Module 3

Power of Attorney

A power of attorney (POA) is a legal document that an individual (the principal or grantor) uses to authorize another (the agent or attorney-in-fact) to act on his or her behalf. When a borrower is unable to attend a closing, use of a POA ensures that the transaction can proceed. Fannie Mae provides guidelines for the use of a POA for conventional loans, stating that an individual holding a POA may sign the mortgage or deed of trust and the promissory note, provided that all of the following conditions are met: The POA:Is valid at the time that the loan documents are signed Is notarized References the address of the property involved in the transaction The lender complies with state law requirements, such as a requirement to record the POA with the mortgage or deed of trust

Income Approach

Normally this approach is not applicable to single-family properties. However, if a single-family home is being utilized as an investment property, the appraiser must prepare a single-family comparable rental schedule in addition to the appropriate appraisal report.

Application Accuracy and Required Information (e.g., 1003) The URLA consists of two separate components: the Borrower Information component, which consumers fill out on their own, and a separate Lender Loan Information component, which mortgage loan originators complete. There is also an Additional Borrower component for transactions that involve a co-borrower. The redesigned URLA offers consumers an application with straightforward, plain-language requests for information. With this form, applicants are simply asked to indicate if they need a home purchase loan or a refinance, and requests related to specific loan products and legal information have been eliminated. Mortgage loan originators collect this information on the Lender Loan Information component of the application.

The design of the updated URLA is similar to that of the Loan Estimate and Closing Disclosure, utilizing a familiar and cohesive format to aid in consumer understanding. The URLA is geared toward digital use, with an interactive, dynamic form that adjusts in size as potential borrowers add information. Users can also complete and save their applications online and print out completed physical copies. While the redesigned URLA resembles the Loan Estimate and Closing Disclosure in format, there is an important difference between them. Provisions of the TRID Rule prohibit making changes to the blank Loan Estimate or Closing Disclosure forms; deletions and alterations are not permitted, even when data fields have no relevance to a particular transaction. Changes as simple as using additional pages with the Loan Estimate are not allowed. In contrast, the URLA is a flexible document, and lenders are allowed to make changes within the guidelines of Fannie Mae and Freddie Mac's "Rendering Options." Prior to creating their own version of the URLA, lenders and loan originators should carefully review the list of permitted changes.

Disclosures As a consumer protection measure, and as a legal compliance measure, the timing and accuracy of disclosures is an important component of loan origination. Lending laws and regulations create long lists of obligatory disclosures.

The disclosures are intended to: Educate consumers Provide consumers with information on loan costs Notify consumers of risky lending terms Notify consumers of their rights under federal lending laws Ensure that consumers know the status of their loan applications Give notice to consumers about changes in the servicing of their loans Following is a list of the requisite disclosures, grouped according to their purposes, and including the timeframe in which they are due.

Section 2: Financial Information - Assets and Liabilities Trade equity: refers to a borrower exchanging property they already own to finance, wholly or partially, a new property. Whether trade equity is acceptable will depend on the circumstances of the transaction and the exchanged property itself. Fannie Mae allows the use of trade equity when:

The equity contribution for the traded property is based on a value supported by a current appraisal, and The borrower makes the minimum required contribution (down payment) from his or her own funds, unless the LTV is 80% or less or the borrower is buying a one-unit principal residence and meets requirements to use gift funds, donated funds, or employer assistance

Calculating Taxes

Taxes are fairly simple to calculate. They are typically obtained as an annual, semi-annual or monthly amount from the locality where a property is located. They are based on the locality's assessed value of the property. The annual tax amount is divided by 12 to arrive at a monthly tax payment (semi-annual is divided by 6), which can be added to a P&I payment or entered along with the other variables into a financial calculator. {Annual Property Taxes} ÷ {12} = {Monthly Property Taxes}

Temporary and Fixed Interest Rate Buy-Down (Discount Points)

Temporary and permanent fixed interest rate buy-downs are handled differently. In a fixed interest rate buy-down, the borrower pays fees to permanently reduce the note rate of a loan. For instance, the lender may offer an interest rate of 7.75% with no discount points or a rate of 7% with three points. The "three points" are equal to 3% of the loan amount and are paid as closing costs, which affect the APR of the loan. The calculation for points is as follows: {Loan Amount} × {0.01} = "1 point" A temporary buy-down is created when funds are placed in escrow to offset the monthly payments required by the terms of the loan. The escrow funds reduce the payment rate for a period of time but not the note rate.

Section L2: Title Information

Tenancy in Common: when homeowners hold the title to a home as tenants in common, they share ownership interests, but there is no right of survivorship. Homeowners must use estate planning to decide how to pass their interest in residential real estate to their beneficiaries. Without estate planning, the passing of ownership interests to the heirs of the deceased homeowner is resolved in court. This arrangement is suitable when homeowners are not married and one of them makes a greater contribution to the cost of purchasing a home than the other. Tenancy in common may also be an option for holding title when homeowners plan to pass their interest in a home to heirs who are not directly related (i.e., are not their children or another immediate relative). Tenancy by the Entirety: each spouse has an equal, undivided interest in the property. This acts to protect each spouse, as something that they co-own cannot be taken from one due to debts incurred solely by the other. This preserves the living spouse's right to inherit joint property when their partner dies, and it ensures that creditors can only attach and execute on property for joint debts.

The Application Interview The purpose of the application interview with the potential borrower is to obtain information to complete the loan application. This may take place in a face-to-face meeting, over the phone, or online.

The 1003 is a fairly extensive document and is used to compile a broad range of personal information about a potential borrower and the loan for which he or she is applying. The following sections will review the 1003 step by step. As lenders, mortgage brokers, and their loan originators help borrowers to complete loan applications, compliance with the Ability to Repay Rule (ATR Rule) and the Qualified Mortgage Rule (QM Rule) should be an ongoing consideration. The law prohibits creditors from entering a consumer credit transaction that is secured by a dwelling "...unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms" (12 C.F.R. §1026.43(c)(1)). These regulations also provide that a creditor's "reasonable and good faith determination" must be based on verified and documented information (12 C.F.R. §1026.43(c)(2)).

