Real Estate Unit 8 (Underwriting Residential Property

Principles of Value: Progression and Regression

Principle holds that a property is affected by surrounding properties. The smallest house on the block will have more value if the other houses around it have higher value. Largest home value might decrease if surrounded by small houses.

Section 5: Monthly Income and Combined Housing Expense Information

- Monthly income, including overtime or bonus income. - Co-borrower too if there is one combined with borrower's amounts. - Child support or alimony if will be used to repay the loan

Market Price

- Actual sales price - Cost and market value usually do not correspond.

Underwriting red flags: Verification of Employment

- An employment overlap between current and previous employment - No prior year earnings - All dollar amounts are rounded off - Borrower was hired on a weekend or holiday - Most income comes from commissions - A prior employer is now out of business - Borrower changed professions from previous employer to current employer - Current business entity is not in good standing with regulatory agencies - Verification form says borrower has a company car, while application shows borrower has an automobile loan. - Income is out of line with the kind of employment - Several whiteouts, cross outs, or squeezed in numbers

Section 9; Acknowledgement and Agreements

- Borrower and co-borrower must sign and date this section

Section 3: Borrower Information

- Borrower provides name, address, Social Security Number, home phone, age, and information about schooling. - Also for the co-borrower if there is one - If borrower has resided at the current address for less than 2 years, a second address is required.

Section 2: Property Information and Purpose of Loan

- Borrower provides property address of the home. If property is multi-unit, borrower needs to provide the number of units (usually property address is enough and actual legal description is not necessary. - Borrower addresses purpose of loan - purchase, refinance, construction or something else? - Borrower also indicates the names and manner in which the title will be held. - Other information like down payment is also indicated.

Principles of Value: Substitution

- Buyer will not pay more for a home than what he or she would pay for another home that's equally attractive and available.

Debt Ratio

- Calculated based on all monthly obligations, including those items or payments the borrower must make for other debts (car payments, revolving charge accounts, etc. Conventional Loans usually require the debt ratio be 36% or lower, but FHA debt ratio may not be greater than 41%.

Principles of Value: Change

- Changes in the market and property's physical condition affect the benefits of the property

Once loan processor has reviews:

- Decide not acceptable, he or she will list the reasons for rejection, inform borrower and close the file. - Sometimes lender will give borrower a less than A-rated loan, officer determines that borrower is an acceptable risk, then will go to evaluation of property - NOTE: if lender denies a loan on basis of credit report, lender must disclose in writing that the borrower is entitled to a statement of reason from any creditor who is responsible for the negative report.

Underwriting

- Determines whether a borrower and property meet minimum requirements established by the lender, investor, or secondary market - Performed by loan officer at financial institution and based on information in borrower's loan application and appraisal of property.

Evaluating Borrower: Red Flags

- Employment or residence data on credit report is different from application - Several recent inquiries from credit card companies or other mortgage lenders. - Social Security number is invalid - Length of credit history is inconsistent with borrower's age - Co-borrower's maiden name is different from date indicated on the application - Borrower is over 25 and has no credit history - Personal data on credit report is not consistent with what is on borrower's application - Late payments on credit report due to unemployment, illness or layoff do not match verification of Employment form data

Income ratio

- Established borrower's capacity to pay by limiting percent of gross income a borrower may spend on housing cost (include principal, interest, taxes, and homeowner's insurance and may include some monthly assessments for mortgage insurance and utilities. - Conventional loans usually require under 28% but FHA guidelines require income ratio to be no more than 29%.

Evaluating Borrower's Credit Report

- Evaluating borrower's credit ability still involves great amount of interpretation, it is subjective and can vary depending on evaluator bias or lender's changing policies. - Standards change. Ex: When money is limited, standards are higher, when money is a large supply, standards are lower. Depending on market, borrower may be eligible or not in the same situation t a different time. - Amount of money borrower has to repay the loan is huge in lender's decision. Person who is divorced needs to submit copies of who is paying what. - Experienced lenders can decide quickly based on employer verification form and amount of loan, and ding a comparison of monthly payroll information with required monthly payments. - If credit report shows late or missed payments, loan processor would recommend to deny loan without further evaluation.

Section 7: Details of Transaction

- Figures relating to purchase price, prepaid items, estimated closing costs, discounts, etc. - Lender mostly responsible for providing most of the info.

Market Value

- Important for lender to determine market value for a particular piece of property. - It is the highest price a buyer is willing to pay and the lowest price the seller will accept under these conditions: - Market is open and competitive - Property exposed in market for a reasonable period of time - Buyer and seller are fully aware of market conditions - Buyer and seller are acting with no undue pressure - Buyer and seller are not related - Buyer and seller are aware of property's potential for use. - Both are aware of property's assets and defects. - Sale is a cash transaction - Property has a marketable title - Price foes bot include hidden aspects like service fees, credits, or special financing terms.

