money, i.e. from a second loan, either personal or on the property in question. Consequently, lenders will “source the funds” to know the exact source of money being used in the transaction.

Seasoned Funds: Must have been in a bank account for at least 60-90 days (depending on the lender) prior to applying for a loan thus giving the lender the confidence that the money is the borrower’s and has been legitimately obtained.



Non-seasoned funds:

• Payroll deductions-Verify a pattern of savings coming from the borrower’s paycheck.

• Tax refund check.

• Bonus from employer.

• Cashing out an IRA.

• Gift from a family member-Not required to be seasoned funds as long as there is a paper trail. The giver may be required to:

wShow they did not take out a loan to provide the funds.

wWrite a letter stating: n The money is a gift. n No repayment is expected. n The dollar amount of the gift. n The date the funds were transferred.

LOAN PROGRAMS & TOTAL COST ANALYSIS

TYPES OF LOANS

Conventional loans:

• Fixed-rate mortgages.

• Adjustable-rate mortgages.

• Considered to be the most secure loans because they usually have a lower loan-to-value ratio.

• Have no government involvement.

The majority of all mortgages are conventional and most are sold into the secondary mortgage market.



Conforming Loans:

• Meet Fannie Mae and Freddie Mac requirements.

• May be sold to the secondary mortgage market.

• Meet the conforming loan limits.

Fannie Mae and Freddie Mac purchase home mortgages with a maximum base conforming loan limit. For the most current limits, check: https://www.fanniemae.com/singlefamily/loan-limits.

Traditional Fannie Mae and Freddie Mac guidelines suggest that the borrower’s total monthly expense for housing (PITI) should not exceed 28% of the borrower’s gross monthly income and that the total monthly debt for the borrower should not exceed 36% of the borrower’s gross monthly income. These are typically what lenders consider to be the ideal front-end ratio and the back-end ratio.

FOR EXAMPLE a borrower has:Monthly income: $10,000Monthly housing expenses allowed: $2,800 Total monthly liabilities or payable debts: $3,600

This borrower has a front-end debt-to-income ratio of 28%: $10,000 x 28% = $2800

and a back-end debt-to-income ratio of 36%: $10,000 x 36% = $3600.



Total monthly debt includes housing expenses and any regular monthly payments with more than 10 payments remaining, such as:

• Car payments.

• Student loan payments.

• Alimony.

• Child support.

Essentially, these are guidelines, not absolutes, and can be changed based on a borrower’s individual circumstances and what the Automated Underwriting Systems (AUS) of Fannie Mae, Freddie Mac, and FHA will accept. If the AUS accepts the ratios or eligible findings, the loan will be accepted as good and can be done. For manually underwritten loans, Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix. The Eligibility Matrix also includes credit score, minimum reserve requirements (in months), and maximum debt-to-income ratio requirements for manually underwritten loans.

Lenders can be more flexible, but that can be at the discretion of the individual lender. Credit scores, savings, down payment, and the type of loan may enable a lender to feel comfortable in allowing higher ratios. For loan casefiles underwritten through Desktop Underwriting, the maximum allowable Debt to Income ratio is 50%. If the DTI on a loan casefile exceeds 50%, the loan casefile will receive an ineligible recommendation. (Desktop Underwriter® (DU®) provides lenders a comprehensive credit risk assessment that determines whether a loan meets Fannie Mae’s eligibility requirements.)



Non-Conforming Loans

Loans that do not meet the requirements of Fannie Mae and Freddie Mac are “non-conforming loans.” A non-conforming loan may be held in the lender’s portfolio rather than be sold into the secondary market.

THE LOAN OFFICER AND CLIENT ASSESS LOAN PROGRAMS & PREPARE TOTAL COST ANALYSIS

Once the loan officer has determined that the borrower is credit worthy, the loan officer will consult with the borrower to determine what type of loan will be most suited to the borrower’s needs. It will be important to assess how long the borrower plans on owning the property, what the down payment will be, etc. A borrower who knows that he/she will not remain in that property for very long needs to assess which loan term might be most suitable for short term ownership.

FOR EXAMPLE: Bob, the borrower, knowing that his employer will be transferring him to another part of the country in 5 years, is purchasing a new home in Arizona. With that in mind, both Bob and his loan officer agree that a 5-year ARM at 4 ⅛% is a better choice than a 30-year fixed mortgage at a 5%.

Private Mortgage Insurance (PMI)

When a borrower’s down payment is less than 20% of the purchase price, the lender will require the borrower to purchase Private Mortgage Insurance (PMI), which protects or “insures” the lender against the buyer defaulting on the loan.