Closing Agent

The closing agent is often employed by the title company, although in some cases, he or she may be an employee of the lender, an attorney, or an attorney that represents the lender. State law determines which types of professionals can serve as settlement agents, with some states having much more restrictive requirements than others. For example, in some states, attorneys must handle closings. The responsibilities of the closing agent include: Coordinating the closing process Verifying transaction amounts Ensuring all parties to the transaction (borrower/buyer, seller, etc.) have copies of forms and disclosures required for settlement Verifying identity of parties and notarizing documents Discussing closing requirements with parties to the transaction including fees, dates, funding, rescission, etc.

Debt-to-Income (DTI) Ratios

Unless there is evidence of a higher minimum payment, Freddie Mac and many other investors require the use of a 5% minimum payment on revolving debt. To calculate the total debt ratio (debt-to-income ratio), begin by calculating the total monthly payments: {Monthly Revolving Debt} x {Minimum Payment} = {Monthly Revolving Debt Payment} {Monthly Revolving Debt Payments} + {PITI} = {Total Monthly Debt Payment} {Total Monthly Debt Payment} ÷ {Income} = {Total Debt Ratio} This series of calculations may seem daunting at first; however, consider the scenario on the following page to help in understanding each step of the process.

Section 2: Financial Information - Assets and Liabilities In Section 2b, the consumer should list any other assets and credits they may have that did not fit the description of items suitable for Section 2a. These might be proceeds from property that will be sold at or before closing of the proposed mortgage loan, proceeds from the sale of non-real estate assets, or other funds, like the following.

Unsecured borrowed funds: these are funds borrowed based on the consumer's qualifications, but not secured by anything. Mortgage loans and car loans, for example, are secured by something - the house, in the former instance, or the car itself, in the latter. In an unsecured loan, the consumer is borrowing based on their qualifications alone, without any collateral. Earnest money: many property buyers will offer an earnest money deposit (EMD) during their transaction, as a sign of their good faith intent to purchase the home. It often comes when a purchase contract is signed, though in particularly competitive markets, it may come attached to the offer. In some cases, earnest money may be nonrefundable; it is important for consumers to be keenly aware of the nature of an EMD and when it may or may not be kept, when one comes into play. Employer assistance: some employers will offer homebuying assistance to their employees as a job incentive. This usually comes in the form of the employer paying a percentage of the potential borrower's down payment. According to Fannie Mae's Selling Guide, for conventional loans intended for purchase by the GSE, employer assistance may be in the form of: Grants Direct, fully-repayable second mortgages or unsecured loans, or A deferred-payment second mortgage or unsecured loan

Project Type

When a consumer is planning to secure a loan with a dwelling that is not a single-family residence, the loan originator must indicate whether the common interest development is a condominium, a cooperative, or a planned unit development. If the dwelling that will secure a loan is a single-family residence, the URLA will show that the "Property is not located in a project."

Suitability of Products and Programs

"Loan suitability" is a term that refers to the diligent matching of loan programs with the financial circumstances of consumers. Provisions of the Dodd-Frank Act encourage consumers to make safer borrowing choices by requiring homeownership counseling for riskier loan products. In addition, the ATR and QM Rules work to help promote and ensure loan suitability for consumers participating in the mortgage market.

Total Credits

"Other Credits" lists the sum of all amounts that a loan applicant has listed as "Other Assets" in Section 2b of the Borrower Information component of the URLA: earnest money, proceeds from the sale of real or personal property, sweat equity, employer assistance, and rent credit.

Tangible Net Benefit

"Tangible net benefit" refers to the benefit that a consumer will attain as a result of a transaction. The practice of loan flipping - the repeated refinancing of a loan over a short period of time without a benefit to the borrower - resulted in mortgage professionals being able to collect excessive fees from consumers who were ultimately saddled with the resulting expenses. Anti-predatory legislation has since tried to combat a number of harmful practices in the industry. Many state legislatures passed laws that require mortgage lenders to show that a refinance will provide a tangible net benefit to the borrower. Some state laws even instruct state regulators to create a tangible net benefit worksheet that lenders must use when refinancing a high-cost mortgage. Use of this worksheet is intended to help lenders ensure that the benefit that a borrower gets from a refinance is not limited to a short-term benefit, such as lower payments for a few months at the expense of a higher interest rate and/or a larger loan balance. Congress has not adopted a "catch-all" tangible net benefit rule. Rather, it attempts to discourage loan flipping and similar practices in transactions for high-cost mortgages by restricting the number of refinances that a creditor can make within a set period of time unless the refinancing is in the consumer's interest. This rule applies to refinances made by the same creditor that made the mortgage that a borrower wants to refinance, and it prohibits refinances within one year of making a high-cost mortgage unless the transaction is in the borrower's interest (12 C.F.R. §1026.34(a)(3)).

Dry Settlement

A dry settlement is the opposite of a wet settlement. A dry settlement occurs when the parties meet to execute documents, but funds are not disbursed. With dry settlements, the parties are made aware that the funds are not disbursing and the property will not be conveyed until certain conditions are satisfied. Some state recordation statutes even require that the mortgage or deed of trust be recorded prior to disbursing funds.

Payments (PITI, Mortgage Insurance)

A more important calculation to borrowers is the PITI (principal, interest, taxes, and insurance) payment. It is based on the same principles as the P&I payment but more accurately portrays a borrower's potential monthly payment because it includes the required escrow amounts for taxes and insurance. Financial calculator models differ in their functions, but many models include a taxes/insurance function for adding these variables into the payment calculation. Regardless of calculator functions, taxes and mortgage insurance are simple calculations that can be added to a P&I payment to advise a borrower of his/her monthly PITI payment.

Using the Margin and Index

A mortgage loan originator might be asked a question in which the margin and index are given, as well as a hypothetical change in the index. In the previous example, the margin on the loan might be 2.75% and the index might have risen to 5.50% at the time the second adjustment occurred. In this case, the actual new rate would have been computed by adding the margin and index, then comparing the result to the maximum rate. The calculations are as follows: 2.75% + 5.50% = 8.25%8.25% < 9.625% Because 8.25% is less than 9.625%, the new rate for year five would be 8.25%.

Refinances The redesigned URLA classifies refinances into no cash out, limited cash out, or cash out.

A no cash out refinance is a loan that provides the exact amount of funding needed to pay off an existing mortgage through a new loan with a lower interest rate. A conventional limited cash out refinance allows borrowers to add the cost of the refinance to the loan amount and to receive a small amount of cash back, which is limited to the lesser of 2% of the loan amount or $2,000 (Fannie Mae Selling Guide B2-1.2-02). With a conventional cash out refinance, borrowers who have equity in their homes can secure cash as well as a new loan. Borrowers will frequently use cash out refinances to pay off high-interest debt, such as credit card balances. Fannie Mae creates a number of restrictions on these transactions, such as a seasoning requirement. With some exceptions, a borrower who applies for a cash out refinance must have purchased the home securing the loan at least six months prior to the new loan's disbursement date (Fannie Mae Selling Guide B2-1.2-03).