Request for Verification of Employment

- Lender completes items 1-7 and borrower will complete item 8, and lender will forward document to employer for completion. - Borrower authorizes employer to give confidential info and employer would be asked questions to give opinion and probability of continued employment

Income Debt Ratio

- Lender tries to estimate the applicant's ability to fulfill the loan obligation by establishing an INCOME RATIO AND A DEBT RATIO

Underwriting Process

- Lender will use info on verification of deposit forms to assess whether borrower has funds to make required down payment. - If deposit payment comes as gift, lender may require a gift letter from person making donation - If borrower is receiving portion from another loan, lender will consider it another debt and will adjust debt ratio accordingly.

Qualifying the Property

- Lenders seek to determine the value of the property as collateral in the event that something unforseen happens.

Section 6: Assets and Liabilities (Continued)

- Liabilities are what borrower owes - Borrower lists the creditor's identifying info for all outstanding debts. - Includes auto loans, charge accounts, real estate loans, medical bills, insurance premiums, etc. - Also long term liabilities like alimony and child support payments. NOTE: difference between assets and liabilities is called NET WORTH. If total liabilities are greater than total assets, lender would probably deny loan.

Underwriting usually works one of these ways in institutions:

- Loan amounts up to Fannie Mae or similar maximum loan limits, the underwriter approves all loans submitted to the lender. - For Fannie Mae maximum loan amounts, it takes two underwriters to deny the loan package, while only one underwriter is necessary to approve loan. - For jumbo loans, a loan committee must approve the file.

Loan Application

- Loan process starts when borrower gives loan application to lender. - Most lenders use some version of the Uniform Residential Loan Application published by Fannie Mae. - Form requests info about property and borrower.

Underwriting

- Most important and last step in loan process. Job is to approve or deny loan which requires highest level of expertise. People work their way up to gain experience and expertise for lenders to depend on. - Lenders use an individual underwriter or loan committees which usually ave a senior personnel who has high responsibility for protection of investor's funds by reducing exposure

To qualify for a loan

- Must meet lender's qualifications of income, debt, cash, and net worth. Also demonstrate sufficient creditworthiness. - Loan officer checks info by contacting references given. Will check banks where borrower has deposits and check with employers. - Borrower must sign a verification thawt allows bank to give lender info about current balances in borrower's accounts. - TYPICAL FORM USED TO VERIFY DEPOSITS = REQUEST FOR VERIFICATION OF DEPOSIT.

Underwriting red flags: From loan application

- New house being purchases is not large enough for all the occupants. - Down payment is something other than cash - Face value of a life insurance policy is shown as a liquid asset, but is not a cash surrender policy - Value of personal property is greater than one year's salary - A high income borrower has no personal property - New housing expense exceeds 150% of current housing expense - Salary amount seems inappropriate with respect to amount of the loan - Social Security number is invalid - A high income borrower has no credit and/or no cash - A low income or young borrower has a substantial amount of cash in bank - A high income borrower has little or no cash in bank - A high income borrower has furniture rental debt through a finance company - A self employed borrower has no business credit cards - Information on the application is inconsistent with other loan documents - Significant changes or contradictions from a handwritten application to a typed application.

Underwriting Process

- Next will check employment status. - Form to check called Request for Verification of Employment

Underwriting Red Flags: Verification of Deposit form

- Not sufficient cash in the bank to close the loan - Bank account is brand new - Bank account si not in borrower's name - Gift letter is not backed by any bank statements or canceled checks - Borrower really has no bank accounts (says he doesn't believe in banks) - An IRA is shown as a liquid asset or as a source of the down payment - Significant changes in a balance from prior two moths to the day of verification is done. - An excessive balance in the borrower's checking account - Date the verification was done by the banks is a weekend or holiday. - Checking accounts have an average two month balance that is exactly equal to the present balance.

Underwriting Process

- Once borrower submits application to lender underwriting process begins. - Underwriter evaluates borrower's ability to repay loan. - Lender risks that borrower might default on repayment of loan and borrower will damage value of property as security. Also, risk of foreclosure in that sale proceeds will not be enough to cover the lender's loss.

Principles of Value: Competition

- Principle holds that several similar businesses are close to one another, together they make more money than individually. - Ex: several fast food chain restaurants located on same major street attracts more buyers than having one.

Principles of Value: Conformity

- Principle says property is at highest value when it conforms with the surroundings. - Ex: If three-bedroom, one bath home is in a neighborhood with two bathrooms, it is wise to consider installing a second bathroom.

