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