Section 10: Lender Loan Processes

Income

-Commonly used for rental or commercial properties that generate income -Sometimes called appraisal by calculation

Income approach

-Estimated monthly market rent -Gross rent multiplier

Expense

-Rent -Insurance -Taxes

In which of the following sections of a credit report might a lender expect to find a loan that has been paid off on time?

Accounts in good standing

Put yourself in the lender's shoes for a moment. Which borrower's net worth is the most favorable?

Borrower C's assets are twice as much as her liabilities.

Vladimir mentioned an example of when the gross rent multiplier would be used instead of the income approach. Take a look at the resource and see if you can understand why the income approach might be used for this type of property, then determine which of the statements is correct.

If a home in the area sold for $100,000 and received $500 per month in rent, the gross rent multiplier would be 200.

Request for Verification of Deposit: Purpose

It allows the lender to verify the cash deposits listed on the applicant's loan application.

Which of the following, once completed, initiates the loan process?

Loan application

Which of the following factors carries the heaviest weight when calculating a credit score?

Payment history

Evaluation

Study of a property, potentially for land use or marketability

Which statement best describes the most common approach used to reconcile the three appraisal approaches?

The appraiser may weigh one or two approaches more heavily than the others, as appropriate for the property type.

Net Worth

The difference between assets and liabilities

From a lender's perspective, the lower the credit score, _______.

The higher the risk

Tina is applying for a home loan. In order for child support payments she receives to be considered in the income evaluation by her lender, what must be true?

There must be a consistent track record of payment or the payments must be the result of a court order.

You've met Vladimir the appraiser. He likes to tell it like it is. Soon we'll learn more from Vladimir about the appraisal process. Let's start by reviewing purpose. What purpose do Vladimir and other appraisers serve?

To determine a property's value

Which of these loan transactions must comply with AIR?

-Four-unit residence, conventional -Single-family residence, conventional loan

Next, let's get into the different appraisal approaches. When using the sales comparison approach, how many comparables is there space for in the URAR?

3

Payment history, credit usage, inquiries, types of accounts, and _______ are factors considered in calculating a credit score.

Age of accounts

Borrower

Loan application

Total debt ratio

(Monthly debt payments / gross monthly income) x 100 -36%

Total housing ratio

(Monthly housing expenses / gross monthly income) x 100 -28%

What property information is provided in the application?

-Address -Estate type -Legal description -Names for title -Year built

BPO (Broker's Price Opinion)

-Minimal cost ($50 - $200), which must be paid to the licensee's broker -Performed by a real estate license -Comparable sales method is used -Basic to moderate level of detail -Prepared for a lender (in a foreclosure or short sale situation) or a relocation company

What type of borrower information does the loan application request?

-Name -SSN -Current address -# and ages of dependents -Martial status

Borrowers are also required to provide employment information. Let's assume a borrower works for a single employer and has worked for the employer for five years. What employment information must be provided?

-Name and address of employer -Years working in this job -Years working in this profession/industry -Position or title

Investment value

-Return on investment a property may provide

Sort the factors based on their importance to a credit score, from most important (first) to least (last).

1. Payment history 2. Credit usage 3. Age of accounts 4. Inquiries 5. Types of accounts

The Uniform Standards of Professional Appraisal Practice Process

1. State the problem 2, Identify data needed 3. Gather and analyze data 4. Determine highest and best use 5. Estimate value of the land 6. Use 3 approaches to estimate property value 7. Reconcile values to determine

One of the pieces of information the depository institution provides is the average balance for the applicant's accounts. What time period does this average cover?

2 months

A CMA or a BPO is an example of ______.

An informal estimate of market value

Marsha made an offer of $325,000 on a home listed for $350,000. The seller accepted her offer. She's now having a(n) ______ done on the home to determine its actual value and hopes it comes in at more than $350,000.

Appraisal by an appraiser

When completing a loan application, applicants must list any items of value they own. What's another term for these items?

Assets

Which of the following net worth examples may a lender view most favorably?

Assets exceed liabilities

Which of these items is a liability on a residential loan application?

Child support

Credit scores are calculated using information from which of these items?

Credit report

What acronym can be used to remember factors that influence real property value?

DUST

Lenders use credit scores when determining whether to approve a loan application. What does the score tell the lender?

How likely the applicant is to repay the money that's been borrowed

What is the purpose of the request for verification of employment?

It allows the lender to verify the employment listed on the applicant's loan application.

Assets

Items of value belonging to the borrower -Cash -Checking account -Real estate

The loan applicant, the depository institution, and the _______ all complete parts of the request for verification of deposit form.

Lender

Payment history, age of accounts, credit usage rate, inquiries, and _______ are factors considered in calculating a credit score.

Length of credit history

What's the price at which a willing buyer and a willing seller would strike a deal, given normal market conditions?

Market value

External obsolescence

Nearby zoning changes

Borrowers must list their liabilities when completing a residential loan application. What are liabilities?