Private mortgage insurance:

• Can be financed within the loan.

• Is paid as a monthly fee.

• Insures the lender for the top 20%.

• Can be terminated when the borrower’s equity reaches 20%, the mortgage payments are current, and the borrower requests termination in writing.

The Homeowner’s Protection Act of 1998 (a.k.a. The PMI Cancellation Act):

• For residential mortgage transactions issued on or after July 29, 1999 for the purchase of or refinancing of a principal residence.

• Requires the servicer to cancel the PMI per the borrower’s request when the cancelation date occurs, which is when the borrower’s principal balance reaches 80% of the “original” value of the loan.

• Does not consider the current outstanding balance of the loan relevant to the cancelation of PMI.

• Provides that on the date that the LTV reaches 78% of the original value of the loan, the lender is required to automatically cancel the borrower’s PMI, whether the borrower has requested it or not, as long as payments are current or on the 1st day of the month following that date in which the borrower becomes current.

• Does not take into consideration any appreciation or depreciation in the market value of the property since the loan was issued.

• Requires that the borrower has not subjected the property to any subordinate liens.



If the loan were issued before July 29, 1999, the borrower’s equity can be evaluated according to appreciation in the market and/or appreciation based upon renovations or improvements that the borrower has made to the property thereby increasing its value.

PMI is generally ½% to 1% of the loan amount and varies according to:

• The amount of the loan being issued.

• The terms of the loan being issued.

• The size of the borrower’s down payment.

PMI is based on the amount of the mortgage being issued.

Piggyback Loans

The form of a piggyback loan currently available is an “80/10/10 Loan” in which the lender issues a first mortgage for 80% of the purchase price and a second mortgage issuer would assume a subordinate lien for 10% of the purchase price. The borrower would provide 10% of his own funds as the down payment. This allows the borrower to avoid PMI because the LTV of the 1st mortgage is 80%.

Currently, the most common subordinate loan in an 80/10/10 is for the second mortgage of 10% to be in the form of a Home Equity Line of Credit (HELOC) rather than in a fixed rate loan.

Jumbo Loans-Non-Conforming Loans

A loan that exceeds the conforming loan limits current is a Jumbo Loan or a Jumbo Mortgage:

• Usually carries a higher rate of interest.

• Not typically sold into the secondary mortgage market.



• Typically sold to outside investors.

• Not backed by Fannie Mae or by Freddie Mac.

• Fewer investors for purchasing.

FHA-Insured Loans

The Federal Housing Administration (FHA), does not issue loans, make loans, or fund loans. It insures loans by insuring the lender against the borrower defaulting. Any loan that FHA insures must be made by an FHA-approved lender and properties purchased with FHA-insured mortgages must be appraised by an approved FHA appraiser.

One benefit of an FHA insured loan is that a borrower with a lower credit score who would have difficulty securing a conventional mortgage, might be able to qualify for an FHA-insured loan. Currently, FHA loan applicants are required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently at 3.5%. If an applicant’s credit score is below 580, however, the applicant will have to a 10% down payment if they want to qualify for a loan.

A borrower with a credit score below 500 would not qualify for an FHA loan.

FHA insured loans allow more flexibility for a borrower in several ways:

• Lower minimum down payment allowed 3.5% of the purchase price on a 1-4 family residence.

• Most of the closing costs and fees can be included in the loan, allowing the borrower to avoid the need to have available cash for closing costs.



• The “up-front premium” or the Mortgage Insurance Premium (MIP) (FHA’s version of PMI) can be financed into the mortgage.

VA-Guaranteed Loans a.k.a. “The GI Bill”

The Department of Veteran Affairs (VA) does not issue loans, make loans or fund loans, but guarantees loans. VA-guaranteed loans are provided by private lenders, i.e. banks and mortgage companies, who must be a VA-approved lender. VA loans are for a personal residence and not for investment properties.

VA guaranteed loans:

• Are reusable.

• Require no down payment (May be required by lender or if purchase price is more than the property’s appraisal).

• Does not require private mortgage insurance.

• Can be assumed by qualifying persons.

• Do not have a maximum debt ratio (but lenders must provide compensating factors if the total debt ratio is over 41%).

• Do not require a minimum credit score.

• Do not have a maximum loan amount, however VA does limit its guaranteed amount to current Fannie Mae guidelines (in most parts of the country).

• Provide lenders with a Certificate of Eligibility (COE) to prove the veteran’s entitlement.