Indian Country Land Tenure Federal law defines "Indian Country" to include:

A reservation established by the federal government A "dependent Indian community" that is set aside by federal government, and Allotments that the federal government made through a land distribution system that existed between 1887 and 1934 (11 U.S.C. §1151) Most of this land is held in trust by the United States government and managed by tribal governments. However, there are some tracts of "fee land" that individual tribes or other persons hold in fee simple. A title search can confirm whether land is held in fee simple or in trust and whether it is located within a reservation's boundaries. Title information related to land in Indian Country is held by the Bureau of Indian Affairs (BIA) in its Division of Land Titles and Records. This division of the BIA has 18 Land Title and Records Offices located throughout the continental United States and Alaska.

Due from Borrower(s) Subsection C: Land: Subsection C must show the value or the cost of land that is not included in the sales contract price for a home purchase loan. Examples include:

A transaction for a construction loan that will finance the cost of building a home on land purchased separately, or A transaction to finance the purchase of a manufactured home that the borrower will place on land that he or she already owns In transactions for refinances, Subsection C must show the value of land that is not related to the mortgage debt that the borrower is refinancing. The information provided in Subsections A, B, and C is used in underwriting systems such as Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Product Advisor to determine sales prices and appraised values that lenders will use to calculate LTV and CLTV ratios (Fannie Mae Selling Guide B2-1.1-01). While the value of land that was acquired separately is relevant to the calculation of LTV ratios, loan originators will presumably deduct this amount when calculating the "Total Due from Borrower," which is listed in Subsection H. Subsection D: For Refinance: Subsection D is related to refinances and requests information on existing loans that the borrower will pay off with a new loan. Subsection E: Credit Cards and Other Debts Paid Off: The amount entered in Subsection E includes debts other than the mortgage debt that is secured by the borrower's home. This amount must include all items listed in Section 2c of the borrower's component of the URLA, such as credit card balances, installment loans, payments that are deferred (e.g., student loans), and payments on leases unrelated to real estate (e.g., automobile leases). Subsection F: Borrower Closing Costs: this subsection relates to the amount of closing costs used in qualifying the borrower. This includes closing costs, prepaid items, initial escrow payments, and costs for mortgage insurance. Many consumers, especially first-time homebuyers, do not realize how many upfront costs they must pay to get a mortgage. Mortgage loan originators should take the time to review these costs with loan applicants and explain why amounts such as future property taxes and insurance premiums are due at closing. Subsection G: Discount Points: if a borrower wants to pay discount points to secure a lower interest rate, loan originators must enter the total of all discount points charged in Subsection G. One discount point is equal to 1% of the loan amount. Different lenders may charge different amounts for interest rate reductions. Subsection H: Total Due from Borrower: loan originators must calculate the amount listed in Subsection H by adding up every expense listed in Subsections A through G.

Wet Settlement

A wet settlement is when the parties to a loan transaction meet to execute documents, and afterwards, funds are disbursed. When a wet settlement occurs, lenders involved in purchase transactions are required to ensure that the closing agent has funds with which to close. Regarding refinance transactions, loans are to be funded the day after the rescission period expires.

Electronic Notarization

According to the National Notary Association, most states with permanent RON legislation in place require the use of two traditional methods of identification, as would be used in person, plus one of three verification methods that are unique to RON. Methods that might be used for identity verification include: Credible witnesses: a third party who is credible in the eyes of the NSA and can attest to the identity of the signor(s) - this is often someone whom both the NSA and the signor(s) know personally Personal knowledge: similar to a credible witness, this is used when the NSA also knows the signor(s) personally and can confirm their identity Multipart identity verification: this process generally involves three steps; state legislation dictates whether an individual must successfully pass a minimum of two or all three. The three components of this process are as follows: Remote ID presentation: the signor shows an identification document (unexpired driver's license, passport) to the camera for the notary to view and verify; state law might dictate what identification documents are and are not acceptable for this purpose Credential analysis: the RON technology platform used will verify security elements on the presented ID - typically this is done by allowing the system to take a picture of the presented ID and analyze it according to its internal algorithms Knowledge-based authentication (KBA): the signor must successfully answer a series of computer-generated questions based on their personal history, credit history, and financial information - for example, a previous residential address, or an account balance at the end of the previous month. [1]

ARMs (e.g. Fully-Indexed Rate)

Adjustable-rate mortgages (ARMs) are products that were not available in the modern mortgage market until the 1980s. They were enormously popular during the lending boom, when borrowers were able to qualify for a mortgage based on its low introductory rate. Today, the Ability to Repay Rule (ATR Rule) requires potential ARM borrowers to qualify using the fully-indexed rate instead. Under the ATR Rule, the "fully-indexed rate" is the interest rate that will apply when the introductory rate expires and the rate resets (12 C.F.R. §102.43(b)(3)). This requirement forces borrowers to consider whether they can make payments on an ARM when rate adjustments lead to payment increases. In the past, this was an optional exercise; now, it is required by law. In order to comply with the ATR Rule, lenders are not only required to determine the ability of a borrower to repay a mortgage at the fully-indexed rate, but also to make monthly, fully-amortizing payments that are substantially equal (12 C.F.R. §1026.43(c)(5)). Lenders must calculate the monthly debt-to-income ratio using verified income and assets and the sum of the loan applicant's mortgage-related obligations, including payments on the loan sought, any simultaneous loans, other current debt obligations, alimony, and child support (12 C.F.R. §1026.43(c)(7)).

Common Underwriting Pitfalls

All of the following are common underwriting pitfalls to which loan originators should pay close attention: Incomplete files with no documents to back up what is stated on the URLA Inaccurate data. These are frequently just calculation errors in income or not using proper percentages for rental income, non-taxable income, or stocks, bonds, and retirement statements. Cash-out refinance loans submitted as no-cash-out Property is not the applicant's principal residence Qualifying ratios exceeded without compensating factors given Obligations of all applicants; non-purchasing spouse not included, inaccurate or unreported borrower debt Insufficient assets to close transaction Assets not documented Applicant's income not calculated correctly Applicant's income not substantially documented, such as self-employment Loan program not provided New construction documentation not provided. This can result in delays in closing. Sales contract not fully executed by all buyers and sellers Major repairs needed and not addressed in loan file Repair or compliance clearances not provided according to sales contract or lender guidelines Alimony or child support not included in debts Secondary financing not disclosed Real estate obligations not disclosed Delinquent federal debts that showed up on title report but not credit report (in the case of a refinance) Incorrectly calculated loan amounts The importance of having a complete and accurate URLA and sufficient documentation in loan files cannot be overstated.

