Sect 16: The Lending Process in WA
How do you calculate total debt ratio?
(Total of monthly debt obligations / monthly gross income) x 100
How do you calculate the housing ratio?
([Principal + interest + taxes + insurance + association fees] / monthly gross income) x 100
Lenders must provide the borrower with a disclosure statement. At what three points in time can a lender provide this statement to the borrower and still be within regulations?
- At the time of the application - One day after the loan application - Three days after the loan application
Primary Mortgage Market
- Bank - Thrift - Credit Union - Mortgage Company
Real Estate Settlement Procedures Act (RESPA) (1974)
- Enacted by the U.S. Department of Housing and Urban Development (HUD). - Prohibits illegal kickbacks and referral fees. - Covers loans on one-to-four-family residential properties (including loan assumptions, refinances, home improvement loans, and equity lines of credit). - The lender must provide the borrower with a written disclosure of estimated settlement costs.
Secondary Mortgage Market
- Fannie Mae - Freddie Mac - Ginnie Mae - Former Mac - Fed Home Loan Bank - Loans are packaged into Mortgage-backed Securities (MBS) to sell to investment banks and Real Estate Mortgage Investment Conduits (REMICs).
A qualified mortgage with Rebuttable Presumption
- Higher priced loan because the lender assumes more risk - Subprime loan (usually offered to consumers who have insufficient or marginal credit history) - Lenders are presumed to have verified the borrower's ability to repay the loan - The borrower in default must show income/assets were insufficient to meet living expenses at the time the loan was granted
Mortgage Fraud
- Illegal property flipping: Illegal when a home is bought, appraised for more than it's worth, and sold within a short time frame. Kickbacks to the parties are commonplace. - Inflated appraisals: An appraiser intentionally submits a misleading report to a lender that indicates an inflated property value. - Silent second: A property buyer accepts a second mortgage without disclosing it to the original lender. Often used when a buyer can't afford the down payment on a home. - Nominee loans/straw buyers: Concealing a buyer's identity by using another person's name and credit information to obtain a loan. - Equity skimming: An investor receives title to a property— often by using a straw buyer—doesn't make the mortgage payments, and usually rents out the home until foreclosure occurs - False identity: Borrowers may use a stolen or fictitious identity to obtain a home loan. - Undisclosed buyer rebate: The seller or another party provides funds that aren't included in the settlement statement. In order to be legal, rebates must be disclosed to the lender and must appear on the settlement statement.
Community Reinvestment Act (1977)
- Lenders must offer affordable loans to their communities' low- to moderate-income individuals. - Lenders must prepare a statement that shows how they've invested in low-income and rehabilitation efforts. - The statement must:Include the community's geographic boundaries.Identify reinvestment credit offered.Include comments from the public about how the lender is doing in meeting the community's needs. Involves federal regulatory review by a federal financial agency, such as:Comptroller of the CurrencyFederal --Reserve's Board of Governors,Federal Deposit Insurance Corporation (FDIC)Office of Thrift Supervision Lenders must publicly post that they are subject to this review, and make the results of that review public.
Qualified Mortgage with Safe Harbor status
- Meets all criteria for a qualified mortgage - Consumer can't later claim that the lender didn't comply with the ability to repay requirements - Lower-priced loan because the lender assumes less risk - Prime loan (as opposed to subprime) Offers borrower the greatest legal certainty that the lender is complying with the ability-to-repay rule. (However, the borrower can legally challenge a lender if that borrower believes the loan doesn't meet the definition of a qualified mortgage.)
Loan Application Stage
1. Find a home and obtain a pre-approval letter 2. Complete a Uniform Residential Loan Application and obtain credit scores 3. Receive clear title and obtain title insurance and homeowners insurance
Lenders can also make money by servicing their own loans or loans for other lenders by billing them for services. What three services can the primary mortgage market lenders make money from?
1. Servicing loans 2. Processing payments 3. Preparing tax records
TILA (Regulation Z) requires that lenders make certain disclosures. Which four of these disclosures does the Truth in Lending Act require lenders to make?