Closing fees or funding fees can be incorporated into the loan amount and financed into the loan. The limit of the VA-guaranteed loan is determined by the buyer’s financial qualifications and by the lender’s parameters. This guarantee is connected to the current



conforming limits set by Fannie Mae and Freddie Mac. Generally, the VA-approved lender will loan an amount that is equivalent to four times the amount that the VA will guarantee. The veteran applies for a Certificate of Eligibility and the VA determines what percentage of the mortgage it will guarantee, thereby establishing the maximum guarantee it will give for that veteran’s mortgage.

If the spouse of a veteran who died in the line of duty is not remarried, that spouse may still qualify for the VA-guaranteed loan. Surviving spouses who remarried after the death of the veteran, may regain their eligibility for a VA-guaranteed mortgage if the remarriage has ended because of divorce or death.

LOAN PROGRAMSTypes of Mortgages

There are two main types of mortgages:

• Fixed rate.

• Adjustable rate.

Fixed Rate Mortgage (FRM):

• Interest rate set at the origination of the mortgage remains the same or “fixed” through the entire life of the mortgage.

• Good for risk-averse borrower.

• Usually based on a 30-year amortization table.

The 30-year fixed and the 15-year fixed terms are the most commonly issued fixed-rate mortgages.



Adjustable Rate Mortgage (ARM):

• Usually based on a 30-year amortization table.

• Interest rate set at the origination of the loan can change throughout the term of the loan.

• Usually has a fixed interest rate for a specific amount of time and then the rate can readjust or reset.

• The rate can increase or decrease according to which way the index it is connected to moves at the time of the adjustment.

• Established with a pre-set margin tied to a financial index such as:

wThe LIBOR (London Inter Bank Offering Rates): The interest rate at which banks offer to lend money to one another in the wholesale money markets in London.

wCOFI (Cost Of Funds Index); A monthly weighted average of the interest rates paid on checking and savings accounts offered by financial institutions operating in the states of Arizona, California and Nevada. Published on the last day of each month, the COFI represents the cost of funds for western American financial institutions.

wCMT (Constant Maturity Treasury): Used by the Federal Reserve Board to compute an index based on the average yield of various Treasury securities maturing at different periods. Constant maturity yields on Treasuries are obtained by the U.S. Treasury on a daily basis through interpolation of the Treasury yield curve, which in turn is based on closing bid-yields of actively-traded Treasury securities. Constant maturity yields are used as a reference for pricing debt securities issued by entities such as corporations and institutions.



As a result, the payment for the loan is recalculated periodically and according to the index to which it is attached. This recalculated payment uses:

• The new interest rate.

• The loan balance as it stands after the last received mortgage payment.

• The remaining term of the loan.

All of these factors are used to recalculate the loan so that the loan will still be paid off with the last payment at the end of the loan’s term.

A mortgage that is a 5/25 ARM, or the like will have a fixed rate of interest for the initial 5 years of the loan and then turn into an adjustable rate mortgage for the remainder of the loan.

Currently, ARMs are generally scheduled as:

• 10/1 ARM;

• 7/1 ARM;

• 5/1 ARM.

Interest Rate Caps For An Adjustable-Rate Mortgage (ARM)

In order to protect the consumer from unlimited and wildly rising rates, limits are set that are called caps or rate caps in that they “cap” the amount of adjustment that can take place on an ARM in any given adjustment period.

The interest rate will never go to 0%, and will likely have a “floor rate”, which is either the original starting interest rate, or something determined by the lender, such as 2% below the original



start rate. The floor rate is the lowest rate to which the ARM can adjust downward. The highest rate of interest an ARM can adjust to (the lifetime cap) is referred to as the ceiling rate.

MORTGAGE RATE VS. THE ANNUAL PERCENTAGE RATE (APR)

The mortgage rate is the rate of interest that the borrower will pay on the principal every month. The Annual Percentage Rate (APR) is the rate of interest that includes all of the costs of securing the loan:

• Processing the loan.

• Underwriting the loan.

• Origination fees.

• Private mortgage insurance.

• Any other fees incurred to secure the mortgage.

The APR:

• Is more representative of the true cost of the loan.

• Is based on the concept that the borrower will hold the loan for the full term.

• Figures the costs of securing the loan will be spread out over the life of the loan.

Third-party fees such as title insurance, appraisal, etc. are not usually included in the APR.



Locking In The Interest Rate

A rate lock:

• Guarantees the promised rate as long as the transaction closes within the specified time frame.