Verification and Documentation

After completing a loan application, an applicant must provide documentation to support the information disclosed in the application. This verification of information is required by the ATR Rule, and it must be made using reasonably-reliable third-party records (12 C.F.R. §1026.43(c)(3)). These documents include: Requests for Verification of Employment (VOE): if the applicant is salaried and is not self-employed, he or she will sign a VOE, which the lender will forward to the applicant's employer for verification of employment and income. If the applicant has not held his or her current employment for two years, the lender will also send a VOE to the previous employer. Lenders may also request W-2 forms, pay stubs, and tax forms. Lenders are not likely to consider overtime and bonus pay as part of a loan applicant's income unless the applicant can show that he or she has received the additional income consistently for at least two years, and the employer indicates that the overtime or bonus pay is likely to continue. Requests of Verification of Deposit (VOD): a Verification of Deposit is a document signed by the loan applicant's bank or other depository institution verifying the applicant's balance in the account and the account history.

Using the Appraisal to Calculate the LTV Ratio

After obtaining an accurate appraisal from a licensed appraiser, the loan originator uses formulas, such as the loan-to-value ratio (LTV), to determine the type of loan for which the loan applicant will qualify. The LTV ratio is calculated by dividing the amount of the mortgage by the appraised value or the purchase price of the home, whichever is less. For example: A loan applicant applies for a mortgage to purchase a home which the seller has agreed to sell for $350,000. The purchase price is $5,000 less than the home's appraised value of $355,000. The loan applicant has savings of $70,000 to use for a down payment. The lender performs the following calculations: {Purchase Price} - {Down Payment} = {Mortgage Amount} {$350,000} - {$70,000} = {$280,000} {Amount of Mortgage} ÷ {Purchase Price} = {LTV} {$280,000} ÷ {$350,000} = {80%} It is important to note, however, if the appraisal is less than the purchase price, the borrower will have to increase his/her down payment or obtain mortgage insurance.

Other Required Inspections

After reviewing the contract and appraisal, the underwriter may ask for verification that repairs were done or require further inspections to be performed. This is all to ensure the collateral of the lender or to meet program guidelines, such as those in an FHA or VA loan. This may include termite, well, septic, roof, or other inspections noted on the appraisal.

The Uniform Residential Loan Application (URLA)

Also known as Form 1003, is the standard form that applicants must complete when applying for a mortgage. One of the first interactions that a potential borrower will have with a loan originator is through the completion of the URLA. Following is a review of important information that a loan originator should share with a loan applicant, and a close look at Form 1003 and the statutory and regulatory requirements associated with its completion. It is important to note that a new URLA came into required use as of March 1, 2021. This course covers this updated version of the URLA.

Payments (PITI, Mortgage Insurance)

Amortized mortgage payments are calculated using a financial calculator designed to compute loan amortization. Calculating payments is generally a very simple process when the originator has the total loan amount, interest rate and loan term. Based on the functions of the calculator, the originator will enter these three factors and ask the calculator to solve for a P&I (principal and interest) payment. Many financial calculators allow a person to enter any three of the variables to return the fourth. For example, a person may enter a loan amount, desired payment, and loan term and ask the calculator to solve for the required interest rate. Likewise, entering the desired payment, loan term, and interest rate will allow a person to solve for the corresponding loan amount.

High Loan-to-Value Ratio (HLTV)

An HLTV is the ratio determined when the borrower has a first mortgage and a home equity line of credit with the balance not fully drawn, which produces a lower CLTV (using the outstanding balance) than that computed when the available balance is used, which produces the HLTV ratio. Studies show that the default rate is higher on high LTV, CLTV, and HLTV loans. Furthermore, a lender may not be able to fully recoup the losses associated with a default on a loan with a high loan-to-value ratio. For example, if the LTV is over 90%, the net sales proceeds may not be sufficient to cover the costs associated with the foreclosure, repair, and resale of the property. Due to the additional risks associated with a high LTV ratio and knowing that a borrower with little equity to protect is more likely to default, lenders will scrutinize the loan application with a high loan-to-value ratio to determine if the additional risk is acceptable and at what increased rate.

Annual Salaries

An applicant's income will occasionally be reported as an annual salary. This is common for educators and business executives. If this is the case, the formula is as follows: {annual income} ÷ 12 = {monthly income}

Combined Loan-to-Value

Assume a borrower is looking to refinance and consolidate some of his debts. He has a first mortgage balance of $115,000 and a home equity loan with a balance of $21,000. He also has a tax lien of $4,000 against his property. His property has appraised at $192,000. What is his CLTV? The calculation is as follows: {1st Loan Balance} + {2nd Loan Balance} + {All Other Lien Balances} = {Total Encumbrance} {115000} + {21000} + {4000} = {$140,000} {Total Encumbrance} ÷ {Property Value} = {CLTV} {140000} ÷ {192000} = {73%}

Underwriting

An underwriter's principal responsibility is to ensure that the proposed loan meets the requirements set forth by the investor who will purchase the mortgage. This includes assessing a borrower's ability and willingness to repay the mortgage debt and examining the property being offered as security for the mortgage. It must be determined that the prospective borrower not only has the ability to pay but has also proven a willingness to repay their debts, thus limiting the probability of default and collection difficulties. Much of the underwriter's decision-making is now done by an automated underwriting system (AUS). These underwriting systems are known by many names, but they all play the same role. They make a decision based on information entered into the AUS. If loans are submitted via the AUS, it is then the underwriter's responsibility to make sure that the information entered into the AUS is indeed the information provided on the URLA and that all information is documented and accurate. It is the originator's responsibility to ensure that the loan file includes all information and documentation necessary to aid the underwriter in accomplishing this task. An underwriter looks for complete and accurate information on the loan application and loan package and addresses any questions raised by lack of documentation or information in order to make an underwriting decision. The major areas that an underwriter examines are credit, income, assets, and collateral.