Principles of Value: Supply and Demand

- Principle says that value of property depends on: - How many properties are available in the area - Property taxes - Number of prospective buyers - Price buyers are willing to pay

Evaluating Borrower's Credit Report

- Quantity and quality of applicant's income: determining whether or not borrower can support his or her family while making the required payments. - Quantity: review the family's total income, borrower plus spouse's income. If income is mostly from commissions, underwriter will scrutinize history of past earnings to decide whether or not commissions are stable enough as a source of payments. - Quality: underwriter asks employer for opinion about borrower's attitude at work, stability of the job and possibility for future promotions or advancements. - Borrowers who change jobs frequently, but whose income history shows those jobs shifts were upward, are considered good candidates

Section 10: Information for government monitoring purposes

- Requested by federal government for certain types of loans related to a dwelling in order to monitor lender's compliance with equal credit opportunity, fair housing and home mortgage disclosure laws. - Borrowers are encouraged to fill this out, but not required. NOTE: if Borrower chooses not provide info in this section, lender is required to note info based on visual observation and surname if borrower makes application in person.

Appraiser Requirements

- Since value of property changes in time, each piece of property must be inspected and appraised carefully. - Depending on what type of loan lender wants to issue and current loan to value ratio, lender will base loan amount on either amount of appraisal or purchase price, whichever is less. - Lenders either have experienced appraisers on their staff or hire them to get an opinion of a property.

Default Insurance

- To protect the lender from potential losses if the borrower defaults on the loan, so lender is not willing to bear total risk of borrower default or if lender is planning to sell to a third party investor. - If sold, lender must consider underwriting standards those other investors require, otherwise lender may lost option of selling mortgages later

In California, the Bureau of Real Estate Appraisers enforces the FIRREA law. Four levels of appraiser licensing:

- Trainee License - Cannot perform an independent appraisal and must work under supervision of appraiser licensing exist. - Residential License - Allows appraisal of both residential and non-residential properties with restrictions on complexity and value of property - Certified Residential License - Allows appraisal of residential properties with no restrictions and non-residential properties with restrictions on value. - Certified General License - Allows appraisal of all property types with no restrictions.

Credit Report

- Underwriter will send request for a borrower's credit reports to the three reporting agencies - report will include borrower's age, address, tenant or owner of residence, amount of time borrower lived in current address, brief employment history, profile of person's credit both past and present. - Credit report is compilation of information from banks, merchants, and credit services as well as lawsuits, judgements, bankruptcies, foreclosures, wage garnishments or defaults - Indicates status of current and past accounts - Borrower's payment history is most important part of the report. - They use past payment history, types of credit the borrower has used, outstanding debt and other factors to evaluate and score a particular borrower.

Section 6: Assets and Liabilities

- all things of value that are owned by the borrower: cash, stocks and bonds and net cash value of any life insurance policies - liquid assets. - Borrower also lists the real estate, net worth of any owned businesses, vested interest in retirement plans and value of his or her cars and other personal property. - When borrower assigns dollar value to these items, should reflect current market value.

Appraisal

- an opinion of a property's value at a specific point in time. - Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 requires that real estate appraisals be in writing and be performed by competent individuals in accordance with set of uniform standards. - Apprasiers must also pass an exam by Appraiser Qualifications Board of the Appraisal Foundation and receive a state license or certification.

Sales Comparison Approach

- based on principle of substitution, buyer will not pay more for the subject property that he or she would pay for a property that has similar characteristics and amenities.

Principles of Value: Anticipation

- benefits a buyer expects to receive over period of time - Property value can increase or decrease depending on whether the anticipated change is a benefit or disadvantage. - Ex: property down the street may become a shopping mall, is it a benefit or disadvantage? depends on buyer's viewpoint.

Section 4: Employment Information

- borrower provides name and address of employer, length of current employment, number of years worked in current line of work, job title, and a phone number. - If borrower has been employed at his or her current employment for less than 2 years, must complete additional info of previous employment

Income approach

- estimate value of properties that produce income, usually from rent paid on leases. - best for estimating the value of apartments, stores, shopping centers, and office buildings.

Principles of Value: Highest and Best use

- every property has a single use which produces the best income and return. So, it will have its highest value when it is used for that purpose. Property's use must be: - Legally permissible - Physically possible - Financially Feasible - Maximally productive Ex: old office building may not be in the highest and best use when located in downtown. Best use might be a conversion to high end condominium units.

Section 1: Type of Mortgage and Terms of Loan

- fills out with help of the lender. - Most items deal with type of mortgages, case numbers, amount of loan, interest rates, etc. Borrower and co borrower need lender's input on these.

Section 8: Declarations

- judgements, bankruptcies, lawsuits, involvement in foreclosures, etc. - info about whether or not borrower is obligated to pay alimony, child support, or separate maintenance. - Must be filled out by borrower and co-borrower.