1. Total principal and interest to be paid toward the mortgage 2. Annual percentage rate 3. Finance charge 4. Amount financed
The Buyer's Loan Approval Process
1.Pre-qualification: Getting pre-qualified is an informal process that involves the buyer being interviewed by a mortgage professional about her income and expenses. The purpose of this step is to give the buyer an idea of the price range she can afford. It can also let the seller know that, based on this initial information, the buyer will qualify for the loan. 2.Pre-approval:Once a property is identified, the buyer will meet with a lender to obtain pre-approval. This is a written statement from a lender that a borrower would qualify for a certain loan amount based on her verified income and credit report. 3.Mortgage commitment: Underwriting: This is the process of comparing the borrower's credit, assets, and other financial factors, together with the property's appraised value, against the lender's standards. Underwriting occurs after the loan package is complete and results in the loan being approved or rejected. If the loan is approved, the loan documents are sent to the closing agent. Final approval: The final approval is communicated to all interested parties through a loan commitment letter, stating that the lender has approved the loan and has committed to issue the loan. The loan commitment is only good for a short time. If there is a delay in the closing, the buyer may need to resubmit the loan application and start over.
What's the typical low end of the housing ratio to qualify for a conventional loan?
25
What's the typical high end of the housing ratio to qualify for a conventional loan?
28
You have an appointment to meet with Ramon and Willis, a young couple who are in the early stages of the homebuying process. They earn a gross monthly income of $3,600 and a net income of $2,900. The lender the couple is working with is conservative and only funds loans at the low end of the housing debt-to-income ratio. How large of a house payment can Ramon and Willis afford (according to their lender)?
3,600 x .25 = 900
Ramon and Willis have other debt that equals $296 per month. With a gross income of $3,600, and assuming they've found a lender that uses the high end of the total debt-to-income ratio, what's the maximum house payment they can afford?
3,600 x .36 = 1,296 1,296 - 296 = 1,000
What's the typical total debt-to-income ratio to qualify for a conventional loan?
33-36
Community Reinvestment Act
A 1977 law requiring all institutions insured by the FDIC to encourage financial institutions to assist with rebuilding and revitalizing communities through sound lending practices
Loan estimate
A disclosure the lender gives to the borrower within three days of the borrower applying for a loan; discloses loan terms, interest rate, and estimated payment (replaced the Good Faith Estimate)
Closing Disclosure
A statement of final loan terms and closing costs, provided to the borrower at least three days prior to closing
What's included in a total debt ratio (aka debt-to-income ratio, total obligation, back end ratio?)
All recurring (or installments) debt that will last longer than 10 months, such as monthly mortgage, car, credit, and loan payments.
Pre-approval
An assurance from the lender that the borrower appears to have the funds and creditworthiness to close; includes verifying the borrower's credit standing, available funds, and employment history.
Pre-qualification
Assumed amount a borrower can afford based upon the borrower's stated information
Loans for ______ purposes don't require TILA disclosure.
Business
How does a lender in the primary mortgage market earn money when a loan is originated?
By charging loan origination fees
National banks that offer consumer and business loans
Commercial banks
Examples of primary mortgage market players
Commercial banks, savings and loan associations, credit unions, insurance companies, and investment groups
Requires lenders to demonstrate they serve the community's low- to moderate-income housing needs
Community Reinvestment Act
Member-based cooperatives
Credit Unions
Prohibits lenders from discriminating based on protected class
Equal Credit Opportunity Act
Which of the following prohibits lenders from discriminating based on protected class status?
Equal Credit Opportunity Act
Equal Credit Opportunity Act (ECOA)
Equal Credit Opportunity Act (ECOA) Regulation B Prohibits discrimination in financing based on several protected classes:RaceColorReligionNational originSexMarital statusAge (over the age of 18)Dependence on public assistance
ECOA
Equal Credit Opportunity Act; 1974 fair housing lending law enacted to prevent lenders from discriminating against applicants based on age, race, color, religion, sex, national origin, marital status, or public assistance income
Underwriter
Evaluates borrower's loan application and property appraisal, then recommends whether or not the application should be approved
Taxes and insurance reserves are collected at the time of the loan commitment.
F
The lender is required to issue a loan once the borrower has been pre-approved.
F, The lender isn't required to issue the loan until the underwriter has approved the loan.
Underwriting occurs before the loan package is complete.
F, Underwriting doesn't happen until all loan documents have been collected.
Reserve Fund: Designed for principal, interest, taxes, and insurance.
F, taxes and insurance only
Cancellation of PMI is never automatic.
F.
Flood insurance is standard coverage with most homeowners insurance policies.
F.
Mike's been friends with Tim since college. They often work together: Mike flips houses and Tim's an appraiser that he uses frequently. It works out great for both friends and Mike definitely gets a better appraised value on the flips Tim handles. For every appraisal Tim handles for him, Mike gives him a $100 gift card. In what illegal practice does it sound like they're engaging?