Other Income

Annual bonuses, summer income, or other recurring additional income may be averaged over a two-year period and included in an applicant's annual income prior to calculating the monthly income. Child support and alimony may be used if it is court-ordered and if the applicant can show a stable history of receiving the payments.

Section 5: Declarations Section 5b collects more detail about the consumer's borrower finances, particularly regarding whether they owe on any other debt and whether they have been subject to foreclosure in the recent past. Answers are again YES/NO selections. The questions here include:

Are you a co-signer or guarantor on any debt or loan that is not disclosed on this application? Are there any outstanding judgments against you? Are you currently delinquent or in default on a federal debt? Are you a party to a lawsuit in which you potentially have any personal financial liability? Have you conveyed title to any property in lieu of foreclosure in the past seven years? Within the past seven years, have you completed a pre-foreclosure sale or short sale, whereby the property was sold to a third party and the lender agreed to accept less than the outstanding mortgage balance due? Have you had property foreclosed upon in the last seven years? Have you declared bankruptcy within the past seven years? If yes, the consumer will be prompted to indicate what type of bankruptcy: Chapter 7 (liquidation), Chapter 11 (reorganization), Chapter 12 (family farmers/fishermen), or Chapter 13 (repayment plan)

Electronic Closings

Arguably the most significant roadblock to a fully digitized loan process is whether documents can be notarized electronically. Notarization is a process used to: Verify and ensure that the parties signing are who they say they are Confirm that documents and signatures are genuine Affirm that signatures are given of the signors' own volition and not under duress Today, nearly half of the states in the U.S. have legislation on the books permitting some form of electronic process for notarization. In the face of the global pandemic that took hold in 2020, numerous additional states took up emergency measures, but these are temporary and were not supported by permanent legislation. As a result, eClosing in those states may only be accessible for a limited time. Hand in hand with notarization of loan closing documents is the need to record them. If closing documents cannot be electronically recorded, a full eClosing using RON is impossible. Instead, the parties to the transaction will need to use a hybrid process to accommodate the fact that paper records need to be filed. Whether electronic recording (e-recording) can be done depends on the county where records will be filed. For those that do not allow e-recording, any documents signed electronically need to be papered out for physical recording.

Title and Title Insurance

As previously discussed, the title to a property is a document that provides evidence of conveyance of an individual's transfer of ownership of property to another individual. Information affecting property title must be recorded in public records in order to provide a clear lineage of the ownership and transfer of a property. A deed, which is a written agreement transferring property from one person to another, is an example of information that affects title and must be properly recorded. The title company is a key player in the loan origination and settlement process which provides information and services relevant to a property's title. A title company may also provide the legal description of property that is needed for a loan application. The title company's responsibilities begin with a title search performed by an attorney or abstractor. The title search is an examination of county or municipal records to determine the legal status of the property. Items that an abstractor will search for include easements in which a property owner consents to another person or persons accessing or using their property (such as utility easements or rights of way to another property), unpaid tax liens, or mortgage liens. The title search results in a title abstract which is a report containing the history (or chain) of title associated with the property. Once it is determined that any title issues do not exist or have been cleared, the title company will issue a title commitment, which is their formal agreement to extend an actual title insurance policy. For short-term loan arrangements, they may instead offer a title binder (title insurance coverage for a brief period, usually two years). Title insurance policies are customized to cover specific property features (like some easements) via additional extensions of coverage, called endorsements.

Verification of Income and Assets

As previously stated, in order to complete an assessment of repayment ability as required by TILA and the ATR Rule, creditors must verify the income and assets that consumers rely on to qualify for mortgages. This verification must come from third-party records that provide reasonably-reliable evidence of the consumer's income or assets (12 C.F.R. §1026.43(c)(4)). A verification of deposit (VOD) is one type of third-party record that creditors rely on when conducting an analysis of repayment ability. Income from employment is typically verified using copies of tax returns that loan applicants have filed with the IRS. Consumers may also rely on verifications of deposit to show automatic deposits from their employers or to verify irregular hourly wages.

Section 2: Financial Information - Assets and Liabilities Section 2d concerns other liabilities not covered in Section 2c, like alimony and child support, job-related expenses, and others. As with most other sections in this area of the URLA, if the consumer does not have any such liabilities, they can select "Does not apply."

Asking loan applicants to produce monthly statements for mortgages and consumer debt such as credit cards and car payments can help the loan applicant and originator to accurately represent the applicant's liabilities.

Safety Issues

Attaching the home to real property usually means, at minimum, removal of wheels and permanent hookup to utilities like electricity and water. Many states will require that the home be placed on and permanently attached to a traditional foundation; some might require that additional work be done on the home to bring it up to stick-built code and reaffirm the fact that it is affixed to real property. Some states will require the owner of the manufactured home to also own the land it is being attached to. Leasing the land is acceptable in some, but not all, jurisdictions; many will require the homeowner to show that they hold the title to the land. Conversion law might not recognize a home as real property, even if it is permanently attached to the land, until the stated requirements are all met. A structural engineer's certificate may also be required. The originator needs to make sure that he or she knows the lender's guidelines regarding manufactured homes prior to submitting the loan file to underwriting to avoid any suspensions or delays in approval. Many mortgage lenders will require conversion in order to extend a loan secured by a manufactured home; this is especially true if the lender will sell the loan to Fannie Mae or Freddie Mac after closing. If the property being financed is a new home under construction, the underwriter will require a completion notice from the appraiser. The underwriter may also require proof or evidence by the local building authority. The originator should be aware of this, plan ahead and order these items before the scheduled closing date. This will avoid last minute delays.

Disclosures to Advise Consumer of Risky Lending Terms or Agreements Some disclosures are offered to consumers to make certain that they understand the risks associated with specific types of lending terms and agreements:

Balloon Payment Notice: required by HOEPA, and due at least three business days prior to closing, this notice is required in those transactions in which balloon payments are allowed. Notice regarding the presence of a balloon payment provision is also required on the Loan Estimate for all residential mortgage transactions (12 C.F.R. §1026.18(5)). Notice regarding insurance premiums: required by HOEPA for a mortgage refinancing if the "amount borrowed" includes financing to cover optional insurance products, this notice is intended to prevent "packing" the cost of unnecessary insurance in high-cost home loans (Official Interpretations, 12 C.F.R. §1026.32(c)(5)). Notice that completion of loan application and receipt of disclosure does not obligate borrower to complete transaction: previously required only with HOEPA loans, this disclosure is required by TILA and due within three business days of application. The signature line for the Loan Estimate reminds consumers that they are not required to accept a loan simply because they have signed the disclosure form (12 C.F.R. §1026.37(n)(1)). If the loan involved is a high-cost mortgage loan, the disclosure must also warn the consumer of the risks of losing their home when signing a lending agreement for all loans (12 C.F.R. §1026.32(c)(5)).

