L15/C1: The Lending Process/Loan Origination Basics

Why do lenders need to evaluate the property?

because if the balance of the borrower's loan is much greater than the appraised value of the property, the lender could risk taking a major loss if the borrower were to default.

During which step(s) the lender evaluates borrower based on credit report and other info?

pre-approval and final approval steps

borrower's word regarding personal finances not considered NOR is a specific property evaluated

pre-approval step

can result in a letter from lender indicating borrower's ability to obtain financing

pre-approval step

carries more weight than pre-qualification but will not result in a loan commitment

pre-approval step

the second step in the loan approval process

pre-approval step

based on borrower-supplied information

pre-qualification step

carries less weight than the other two loan approval steps

pre-qualification step

is generally a free service

pre-qualification step

the first step in the loan approval process

pre-qualification step

During this final review/approval, the lender will evaluate two things:

1. Borrower approval (creditworthiness of the borrower) 2. Property approval (value of the property)

What information is the underwriter going to be evaluating?

1. borrower's loan application 2. bank balances 3. credit history 4. tax returns 5. information about the property that will be collateralizing the loan

rate lock

A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost.

What happens during the Final Loan Approval step?

A lender makes a final analysis of the borrower's creditworthiness and adds to that an evaluation of the property collateralizing the loan. If the lender is comfortable with the risks involved, a mortgage (loan) commitment is made.

What happens during the Pre-Qualification step?

A lender takes a prospective borrower at their word regarding the borrower's financial and risk profile and then gives them a general estimate of the amount for which they could expect to be approved.

What happens during the Pre-Approval step?

A lender thoroughly reviews the borrower's qualifications and, if the borrower is approved, offers a pre-approval letter indicating the borrower's ability to obtain financing.

How is automated underwriting beneficial to lenders and borrowers?

Automated underwriting has lowered the cost of loan processing for lenders and created homeowners from borrowers who might not have been approved through the traditional manual underwriting procedures.

CLO

Computerized Loan Origination

Fannie & Freddie Do CLOs. What systems do they use?

FANNIE: Desktop Underwriter (DU) FREDDIE: Loan Prospector (LP)

Loan origination is overseen by the_________________ to ensure compliance with Title XIV of the ________________________________

Federal Deposit Insurance Corporation (FDIC)/Dodd-Frank Wall Street Reform and Consumer Protection Act

What happens if a borrower's loan application is rejected by a CLO?

If the computer rejects the borrower, the file goes to a live underwriter for review. The underwriter reviews the file to see if there is any offsetting information that would enable them to approve the buyer.

When might manual underwriting be required?

If the computer rejects the borrower, the file goes to a live underwriter for review. The underwriter reviews the file to see if there is any offsetting information that would enable them to approve the buyer.

Mortgage Brokers

Intermediaries, simply brokering the deal that brings lenders and borrowers together. Have zero money to lend

Two common types of mortgage originators

Mortgage bankers Mortgage brokers

In which step it is not the norm for there to be any fees associated with it?

Pre-qualification step

Which step is based almost exclusively on information reported by the borrower themselves?

Pre-qualification step

When doing automated underwriting, what act must be followed?

RESPA Real Estate Settlement Procedures Act

The Three Steps to Loan Approval

Step 1 - Pre-Qualification Step 2 - Pre-Approval Step 3 - Final Loan Approval

What things will be verified during the Pre-Approval step?

The borrower's assets, income, debt, and credit history

What is pre-approval?

The official process of a borrower being approved by a lender to borrow a specific amount at an interest rate within a small range.

True or False: DU does not use FICO credit scores in its analysis.

True

Automated Underwriting

a process of electronically (software programs and computer models) evaluating a loan application and subsequently providing a recommendation for or against loan approval.

What is the consequence of DU not using FICO credit scores in its analysis?

because it does not use FICO scores or consider extenuating circumstances, lenders who use DU still must consider each loan applicant on a case-by-case basis.

can result in a loan commitment

final loan approval step

considers the property being purchased

final loan approval step

is the last of three steps in the loan approval process

final loan approval step

is the second step in the loan approval process to consider credit reports

final loan approval step

Quick 1003

form in Desktop Underwriter that allows the lender to quickly evaluate the borrower

Brooke is in the mortgage industry. Primarily, she talks with buyers and helps them locate the right lender for their financial situation. Brooke is a:

mortgage broker

Loans are originated through the work of a _______________

mortgage loan originator

During which step(s) the lender charges fees?

pre-approval and final approval steps

What is the primary difference between pre-approval and final loan approval?

that the property information is not considered until the final loan approval stage.

Who pays the origination fee?

the borrower

In order to determine whether or not to approve a loan, the underwriter needs to evaluate both:

the borrower AND the property

Computerized Loan Origination

the electronic network of participating mortgage lenders and the real-time interest rates and loan terms they offer. This online system, accessible from the real estate broker's office through a CLO terminal, is how the matchmaking of client to lender often begins.

During the Pre-Approval step, what will be generated if the investigation into the borrower's financial status comes back problem-free?

the lender will generate a pre-approval letter indicating the borrower's ability to obtain financing pending property approval.

The mortgage broker receives their compensation from __________ in the form of an ______________

the lender/origination fee.

Underwriting

the process of determining the level of risk a lender is willing to take in extending a loan to a borrower.

loan origination

the process through which a buyer obtains a mortgage loan from a lender.

Why is the lender doing a borrower approval again during the Final Approval step?

to make sure that nothing of significance has changed while the underwriting focus has shifted to the property. Example borrower taking on new loans