Falsely inflating appraisals
Of the institutions listed, which of these is viewed only as a secondary mortgage market player?
Fannie Mae
Examples of secondary mortgage market players
Fannie Mae, Freddie Mac, Ginnie Mae, Farmer Mac, U.D. Department of Agriculture (USDA) Rural Housing Service (RHS)
What's a loan origination fee?
Fees charged by a lender for processing or originating a loan
How to determine if a client qualifies for a mortgage?
Housing Debt-to-Income ratio: 25%-28% Total Debt-to-Income ratio: 33%-36%
The property is purchased, falsely appraised at a higher value, and then quickly sold.
Illegal property flipping
An appraiser secretly works with a borrower and provides a misleading appraisal report to the lender.
Inflated appraisals
Companies that use company capital to finance long-term loans, such as mortgages
Insurance Companies
Lend money to those who want to avoid conventional financing and also purchasers of mortgage-backed securities
Investment groups
Regulation Z
Legislation from the Truth in Lending Act that requires disclosure of terms by lenders
How the Primary Mortgage Market Makes Money
Lenders in the primary mortgage market make money by: - Collecting finance charges at closing, such as loan origination fees and/or discount points - Collecting interest payments from the borrower Lenders can also make money by servicing loans for other lenders, billing them for: - Collecting mortgage payments - Processing tax and insurance payments - Preparing insurance and tax records
What could be a consequence if there were no secondary mortgage market?
Lenders might not have funds available to make new loans to the public.
How do you calculate loan origination fee?
Loan amount x origination rate (divide a percentage by 100 to obtain the rate, so an origination fee of 2% is the same as 0.02)
What's included in the housing ratio (a.k.a., front-end ratio)?
Monthly housing obligation, (principal, interest, taxes, insurance), homeowners or condo association fees.
MBS
Mortgage-backed security (mortgages that are pooled together and sold to investors on the secondary mortgage market)
Which program helps homeowners in flood hazard areas obtain insurance?
National Flood Insurance Program
You have a client who's selling his family's working tree farm. Does TILA apply?
No, A working farm is a business enterprise, and TILA doesn't cover loans for commercial purposes.
"Get a VA-guaranteed loan here!"
Permitted statement
Loans available at 5% annual percentage rate.
Permitted statement
"For a good mortgage, call Mike!"
Permitted statement.
Sophie only has 15% to put down on her new home. What might the lender require in order for Sophie to obtain conventional financing?
Private mortgage insurance
Which of the following is a type of subprime loan usually offered to consumers with insufficient or marginal credit history?
Qualified mortgage with the rebuttable presumption
Requires written disclosure of estimated settlement costs to the borrower
RESPA
RESPA
Real Estate Settlement Procedures Act (consumer protection act that ensures borrowers don't pay too much for credit by requiring disclosures that allow borrowers to comparison shop, and prohibiting kickbacks among settlement service providers)
Institutions that purchase loans, package them into mortgage-backed securities, then sell these to investors may commonly be referred to as ______.
Secondary market players
Mortgage-backed securities (MBSs) are created when several loans, which usually have similar characteristics, are grouped, or pooled, together and then sold. How does the loan originator make money from an MBS?
Sells the flow of principal and interest Explanation: Selling the principal and interest allows primary lenders to free up capital so that they can make more loans.
Consumers approach lending institutions in the primary market when they need a loan. After that institution issues the loan, it approaches the secondary market. Order the steps showing the process a loan goes through to get from the primary to the secondary mortgage market.
Step 1: Lending institutions market their loan to the secondary market. Step 2: A secondary mortgage market institution purchases the loan. Step 3: Loans are packaged into a mortgage-backed security (MBS). Step 4: Investors purchase shares of the MBS. Step 5: Money received from investors is used to purchase additional loans.
The borrower's identity is concealed behind someone else's name and credit history.
Straw buyers
The underwriter determines if a loan is approved or rejected.
T
A loan commitment is good only for a short period of time.
T, If too much time passes between commitment and closing, the buyer may have to repeat the loan approval process.
Federally regulated lenders require borrowers to obtain flood insurance if the property is in a flood plain as a condition of obtaining a mortgage.
T.
It requires cancellation of PMI when the borrower's equity reaches 22% of the property's original loan value.
T.
PMI: This act is also called the Homeowner's Protection Act.
T.
Reserve Fund: Lenders may require as much as 14 months' worth of prepaid tax and insurance amounts in reserve at the time of closing.
T.
Reserve Fund: May also be called an escrow account.
T.