Understanding Title Documents

Be aware that the use of these terms across the industry varies widely. For example, in some areas, the abstract and the commitment are merged into one continuous file or document, placed in a literal binder - thus called the "title binder," even though the documents inside are not actually serving as a title binder in its true definition (a temporary policy with a limited term). Knowing what information is actually contained in a document - no matter how it is referred to at the time - will help identify its true purpose as a report, commitment, or temporary offer of coverage.

Refinances Government-insured and -guaranteed refinances are also available as cash out or no cash out transactions. However, streamline FHA, VA, and USDA refinances, which involve no appraisal requirements and minimal underwriting, do not allow borrowers to secure cash back. These products are more suitable for borrowers whose sole objective is to refinance an existing FHA, VA, or USDA loan with a new loan at a lower interest rate.

Because conventional refinances require full documentation, an updated appraisal, and a repayment analysis that meets the standards of the Ability to Repay Rule, these refinance programs are identified on Section L1 of the URLA as "full documentation" loans. Loans that require minimal documentation include VA interest rate reduction refinance loans (IRRRLs) and FHA streamline refinances. These products, which are available to borrowers with good payment histories, do not require updated appraisals or underwriting. Though the lack of appraisal and underwriting requirements facilitates the completion of these transactions, loan originators must conduct an analysis to determine whether the new loan offers the borrower a net tangible benefit. To determine whether an IRRRL or a streamline FHA refinance will result in a net tangible benefit, loan originators must conduct their analyses in compliance with VA and HUD regulations. General factors considered include: The length of time that it takes for borrowers to recapture closing costs The size of interest rate reductions The replacement of an ARM with a fixed-rate loan

Rural Properties

Because rural properties are often situated on large lots, and rural neighborhoods can be relatively underdeveloped, there may be a shortage or absence of recent comparable sales in the immediate vicinity of the subject property. This means that the appraiser will often need to select comparable sales that are located a considerable distance from the subject property. In such cases, the appraiser must use his or her knowledge of the area and apply good judgment in selecting comparable sales that are the best indicators of value for the subject property. The appraiser should include an explanation in his or her report of why the particular comparables were selected in his or her analysis.

Example, cont'd

Because the Nguyens' home is located in a mandatory flood zone, their need to maintain flood insurance shows compliance with the law and may help protect them from equity loss in the event of a catastrophe. Their PMI situation also shows a typical scenario for payment of PMI. The Nguyens' ability to request cancellation of the insurance at 80% LTV shows that they had a good payment history, no delinquencies, and otherwise represented minimal risk to the lender after cancellation of PMI.

Electronic Closing and Conventional Loans

Both government-sponsored enterprises (GSEs) have issued guidance on electronic mortgage loan origination processes. In general, conventional loans that are eClosed are acceptable to Fannie Mae and Freddie Mac, subject to specific requirements. For instance, Fannie Mae will only purchase an eMortgage from a lender with whom it has a special addendum to an existing selling or servicing contract. Most conventional first loans can be delivered to Fannie Mae as eMortgages; this includes both fixed-rate and adjustable-rate loans. To make an eMortgage eligible for sale to Fannie Mae, the loan must be originated using the Uniform Fannie Mae/Freddie Mac form of eNote. This is done by modifying the Fannie Mae/Freddie Mac Uniform Note that is available online and adding a specific provision (Section 11 or Section 12, based on whether the loan has an adjustable interest rate) (Fannie Mae eMortgage Guide). There are many additional requirements that need to be met to keep compliant with GSE expectations for eMortgages. These can be found online. [1]

If a mortgage lender is trying to make a qualified mortgage, Regulation Z's Appendix Q provides guidelines for analyzing income from a broad range of sources, including Social Security disability income, income from a family-owned business or from a partnership, and rental income. The QM Rule requires consideration and verification of a loan applicant's current or reasonably-expected income or assets (12 C.F.R. §1026.45(e)(2)(v)). Appendix Q also sets standards that determine whether a consumer may rely on alimony and/or child support as sources of income, and establishes verification requirements for these sources.

Both the ATR Rule and the QM Rule prohibit the use of the value of the dwelling securing the loan, as well as any real property attached to the dwelling, when determining repayment ability. This practice, known as equity-based lending, was common prior to the enactment of these rules, and is no longer permissible.

Getting Permission to Access Credit Information

By obtaining a consumer report, the originator has instant access to a powerful tool that can determine the direction of the loan application process and has, in hand, critical information to determine what loan might suit the applicant's needs. To make a credit inquiry, along with consumer consent, a loan originator must have a "permissible purpose" identified under the federal Fair Credit Reporting Act (FCRA). A permissible purpose for obtaining a consumer report includes a mortgage lender's need for a consumer's credit history.

Example

CJ qualifies for a mortgage loan of $125,000 with an interest rate of 8.25%. CJ is expecting an increase in his salary over the next three years, and would like to save money on his monthly mortgage payment for that period of time by using a seller concession to pay for a 2-1 buy-down. He receives the maximum concession possible from the seller (6% of $125,000, or $7,500). This essentially means that the seller is paying CJ's buy-down fee, enabling him to pay nothing for his temporary buy-down. The following table shows a payment analysis and total cost for his transaction. The total cost would be the escrow amount required to maintain the temporary buy-down, as follows:

Defining Capacity

Capacity refers to a potential borrower's ability to repay, based on their current financial situation. Determining a consumer's capacity involves careful review of his or her current debt obligations. Debt-to-income ratios play a large part in analyzing whether a prospective borrower will have the ability to repay the loan. The ratio of monthly housing payment to income, and the ratio of total monthly debt to income, must be manageable for the borrower. Debt-to-income ratios must also meet certain guidelines for conventional and government loans. Creditors ask applicants for their employment information, including occupation, how long they have worked, and how much they earn. Creditors also want to know their expenses, including how many dependents they have, whether they pay alimony or child support, and the total of all other financial obligations. Verified income and assets demonstrate the potential borrower's financial capacity.