Obligations a borrower owes

Liabilities

Obligations or debts owed by the borrower -Mortgage -Car loan -Unpaid taxes

Bobby is completing a residential loan application. On the application, he lists his liabilities. What are liabilities?

Obligations the borrower owes

Functional obsolescence

Overbuilt for the area Old wiring and plumbing

Who completes the different parts of the form?

Part 1: Request- Lender Part 2: Verification of Depository- Depository institution

Who Completes What (V of employment)?

Part 1: Request- Lender Part 2: V of Present Employment- Current employer Part 3: V of Previous Employment- Former employer

In which section of a credit report may a lender expect to find a loan that the consumer is delinquent on?

Potentially negative items

Which of the following is an example of an inquiry initiated by a creditor (without the consumer's permission) that may appear on a credit report?

Pre-approved credit

Valuation

Process of forming an opinion of a property's value

Which of the following is a piece of specific data an appraiser may gather?

Property lot size

The Accounts in Good Standing section lists accounts that may be viewed favorably by a lender. These are generally accounts without any late payments or that have been paid off or closed. What type of accounts may be listed here?

Revolving and Installment

The characteristics of value include which of the following?

Scarcity

Before we dig into the details of the URAR, let's start with the purpose of this report. What is its purpose?

To provide the lender with an accurate opinion of the property's market value

Appraisal

Unbiased estimate of value of a specific property on a specific date

Which of the following provides the lender with an accurate opinion of a property's market value?

Uniform Residential Appraisal Report

Lender

-Loan Estimate -Closing Disclosure

Which of these are characteristics the appraiser notes about the neighborhood where the subject property is located?

-Location type (urban, rural, etc.) -Property value trends -Supply vs. demand -Growth of neighborhood

The personal information section includes either information you reported to the credit reporting agency, or information your creditors or other sources reported to the agency. What information can you find in this section?

-Name and name variations -Year of birth -Employers -Spouse or co-applicant name -Addresses

When completing the Assets and Liabilities section of the application, what information should the borrower be prepared to provide?

-Account number -Cash value or unpaid balance -Name and address of bank or company -Monthly payment

Although the credit reports from each of the major reporting agencies may vary, you can expect to find the same type of information. Which of these items can be found on our sample credit report?

-Accounts in good standing -Contact information for the credit reporting company -Credit history inquiries -Personal information -Potentially negative items

Income may come from a variety of sources, some viewed more favorably than others. Which of these are sources of income a lender might consider?

-Alimony -Bonuses -Child support -Government entitlement funds -Normal wages or earnings -Pensions

Let's walk through the loan application. What type of information does the application request?

-Amortization type -Amount -Interest rate -Length -Mortgage type

Appraiser Dos

-Ask an appraiser to consider additional, appropriate property information -Ask for more detail or an explanation of the appraiser's value determination -Ask an appraiser to correct errors in an appraisal report

Several parties are involved in the loan approval process. Who are four of the major players in a typical financing arrangement?

-Borrower -Lender -Settlement agent -Underwriter

Insured value

-Cost to replace or rebuild a property -Value of importance to insurance companies

Appraisal

-Costs $400+ -Performed by a state-licensed or certified appraiser -Multiple methods of performing the appraisal are used, including sales comparison and cost. Appraisers may also use the income approach for income-producing properties. -Very detailed -Prepared for the lender, buyer, seller, or sometimes the courts

The loan application is used to gather information needed to determine whether the applicant can repay the loan. What information is requested in the application?

-Credit references -Borrower net worth -Employment history

Several parties have a role in completing parts of the form. Which of these parties are involved?

-Depository institution -Applicant -Lender

Cost

-Estimates the cost to reproduce or replace any buildings on the property, plus the value of the land -Commonly used to appraise properties with few or no comparables

CMA Comparative Market Analysis

-Free -Performed by a real estate licensee -Comparable sales method is used -Basic to moderate level of detail -Prepared for a seller or a buyer

When an individual is self-employed, proving income and finances to a lender may take a little extra effort than for other individuals who are not self-employed. According to the resource, what additional documents may a self-employed individual need to provide when obtaining a loan?

-IRS Form 4506-T -Profit-and-loss statement -Tax returns

Five factors are used to determine a FICO® credit score. The video attached in your resources briefly introduces these factors. What are they?

-Inquiries -Payment history -Types of accounts -Age of accounts -Credit usage

Several parties have a role in completing parts of the verification of employment form. Which of these parties are involved?

-Lender -Applicant -Applicant's employer

AIR sets certain criteria for selecting an appraiser. Which of these appraiser requirements does AIR specify?

-Licensed or certified in the state where the property is located -Knowledgeable about the local market -Qualified to appraise the property involved in the transaction -Able to access the data needed to perform an appraisal

Some items on a credit report may be viewed negatively by a lender. Which of these items would you expect to find in this section of the report?

-Loan with a past due balance -Bankruptcies -Liens -Court judgments -Accounts sent to collections

Market value or fair market value implies certain conditions exist. According to Vladimir, what conditions does fair market value imply?

