Finance - Chapter 7

FHA TOTAL DEBT SERVICE RATIO (43%) EXAMPLE

$706.42 Housing Expense (previous ex) $292.65 Auto Payment +$200.00 Revolving Account ___________ $1,199.07 Total Debt Payments $1,199.07 / 0.43 = $2,788.53 min monthly income needed to buy the house

OTHER ASSETS INCLUDE EQUITY:

-Automobiles -Furniture -Jewelry -Stocks -Bonds -Cash value in a life insurance policy

SOURCES OF INCOME:

-Bonuses, commissions, part-time earnings -Overtime -Disability -Social Security -Pensions/Retirement benefits -Interest-yielding investments -Rental income -Alimony/Child Support-don't need to be listed -Unemployment/welfare - NOT treated as stable monthly income - unless it is a pattern -Self-employment income -Co-borrowers (spouses, parents)

CALCULATING A MAXIMUM MORTGAGE AMOUNT

-First, take the borrowers' stable monthly income and multiply it by the maximum housing expense ratio (28% or 0.28)=Max mortgage payment allowable under the first ratio -Next, take the borrower's stable monthly income and multiply it by the maximum total debt service ration (36% or 0.36) = the amount of total monthly long-term debts the borrower is permitted to have -Take the second amount and subtract the monthly long-term obligations the borrower already has (not including mortgage payments)= the largest mortgage payment allowed under the second ratio.

MOST IMPORTANT CRITERIA EVALUATED IN QUALIFYING A BORROWER FOR A PARTICULAR MORTGAGE LOAN ARE:

-Income - two important factors to consider: Housing expense ratio Total debt service ratio -Credit history -Net worth

LOAN APPLICATION INFORMATION

-New home purchase and sale agreement -Residence history (past 2 years) -Employment history (past 2-3 years) -Income information -List of assets -List of liabilities -Copy of gift letter, if source of down payment or closing costs -Certificate of eligibility and DD-214 - VA loans only -Existing home sale information (if applicable)

COMMON FEES ASSOCIATED WITH REAL ESTATE LOANS

-Pulling a credit bureau report -A property appraisal report -A preliminary title report -Required inspections Also: -Property appraisal -loan origination fees (once loans close) (usually based on percentage of the loan amount 1% = 1 point) RESPA requires lenders to provide a Loan Estimate that includes a "good faith" estimate of settlement costs no later than 3 business days following the date of a completed mortgage loan application.

FICO WEIGHTS FIVE CATEGORIES

-Recent payment history (35%) -Amount owed on accounts (30%) -How long individual has been a credit user (15%) -New credit inquiries/opened accts (10%) -Types of credit used, mortgage, install loans (10%)

TWO GENERAL STEPS ALL LENDERS TAKE BEFORE AGREEING TO MAKE A REAL ESTATE LOAN ARE TO EVALUATE THE:

1. Borrower (to make sure he meets minimum qualifying standards) 2. Property

THE FIVE "Cs" (Borrower evaluated on 5 Criteria)

1. Capacity-can borrower pay mortgage with other debts/obligations? 2. Collateral 3. Credit 4. Character-does borrower have stable job? 5. Conditions-economic health of borrower's job Lender also wants to know the source of the buyer's down payment.

LOAN APPROVAL PROCESS

1. Consult with the lender 2. Complete the loan application 3. Process the loan application 4. Analyze the borrower and the subject property

4 THINGS THE UNDERWRITER IS LOOKING FOR ONCE VERIFICATION OF DEPOSIT FORMS OR BANK STATEMENTS FROM THE BORROWER ARE:

1. Does the verified information conform to statements made in the loan application? 2. Is there enough money in the bank to pay the costs of buying the property? 3. Has the bank account been opened within the last few months? 4. Is the present balance notably higher than the average balance?

VA: TOTAL DEBT SERVICE RATIO

41%

STABLE MONTHLY INCOME

A borrower's monthly gross income that can reasonably be expected to continue in the future.

CHAPTER 7 BANKRUPTCY

A liquidation proceeding. Debtor receives a discharge of all dischargeable debts Remains on credit report 10 years

AUTOMATED UNDEWRITING

A process whereby information from a loan applicant is entered into a computer and an evaluation comes back within minutes advising the lender to accept the loan applicant, or refer the loan application for further review and analysis by a loan underwriter. These tools/systems do not approve or reject loans.

CREDIT HISTORY

A record of debt repayment

FINANCIAL STATEMENT

A summary of facts showing the individual's financial condition. Shows assets and liabilities.