Section 2: Financial Information - Assets and Liabilities Section 2 asks about things of value that the consumer owns and wants to use to help qualify for the loan. They are also prompted to identify any debts they face each month. Section 2a instructs the applicant to identify bank accounts and other asset accounts (mutual funds, money market accounts, savings accounts, etc.) they have and wish to use to qualify for the loan. Commonly-listed items can include:

Checking and savings accounts Money market account: a savings account held at a bank or credit union and offering a higher-than-average interest rate. These typically have a higher minimum deposit or balance requirement and allow a limited number of transactions (i.e., card transactions or check draws) per month. Certificates of deposit (CD): a type of savings account with a fixed term length and maturity date and a higher-than-average interest rate. The consumer places funds in the CD for a predetermined period of time, usually a few months or years, and they withdraw the funds at the end of the fixed term. Early withdrawal is possible, but usually results in penalties. Mutual funds: an investment vehicle funded by deposits from a number of different individuals into one pool. The funds are then used to invest in securities (e.g., stocks, bonds, etc.) and are controlled by money managers. Participants will gain or lose money in proportion to their investment in the fund.

Section L1: Property and Loan Information In Section L1 of the URLA, loan originators must indicate whether:

Community property laws are relevant to the transaction The transaction involves a loan for the renovation or construction of a home The transaction is for a refinance, and if so, whether it involves a conventional refinance or a government-insured or -guaranteed refinance The transaction involves an energy improvement loan The home that will secure the loan is collateral for an existing energy improvement loan The home securing the loan is part of a common interest development

Credit Accounts There are variations in how each of the CRAs release information and how third party credit services may collate and document the information. However, credit accounts greatly impact a consumer's credit score and provide insight into credit character for loan qualification. The following areas are typically found in the credit accounts section of a credit report:

Company Name: the name of the creditor Account Owner: will indicate whether the consumer is a joint account owner, authorized user, co-signor, etc. Date Opened: the month and year the credit account was established Date Reported: the date the last report was made to the CRA on the account - this can be an area of importance if there has not been a recent report establishing up to date payments Months Reviewed and Date of Last Activity: the number of months that have been reported and the last time any activity (including payment) occurred on the account High Credit: usually means the credit limit on the account Balance and Past Due Amounts: the amount the consumer owes on the credit account and any amount that has been reported past due Type of Account: such as open (for utilities), revolving (credit cards), installment (car loans), etc. Timeliness of Payment: the consumer's payment history regarding the account. As a rule, the following codes correspond to timelines: 0 = Credit is open but has not been used (or reported)1 = Paid on time2 = 30+ days past due3 = 60+ days past due4 = 90+ days past due5 = 120+ days past due and/or referred to collections6 = Making payments via wage garnishment7 = Repossession8 = Charged off bad debt Alternately, there may be a scale of combined numbers and shorthand used on the report: N/R = Not reported X = Unknown OK = Current 30 = 30 days late 60 = 60 days late 90 = 90 days late 120 = 120+ days late COL = Collection VS = Voluntary surrender RPO = Repossession C/O = Charged off FC = Foreclosure

How Is Credit Identified?

Consumer reporting agencies (CRAs) gather and sell information regarding an applicant's credit in the form of credit reports. The information is available to individuals, who are entitled to a free credit report annually, when they request one. It is also available to creditors, employers, insurers, banks, lenders, and similar entities. A credit report evaluates the financial responsibility of prospective borrowers. The applicant's credit report contains information with different levels of detail and specificity depending on the type of report requested. The highest level and most detailed report, called a tri-merged report, uses data from the three major repositories: Experian, Equifax, and TransUnion, otherwise known as the Big Three.

Discussion Analysis

Does Philip comply with initial disclosure requirements in his interaction with Michael and Hannah? Yes, he does. First, Philip is described as giving the couple a copy of "Your Home Loan Toolkit: A Step-by-Step Guide." This initial disclosure required by RESPA is due within three business days after completion of an application. Philip provides it immediately upon completion of the loan application. Similarly, he immediately provides a Loan Estimate - another disclosure required to be delivered or mailed within three business days after receiving a completed application. He follows these up with a "packet" of additional disclosures, which is specified as including a list of homeownership counseling organizations and notice of the right to receive a copy of the appraisal. While the rest of the disclosures in the packet are not listed in detail, based on his other conduct, it may be presumed that Philip is making a good faith effort to comply with initial disclosure requirements. What are the delivery requirements for a Notice of Action Taken? ECOA requires a Notice of Action Taken in order to ensure that consumers are alerted about the status of their loan applications in a timely manner. The Notice of Action Taken is due no later than 30 days after receipt of a loan application. In this case, the couple receives their Notice within about two weeks of their initial application, well within the required window for delivery. Is Philip in compliance with the law when he issues a revised Loan Estimate? Yes, he is. Locking a floating interest rate is one change that requires the issuance of a revised Loan Estimate. When this occurs, the revised disclosure is due no later than three business days after the date on which the rate is locked. Here, Michael and Hannah receive their revised Loan Estimate two days after locking the rate. Does Philip deliver the Closing Disclosure within the required time for a closing scheduled on April 10? Yes, he does. A Closing Disclosure is due no later than three business days prior to consummation. If closing is scheduled for April 10, Philip must ensure that he delivers or mails the disclosure at least three business days prior to that date. He is described as preparing and issuing it on April 6, which is four days ahead of closing and thus slightly earlier than required - signifying that he has complied with the law for delivery of the disclosure.

Discussion Questions

Does Philip comply with initial disclosure requirements in his interaction with Michael and Hannah? What are the delivery requirements for a Notice of Action Taken? Is Philip in compliance with the law when he issues a revised Loan Estimate? Does Philip deliver the Closing Disclosure within the required time for a closing scheduled on April 10?

Example

Dominic is a web developer who has been self-employed for the past four years. He is applying for a mortgage loan to purchase a home. His monthly income is calculated as follows: ($76,250) + ($77,560) = $153,810($153,801) / 24 = $6,408.75

Down Payment

Down payment is often a component of determining loan-to-value ratios for the purposes of various loan programs or for figuring a maximum loan amount. For instance, FHA borrowers are required to have a 3.5% investment/down payment in their loan transaction. Conventional lenders usually require borrowers to pay PMI if they make a down payment of less than 20%, or otherwise have less than 20% equity in their property. The calculation is as follows: {Purchase Price} x {Maximum LTV} = {Loan Amount} Or, more simply: {Purchase Price} x {Down Payment %} = {Minimum Down Payment}

How Is the Information Formatted and Provided?