-Neither the buyer nor the seller is being forced into an agreement. -The buyer and seller are acting in their own best interests. -The property has had reasonable exposure to the market. -The buyer is using cash or obtaining financing.

Mortgage value

-Of great importance to a lender -Price at which the property can be loaned on or sold for at a foreclosure sale

The purpose of the loan is another piece of information the borrower must complete. If the loan is for construction, what five pieces of additional information must the borrower provide?

-Original cost -Existing lien amount -Present value of lot -Cost of improvements -Year the lot was acquired

One of the final sections the borrower completes is Declarations. What does this section seek to uncover?

-Outstanding judgments -Previous bankruptcies or foreclosures -Current delinquency or default on debt obligations -Citizenship -Intention to occupy the property as a primary residence

Borrowers provide a lot of unsubstantiated information on the loan application. Which of these items might a lender use to verify the information provided by borrowers?

-Pay stubs -Verification of deposit -Verification of employment -Bank statements -Credit report

Current employers provide quite a bit of information to the lender. Which of these items are provided?

-Probability of continued employment -Gross base pay amount -Overtime, bonuses, or commissions paid -Likely continuance of bonus or overtime pay -Information about last and next pay increase

We'll start with the Subject and Contract sections of the report. Identify whether these pieces of information are found in these sections.

-Property address -Legal description -Amount of real estate taxes -HOA assessment amounts -Sale price -Financial assistance being obtained by the borrower

Site

-Property dimensions -Whether the present use of the property is the highest and best use -Utilities

Uniform Residential Appraisal Report

-Subject property information, such as address, owner information, HOA fees, transaction type, lender information -Information related to the sales contract (such as sale price) -Description of the neighborhood -Subject property site information, improvements, details about condition -Comparable properties and their features

Appraiser Dont's

-Threaten to withhold payment for the appraiser's value determination -Suggest additional business be contingent upon the appraiser's value determination for a current property

Sales Comparison

-Uses similar, recently sold properties and adjusts their sales price based on differences from the subject property -Primary approach to determine value, especially for residential properties

Real Estate Professional

-Usually hired by the buyer or seller -Determines what a buyer may pay for a property -Provides an estimate of value that may be influenced by the consumer

Appraiser

-Usually hired by the lender or buyer, or sometimes the seller -Determines a property's worth -Provides unbiased estimate of value

Income

-Wages or salary -Commission -Bonuses

Physical deterioration

-Wear and tear from normal use -Unrepaired storm damage -Improper maintenance of property

Cost approach

-Whether the numbers represent reproduction or replacement -Estimated remaining economic life -Source of cost data

Improvements

-Year built -Foundation type -Amenities and appliances

What additional five pieces of information must the borrower provide when requesting a refinance?

-Year the property was acquired -Reason for refinancing -Original cost -Existing lien amount -Cost and description of improvements made or to be made

Loan Approval Process

1. Prospective borrowers complete loan application and submit to lender, along with additional documentation. 2. Lender provides applicants with Loan Estimate within three business days of making the loan application. 3. Lender assembles application packet and documentation for processing. 4. Lender arranges appraisal of property. 5. Underwriter evaluates application packet and property appraisal. 6. Underwriter makes recommendation (yes, no, or maybe) related to the application. 7. Approved applications head toward closing. 8. Lender's closing department prepares documents for closing. 9. The settlement agent receives loan documents. 10. Settlement agent orders title search, survey, and insurance. (The title search is generally done weeks or months before the closing, but a second search of the title record is done right before closing to ensure that no new encumbrances have been added to the record, which is especially important when seller is financially distressed.) 11. The lender prepares the Closing Disclosure and the settlement agent prepares the deed for closing. 12. Borrowers receive Closing Disclosure at least three business days before closing. 13. Borrowers attend closing (conducted by settlement, escrow, or closing agent) and, after funding and recording, get the keys to their new home.

Kelly is reviewing Steve's loan application. She wants to verify that he has a solid history of paying obligations on time. What should she request to do this?

Credit report

What's Your Score?

The median credit score for consumers is 670-739. This is a good credit score, and these consumers are "acceptable" borrowers and only stand an 8% chance of falling into serious delinquency in the future. Consumers in the 800+ range are well above the average credit score and generally have an easy time getting approved for new credit. Consumers in the 740-799 also fall above the average credit score and tend to qualify for better interest rates than those in the "acceptable" category. Subprime borrowers have a credit score of 580-669. They may have some challenges getting a loan, and if they do qualify, it will likely be at a higher interest rate, given that they are a higher credit risk. Sixty-one percent of consumers with a credit score of 579 and lower are likely to become seriously delinquent. Because of this, they're unlikely to be approved for loans, any credit cards issued may include extra fees or require deposits, and utility companies may also require deposits from these consumers.

What's the purpose of the appraiser independence requirements?

To protect parties, such as investors and homebuyers