• Is generally for 7 to 90 days, some lenders allow 120 days. (Very low rates are usually the shorter time.)

• Can adjust the lock-in rate if interest rates go down after the lock-in.

• Longer than 60 days generally requires an additional fee to lock-in for the extended time.

• May have a fee associated with it.

If closing/settlement does not occur within lock-in, the lock-in expires and the borrower will either need to pay a “lock-in extension fee” to retain the longer extension period or choose to lock in a rate again.

Appraisal

An appraisal evaluates a property’s market value at a moment in time. The appraiser gives an exact price, not a range, that he/she considers the value of the property. The lender orders an appraisal after the borrower has given an Intent to Proceed.

FINALIZING THE LOAN

The TILA-RESPA Integrated Disclosure (TRID)

Within three (3) business days after the buyer completes the loan application, the lender must provide the borrower with a Loan Estimate (LE) of the anticipated closing costs.



The LE shows the costs associated with the loan settlement such as:

• Origination fees.

• Mortgage insurance.

• Title insurance.

• Escrow reserves.

• Hazard insurance.

A Closing Disclosure (CD) must be provided to the borrower at least three business days prior to consummation. If there have been changes to the loan product or changes that result in an increase in the APR, the CD must be revised and a new three business day waiting period applies.

Consummation is not the same thing as a closing. It occurs when the consumer and the lender become contractually obligated to one another. (The borrower signs the loan documents.) The closing may take place at any time after consummation as long as the APR has not increased more than ⅛% (.125%), the type of loan has not changed, and the lender has not added a pre-payment penalty.

The three main people involved in the mortgage loan process are the loan officer/loan originator, the processor and the underwriter.

The Loan Officer:

• Meets with the client.

• Takes the application.

• Pulls the credit report. (Before providing the Loan Estimate, the only fee the lender may collect is for the credit report).



• Obtains the necessary documentation/information the applicant needs to for “application”:

wProperty address.

wLoan amount.

wBorrower’s income.

wProperty’s estimated value/contract price.

wBorrower’s name.

wBorrower’s Social Security Number.

• Supplies Loan Estimate to the borrower within three business days after application.

• Receives borrower’s Intent To Proceed.

• Lender orders the appraisal.

• Loan goes to the processor.

FOR EXAMPLE: March 3: Takes application.March 6: Delivers Loan Estimate directly or via email/eSign or may place in the mail and may request verification of receipt.March 11: Last date by which the borrower must have the Loan Estimate in his possession. Borrower indicates the Intent To Proceed.March 13: Lender orders appraisal.March 14: Seven Day waiting period for consummation after delivery of Loan Estimate is expired. First day on which consummation can occur.May 26: Consumer must have received Closing Disclosure. (No later than three business days before consummation.May 29: Closing (Most often when consummation occurs.)

Note: The lender must deliver the initial Loan Estimate or place it in the mail no later than the 7th business day before consummation.



The Processor:

• Works for the mortgage broker or banker.

• Is an assistant to the loan officer.

• Is responsible for:

Verifying.

Organizing.

Compiling the relevant information for each applicant.

Approving the application before sending it to Underwriting.

• Takes the loan from pre-approval to closing.

• Works as a “middleman” between the borrower and the underwriter.

• Works to meet the underwriter’s conditions for approving the loan.

The Underwriter:

• Is an employee of the bank, the mortgage broker or the mortgage banker.

• Certifies that the borrower fits within the end lender’s guidelines for the loan.

• Makes the final decision as to whether or not the loan is approved-says “yes” or “no”.



The underwriter evaluates the risk involved with issuing this loan and determines:

• The borrower’s ability to repay the loan.

• Whether the loan file meets the end lender’s guidelines.

• The loan-to-value ratio and evaluates it by reviewing the appraisal and assessing if the property is sufficient collateral.

• Issues the commitment letter if the loan is approved or asks the processor to issue the letter.

If the underwriter is not satisfied with the information, has questions or needs more information, the loan is suspended and goes back to the processor with instructions on what needs to be cleared up. Once cleared up, the file goes back to the underwriter in order to obtain an acceptance of the loan and receive a “clear to close” from the underwriter.

The underwriter reviews the appraisal, the title insurance information and, if applicable, the condo questionnaire.

Commitment Letter

A commitment letter is the lender’s commitment to issue the loan, but it may not mean that the loan is ready to close and be funded.

If the loan is approved, the borrower receives a commitment letter which:

• Is given after review of the appraisal.

• Is not a “guarantee” that the mortgage will be given.

• Is dated and has an expiration date.