CREDIT SCORING

An objective means of determining the creditworthiness of potential borrowers based on a number system.

LIQUID ASSETS

Cash and any other assets (stocks/bonds) that can be quickly converted to cash.

RESERVES

Cash on deposit or other highly liquid assets a borrower has available.

NET WORTH

Determined by subtracting liabilities from total assets. It's the value of all the property (real and personal) accumulated, after subtracting all debts or obligations owed.

FICO/BEACON SCORES

FICO is a credit score developed by Fair, Isaac, & Co. and used by Experion BEACON is a credit score used by Equifax; TransUnion's credit score is call EMPIRICA

CHAPTER 13 BANKRUPTCY

Filed by those who want to pay off their debts over a period of 3-5 years Remains on credit report 7 years.

TWO BIGGEST AUTOMATED UNDERWRITING TOOLS USED TODAY

Freddie Mac's Loan Prospector Fannie Mae's Desktop Underwriter - looks at 14 separate factors but most important 3 are: - Equity in the property - Credit history of the borrower - Liquid reserves in the bank

QUALIFYING INCOME EXPENSE RATIOS FOR CONVENTIONAL, FHA, AND VA LOANS

HOUSING EXPENSE RATIO: Fannie Mae/Freddie Mac = 28% of Income FHA = 31% of Income VA = n/a TOTAL DEBT SERVICE RATIO: Fannie Mae/Freddie Mac = 36% of Income FHA = 43% of Income VA = 41%

COMPUTING MONTHLY INCOME

Hourly wage x 40 hr x 52 (weeks) / 12 month = monthly earnings (make sure to confirm work week consists of 40 hours

DURABLE SOURCE OF INCOME

Income that is expected to continue for a sustained period. (Permanent disability, retirement earnings, and interest on established investments.

QUALITY SOURCE OF INCOME

Income that is reasonably reliable, such as an established employer, government agency, interest-yielding investment account, etc.

TOTAL DEBT SERVICE RATIO EXAMPLE:

Kathy has $2900 in stable gross monthly income and the following monthly dept payments: $700 Proposed Mortgage Payment $225 Car payment + $100 Child support payment ------ $1,025 / $2900 = 0.35 = 35 % which is less than 36%, so she qualifies for the loan

CALCULATING A MAXIMUM MORTGAGE AMOUNT EXAMPLE:

Mary has a stable monthly income of $3200. She has three long-term monthly debt obligations: $220 car payment, $75 personal loan payment, $50 revolving charge card payment. What is the maximum monthly mortgage payment for which she can qualify? House Expense Ration = 28% $3200 Gross monthly income x 0.28 Housing expense ratio = $896 Max Mortgage payment Total Debt Service Ratio = 36% $3200 Gross monthly income x 0.36 Debt Service ratio = $1,152 Max total debt service $1,152 Maximum Total Debt Service -$220 Car Payment -$75 Personal loan payment -$50 Charge card payment ________ $807 Maximum Mortgage payment

ANNUALCREDITREPORT.COM

One free credit report per year

RESPA

Real Estate Settlement Procedures Act (potential topic on the real estate licensing exam)

QUALIFYING A BUYER

Simply means evaluating a borrower's creditworthiness.

EQUITY

The difference between the market value of the property and the sum of the mortgages and other liens against it.

UNDERWRITER

The individual who evaluates a loan application to determine its risk level for a lender or investor and is usually the final decision maker on whether a loan is approved.

PRE-APPROVAL

The process by which a lender determines if potential borrowers can be financed, and for what amount of money. Agent's CAN'T give a buyer a pre-approval.

PRE-QUALIFICATION

The process of pre-determining the loan amount a potential homebuyer may be eligible to borrow. An agent or lender can pre-qualify a buyer; however, it does not guarantee approval. Pre-qualification of a buyer is not binding on the lender.

FHA TOTAL DEBT SERVICE RATIO (43%)

The relationship between the borrower's total monthly debt obligations and income, expressed as a percentage: Total Debt Service/Gross Monthly Income = Ratio%

TOTAL DEBT SERVICE RATIO (36%)

The relationship of the borrower's total monthly debt obligations (including housing and long-term debts with more than ten payment left) to income, expressed as a percentage: Total Monthly Debt Service / Gross monthly income = Ratio% Conventional lenders want to be sure borrower's housing expenses plus any installment debts with more than ten payments left do not exceed 36% of his stable monthly income.