The National Flood Insurance Program helps homeowners in flood hazard areas obtain insurance.
T.
Truth in Lending Act (TILA) disclosure rules.
TILA applies to consumer loans. Therefore, commercial and agricultural credit, such as a loan to buy an agricultural property for farming purposes, are exempt from TILA disclosure requirements.
The Consumer Credit Protection Act (1968)
The Consumer Credit Protection Act (1968) The Consumer Credit Protection Act (CCPA), created in 1968, includes the Truth in Lending Act (TILA). The intent of the legislation was to safeguard the consumer in the use of residential credit by requiring full disclosure of the terms and conditions in any offers of credit. These "trigger" terms are: Down payment Payment amount Number of payments Interest rate (other than APR)
With all of this money lending and money making going on, which player has the most influence on real estate financing?
The Federal Reserve System. The Fed controls the money that's available to the banks, and it also impacts what the banks can charge for the money.
Loan-to-value ratio
The ratio of a loan amount to the value of the property purchased
The secondary mortgage market serves a very important role in real estate finance. Which of these statements best describes that role?
The secondary market purchases loans from primary lenders and helps keep credit available to loan originators.
"Loans available at 5% annual percentage rate with $0 down."
This is a violation. Full disclosure of all terms is required because something other than APR was mentioned.
In addition to placing requirements on lenders, borrowers also have some guidelines, such as the cut-off point for borrowers to rescind or cancel a new mortgage on a residence they already own. What is this cut-off point?
Three days after the loan closing
What's the purpose of the pre-qualification stage of the loan approval process?
To determine the amount of money the buyer will qualify for based on initial information provided by the borrower
Private Mortgage Insurance (PMI) purpose
To protect the lender in case of borrower default when the borrower has put down less than 20%
What's the purpose of the loan commitment?
To provide notice from the lender that the loan has been approved. The loan commitment is only good for a short time. If there's a delay in the closing, the buyer may have to apply for a new loan.
Requires disclosure of loan terms and costs
Truth in Lending Act
TILA
Truth in Lending Act (requires lenders to inform borrowers of all direct, indirect and true costs of credit)
Washington Usury Law
Usury is lending money at an excessively high rate (think loan sharks, but with business cards). Usury often involves unscrupulous lenders who take advantage of a consumer's naivety or circumstances to get them to sign loans with not just unfavorable, but nearly impossible, terms. Usury laws have been enacted to prevent this practice and protect consumers. Washington's usury laws prohibit interest rates above 12%
"30-year mortgages available at 5% annual percentage rate with $1,000 down."
Violation statement
As Brent's agent, you confirm that his income and assets were verified when he obtained the pre-qualification letter. The letter must be provided during the transaction process. But when?
When an offer is made
Brad is poised to make it big in the music world. He's got talent, he's got drive, and he's got a garage band. The only thing he hasn't got is money to buy the new guitar he needs. No one he knows will lend him the money, so he ends up striking a deal with a fellow one of his bandmates knows. Brad gets the money, buys his guitar, and figures he'll worry about that 18% interest rate next month, when his first payment is due. Does this deal violate Washington usury law?
Yes, Usury laws apply to private lenders, and that means that Brad's loan shouldn't have a rate higher than 12%.
Mortgage bankers
actually do the lending. They have in-house loan processors and underwriters. Wells Fargo Mortgage is an example. Mortgage bankers can close pretty quickly because they fund their own loans, but their range of offerings is narrow because it's limited to their own products.
What's loan to value ratio? (LTV)
amount being borrowed compared to the value of a property (either the appraised value or sales price, which ever is less)
How to calculate loan to value ratio (LTV)?
amount financed/ property value x 100
Mortgage-Backed Security (MBS)
are investment products similar to bonds. Each MBS consists of a bundle of home loans and other real estate debt bought from the banks that issued them. - Mortgage-backed securities (MBS) turn a bank into an intermediary between the homebuyer and the investment industry. - The bank handles the loans and then sells them at a discount to be packaged as MBSs to investors as a type of collateralized bond. - For the investor, an MBS is as safe as the mortgage loans that back it up.
The Federal Reserve System
is commonly referred to as the Fed. The Fed comprises 12 Federal Reserve districts, each served by a district Federal Reserve bank. All national banks must be part of the Fed and must purchase stock in the district banks. To help avoid inflation deflation.
Mortgage brokers
mortgage brokers work with multiple lenders to search for and negotiate the best deal for a particular borrower's circumstances. They don't loan the money out themselves, so they're not tied to a specific suite of loan products