The borrower may receive a “conditional” approval/commitment with a list of conditions which must be met before the loan can close.

A conditional commitment letter usually states:

The lender will issue the loan as long as the borrower meets certain conditions which might include:

• A new review of the borrower’s credit.

• A re-verification of the borrower’s employment.

• The final terms of the loan.

• The length of time in which those terms are valid and available (the date by which closing must occur).

A firm commitment letter usually states:

• The time frame in which the loan must be repaid (the term of the loan).

• The interest rate.

• The date by which the loan must be closed and funded or it is canceled.

If the loan is suspended, the borrower may need to supply additional information, certain paperwork or an explanation to the underwriter before the loan process can continue.

If the loan is denied or declined, the borrower will need to seek out a different lender, apply under a different program or give up trying to purchase property.



Equal Credit Opportunity Act (ECOA)

If a lender rejects or denies credit to an applicant, they must inform the applicant as to the reason or reasons why. The Equal Credit Opportunity Act (ECOA) is a federal law prohibiting the rejection of issuance of credit to consumers because of discrimination based on:

• Race.

• Color.

• Religion.

• National origin.

• Sex (Gender).

• Marital status.

• Age.

• Dependence on public assistance.

Clear to Close Approval Issued

When the underwriter has approved the loan, he/she determines that the loan is “clear to close” and sends the loan to funding. This is the true indicator that the loan is ready to go to closing.

The Funding Department then:

• Issues a check or prepares for electronically sending or “wiring” the mortgage to the closing.

• Puts together the closing documents.

• Sends the package to the closing agent.



REVIEW OF THE FINAL SETTLEMENT STATEMENT

Prior to closing, the title company delivers the final figures to the lender, and, depending on the state, to the attorney and/or the real estate broker.

The lender:

• Draws up the documentation package.

• Has the closing department review the documents and closing figures.

• Forwards the documentation package to the closer.

The package may be overnighted, faxed or electronically delivered to the closer or to the closer’s office and funds can be disbursed at the end of the closing.

The Closer

The closer is an uninterested third party who finalizes the transference of ownership from seller to buyer. The closer’s duties may include:

• Verifying the title and its ability to be successfully transferred.

• Verifying the accuracy of the documents submitted.

• Disbursing the monies to and from the seller and the buyer.

• Calculating the prorations for:

Mortgage balances and payoffs.

Real estate property taxes.

Insurance premiums.

Assessments.

Any ongoing special assessments.



• Preparing the closing statement which includes:

The financial settlement between the seller and the buyer.

The closing costs incurred by the seller and the buyer.

• Obtaining and notarizing the signatures of the principals in order to ensure that the agreements will be legally acceptable.

• Collecting the buyer’s down payment.

• Determining that the documents have been correctly executed as to be legally acceptable and binding.

• Determining that the documents are ready to be recorded.

The Closing or Settlement

The borrower/buyer signs all the necessary loan documents. Monies, generally from the lender-supplied mortgage money, are paid out through the closer and the title company to the seller, who may be paying off his/her existing mortgage. The deed, keys and ownership of the property go to the buyer.

If there are additional funds that need to be brought to closing, the borrower will be required to bring a certified or cashier’s check. Often, the buyer’s certified check is for more than is necessary and in that case, the title company will issue the buyer a check for the remaining money.

When the borrower has signed the final documents, the documents are returned to the bank or lender for review and then electronic funding or wiring of the money is done, with the lender sending the money to the title/escrow company. Actual funding of the loan, the arrival of the money at the closing, may take some time and there may be a delay of the funds arriving.

The borrower will be paying interest from the day of the actual funding.



THE BUYING/MORTGAGE PROCESS

1. Pre-Approval

2. Finding the right property

3. Offer and contract

4. Attorney/Inspection Contingency Period

5. Make application for the loan

6. Lender issues Loan Estimate

7. Issue “Intent to Proceed”

8. Appraisal

9. Loan processed

10. Appraisal received

11. Initial underwriting

12. Clear any conditions

13. Final underwriting “Clear To Close”

14. Lender issues Closing Disclosure

15. Credit pulled again

16. Employment verified

17. Closing-Loan is funded

Websites for mortgage information:https://www.consumerfinance.gov/know-before-you-owe/https://www.fha.com/fha_requirements_debthttps://www.fha.com/fha_credit_requirementshttps://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf

https://www.fanniemae.com/singlefamily/loan-limits

chicagorealtor-12462.kxcdn.com · 2019-06-24 · a large mortgage banker usually services the...

Documents