HOUSING EXPENSE RATIO (28%)

The relationship of the borrower's total monthly housing expense to income, expressed as a percentage: Total Housing Expense / Gross monthly income = Ratio % Conventional lenders consider a borrower's income adequate for a loan if the proposed total mortgage payment of Principa, interest, taxes, and insurance (PITP) does not exceed 28% of stable monthly income

FHA HOUSING EXPENSE RATIO (31%)

Total Housing Expense/Gross Monthly Income=Ratio% FHA considers a borrower's income adequate if the proposed total mortgage payment does not exceed 31% of stable monthly income. Max mortgage must include principal, interest, taxes, and insurance (PITI)

FHA HOUSING EXPENSE RATIO EXAMPLE:

Total Housing Expense/Max Ratio Allowed = Income needed to qualify $538.42 Principal and Interest $53.00 Property Taxes $25.00 Homeowner's Insurance +$90.00 Association Dues _________ $704.42 Total Housing Expense FHA allows max housing expense ration of 31% so: &706.42 / 0.31 = $2,278.77 (minimum monthly income needed to buy the house)

CLOSING PROCEDURE:

Two types of closings: - Escrow closings - conducted by a disinterested third party - Roundtable closings - conducted with all parties present

VA: RESIDUAL INCOME (Cash flow analysis method)

VA underwrites loans using this method: Income a borrower has left after subtracting taxes, housing expenses, and all recurring debts and obligations Guidelines for residual income are based on loan amount, family size, and region of the country and can change from year-to-year.

A borrower must provide how many years' worth of employment information?

a. 2-3 b. 3-4 c. 4-5 d. 5-6 ANSWER: A

Quiz The FHA allows a maximum housing expense-to-income ratio of ______ and a total debt service-to-income ration of ______

a. 28%; 33% b. 28%; 36: c. 29%; 36% d. 31%; 43% ANSWER: D

A borrower applying for a VA loan must provide a

a. Certificate of Eligibility and DD-214 b. Certificate of Value c. military ID card d. referral from a superior officer. ANSWER: A

Quiz Which prevents senior citizens from being discriminated against in the loan process?

a. Equal Credit Opportunity Act b. Federal Fair Housing Act c. Real Estate Settlement Procedures Act d. Regulation Z ANSWER: A Prohibits discrimination based on age

Quiz Which has its own underwriting standards?

a. Fannie Mae b. the FHA c. the VA d. all of the above ANSWER: D

Conforming loans follow the guidelines of

a. Fannie Mae/Freddie Mac b. the FHA c. RESPA d. the VA ANSWER: A

Which statement about about the loan process is FALSE?

a. Lenders who wish to sell loans to the secondary market require the use of standardized loan application b. Pre-qualification is binding on the part of the lender c. A real estate agent cannot pre-approve a buyer client for a mortgage loan. d. A seller may be more likely to accept an offer from a buyer who has a pre-approved letter from a lender. ANSWER: B

__________ can be used to offset a marginal or high total debt service ratio.

a. above-normal net worth b. a co-borrower c. high credit scores d. all of the above ANSWER: D

Quiz To qualify for a conventional loan, stable monthly income may include

a. alimony received (which a borrower chooses to reveal) b. a Christmas bonus received last year for the first time c. erratic unemployment earnings d. income from other family members ANSWER: A

Which is LEAST LIKELY to be a factor when qualifying a borrower for a loan?

a. credit history b. income c. marital status d. net worth ANSWER: C

There has been _______ dependence on the secondary mortgage market, which has brought a high degree of __________ to loan underwriting.

a. decreasing; creativity b. decreasing; standardization c. increasing; creativity d. increasing; standardization ANSWER: D

FHA and VA debt-to-income ratio formulas are __________ than conventional ratios

a. harder to calculate b. less generous c. more generous d. the same ANSWER: C

An escrow agent may be from a(n)

a. independent escrow company b. in-house escrow department c. title insurance company d. all of the above ANSWER: D

Quiz A gift letter

a. is never necessary b. may come only from a friend or family member of the borrower c. must be signed by the donor d. must state when the gift is to be repaid ANSWER: C

The VA underwrites loans using the

a. residual down payment method b. residual income/cash flow analysis method c. total debt expense-to-income ratio d. total housing expense-to-down-payment ratio ANSWER: B

If the borrower is self-employed, he should provide

a. the average monthly income earned over the previous two years b. employment verification from the last employer c. profit and loss statements for the previous six years d. tax returns for the previous two to three years ANSWER: D