Cost Approach

- most reliable for properties built recently. - Get actual costs of development and construction - special purpose buildings when data on income is not available or when there are no comparable sales.

Market Value

- opinion of value of property based on data collected about property, info like potential income and expenses to the property in addition to analysis of comparable properties that sold.

Principles of Value: Diminishing Return

- result of continuing to add improvements to property when they have no effect on increasing value of property.

Principles of Value: Assemblage

- two adjacent pieces of property are joined together. Value of both properties together may be more valuable than selling separately. - Ex: two lots valued at $25,000 each when combined for one use, value is $60,000. - Combining for higher value is called - PLOTTAGE VALUE.

Underwriting Process

- underwriter also examines assets and liabilities. Info about net worth is important to the lender as it gives indication of stability even when borrower loses their job.

Principles of Value: Contribution

- what the market recognizes as change in value when an improvement is added, not the actual cost. - May cost 10k but the value added to the property is 30k.

Check Your Understanding

1 What are the four critical procedures for processing a loan? - 1) Determine ability of borrower to repay the loan 2) Estimate the value of property that is collateral for the loan 3) Research and analyze the marketability of the title 4) Prepare the documents necessary to approve the loan and close the transaction 2) Define underwriting - Process used to determine borrower's ability to repay loan and estimating the value of property being used as collateral. 3) Who usually performs the underwriting tasks? - Loan officer at the financial institution 4) What is detailed in the Assets and Liabilities section of the loan application? - All things owned by borrower including cash, stocks, bonds, life insurance polices, value of real estate owned, value of businesses, and value of automobiles and other personal property. - What borrower owes including auto loans, charge accounts, real estate loans, medical bills, insurance premiums and any long term liabilities such as alimony and child support payments are detailed in the liabilities.

Check Your Understanding:

1) Explain the difference between market value and market price - Market value is an opinion of value of property based on analyzing date collected. Market price is the actual sales price. 2) What does the term anticipation mean as it relates to property value? - Benefits a buyer expects to receive over the period of time he or she holds the property. 3) What are the four levels of appraiser licensing? - Trainee's license - Residential License - Certified Residential License - Certified General License 4) What are the three approaches to estimating a property's value? - Sales comparison approach - Cost approach - Income Approach

Check Your Understanding

1) What is the Request for Verification of Deposit form? - allows bank to give lender information about current balance in borrower's accounts. 2) What kinds of info does an employer provide on the Verification of Employment form? - Info includes borrower's wages and length of employment, an opinion of the borrower's attitude on job, probability of continued employment and prediction of what borrower's prospects are for pay increases and promotions. 3) What is the most important part of the credit report? - Borrower's payment history 4) Nam two red flags may appear on borrower's credit report - Employment or residence data on credit report is different from the application - Several recent inquiries from credit card companies or other mortgage lenders

Uniform Residential Loan Application

At top of form is place for borrower and co-borrower to sign stating that application is for joint ant must have signatures before any personal or financial info is taken.

Uniform Residential Appraisal Report

FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) requires real estate appraisals to be in writing and performed by competent individuals in accordance to uniform standards.

The Uniform Appraisal Report (UDAR) reffered to as 1004 is the standard in the industry.

Report requires appraiser to do: - Perform a visual inspection of interior and exterior areas of the subject property. - Inspect the neighborhood - Inspect each of the comparable sale properties - Collect, confirm and analyze date from reliable public or private sources. - Submit analysis, opinions, and conclusions in the report. PLUS, all of these exhibits - a street map that shows location of the subject property and the comparables - An exterior building sketch of the improvements, indicating the dimensions and including calculations to show how the appraiser arrived at the estimate for gross living area. If floor plan is not typical or is functionally obsolete, appraiser can include a floor plan sketch with dimensions instead of exterior building sketch. - Photos showing front , back, and a street scene of the subject property - Photos showing the front of each comparable sale property - Any other attachments that will provide support to the appraiser's opinion of market value

Appraisal Process

Seven Steps: 1) identify purpose of appraisal, such as market value for a purchase or value as loan collateral 2) Gather data relevant to the property, such as tax and title records, costs and demographic and economic data. 3) Assess the highest and best use of the property by analyzing market conditions. 4) Estimate the value of the land 5) Use the three approaches to estimating cost to help reduce errors and establish a "range" of value. 6) Reconcile the estimates from the three approaches into a final value estimate. 7) Compile and present a formal report to the client

Loan Process

four critical procedures involved: - Lender or deisgnee must: - Determine the ability of the borrower to repay the loan - Estimate the value of the property thawt is collateral for the loan - Resarch and analyze the marketability of the title - Prepare the documents necessary to approve the loan and close the transacion.