Each repository presents personal identification and credit information in a different format. In addition, most mortgage lenders, mortgage brokers, and banks use repository information consolidators that provide the information in the formats required by the originators. Different CRAs provide a varied menu of services, including those that compile information from the "The Big Three" and combine it in an easy-to-read format.

Application Accuracy and Required Information (e.g., 1003) Acceptable alterations include:

Elimination of the "Additional Borrower" application and the "Unmarried Addendum" when a transaction involves only one loan applicant Addition of state-required disclosures on the URLA's Continuation Sheet Presentation of different components of the URLA in a combined document or as separate components, with a recommendation to present the components of a combined document in the following order : Borrower Information Additional Borrower (if applicable)Lender Information Use of different font styles, though a minimum of eight-point font size is recommended Repetition of subsections when additional space is needed to record a loan applicant's previous employment, additional employment, and additional properties Expansion of sections related to assets and liabilities Though these changes are permitted, it is important to clarify that the wording on the form may not be changed at all, and field names, descriptions of requested information, and section order may not be changed. [1]

Example

Emmett and his wife, Jane, earn $6,780 per month. They are seeking a mortgage loan to purchase a new home. The loan they are currently trying to obtain includes a PITI payment of $1,756. The front end ratio for the loan is calculated as follows: {$1,756} ÷ {$6,780} = 0.26 This indicates that Emmett and Jane's front end ratio is 26%. They also have a $358 monthly car payment with 22 months remaining, as well as $3,500 in credit card debt. Their back end ratio is calculated as follows: First, their total monthly debt is determined: {$3,500} x {.05} = $175{$175} + {$358} + {$1,756} = $2,289 Then, this figure is used to calculate the back end ratio: {$2,289} ÷ {$6,780} = {0.34}

Escrow Expenses

Escrow accounts allow for funds to be set aside and made available for future payments of loan-related expenses, such as taxes and mortgage insurance. In some transactions, the borrower will be required to have and maintain an escrow account; for other transactions, maintenance of an escrow account is optional. The lender uses the money kept in this account to make insurance and tax payments during the life of the loan. This can make the total due at closing higher, as the borrower must have the account funds available at that time.

Trust Information

Estate planning often involves the creation of a trust, which allows the passing of assets to beneficiaries without the involvement of a probate court. An inter vivos trust (a living trust) is established during the lifetime of a homeowner. A land trust is a type of living trust. A living trust can hold many types of assets, ranging from residential real estate to securities, but a land trust only holds real estate assets, such as deeds and mortgages. Loan originators will need to ask applicants for home purchase loans if they intend to hold the title in a trust, and if so, what type. There are two types of living trusts: Irrevocable trusts: the homeowner/trustor (a.k.a., grantor or settlor) places their property into this form of trust and surrenders management of their assets to a third-party trustee. Once it is formed and finalized, it is extremely difficult to make changes to or terminate an irrevocable trust - i.e., it is irrevocable. Selling or refinancing a home that is included in an irrevocable trust presents many legal obstacles; as a result, many lenders are not willing to process refinance applications involving homes that are placed in irrevocable trusts. Revocable trusts: if a trust is revocable, the homeowner/trustor also functions as the trustee and has authority to manage the assets of the trust. The owner of a home that is included in a revocable trust does not need the permission of the trust's beneficiaries to change or terminate it. Revocable trusts do not offer the same tax benefits as an irrevocable trust, but they allow grantors to sell or refinance a home. They also facilitate the distribution of assets to beneficiaries at the time of a trustor's death. While it is possible to refinance a loan that is secured by a home held in a revocable trust, there may be extra steps to gaining loan approval. For example, a lender may require the borrower to enter an agreement stating that the trustee will deliver the home to the lender if a default occurs. Land trusts are a type of living trust, and they are usually set up as revocable trusts.

Explanation of Fees and Documents

Even if a loan originator is not practicing in a state that has adopted laws imposing fiduciary duties on mortgage brokers, the failure to provide open and honest communication about fees and other obligations may constitute careless or even predatory and unethical mortgage origination. Providing a comprehensive and accurate explanation of all fees ensures that a mortgage professional is meeting obligations under RESPA, TILA and other consumer protection laws. Neglecting to explain any of these items to a borrower can place a mortgage professional at risk for violating disclosure requirements of these federal laws as well as state and federal laws pertaining to deceptive trade practices.

Identifying Problems in the Credit Report and Fraud Alert

Examining the credit report is the originator's first line of defense to identify potential discrepancies and fraud. The Federal Trade Commission's Red Flags Rule requires financial industry professionals to identify and mitigate instances of identity theft as they pertain to credit reports. Some standard underwriting red flags, as well as red flags established by the FTC, include : Recently opened accounts All balances in round numbers Changes of addresses, especially recent P.O. Box addresses Recent payoff of a large number of accounts Misspellings and errors Large numbers of recent credit inquiries Uncharacteristic use of credit or sudden increase in use of credit A credit history that does not match the consumer's age The originator and the processor, through verification of assets, employment, and the veracity of information provided on the application, are the first to sense that either the application is accurate or that fraud may be present. Under current federal law, all participants in the application and submission of a fraudulent loan are liable regardless of when the fraud was subsequently discovered. It is better to be cautious.

Example Larissa is purchasing a property for $237,000. Her lender requires PMI unless the LTV is 80% or below. Larissa mentions this to her sister, who is a mortgage loan originator. She offers to sit down with Larissa and do some calculations to determine the minimum down payment that would be required in order to avoid paying PMI. The calculation is as follows: {$237,000} × {.20} = {$47,400}

Example, cont'd Larissa's calculation could have been completed one of two ways. The method shown uses the more straightforward method of multiplying the loan amount by the down payment percentage to come up with the dollar amount needed. Alternately, Larissa could have multiplied the purchase price by the maximum LTV (80%) to determine the loan amount, then subtracted that amount from the purchase price to find her minimum down payment.

Income The QM and ATR Rules also include requirements for the verification of income. The ATR Rule requires creditors to verify income and assets using copies of tax returns, IRS W-2 forms, payroll statements, bank statements, records from government agencies regarding entitlements, and receipts from the use of check cashing services (12 C.F.R. §1026.43(c)(3)).

Examples of other types of income documentation that is commonly used include: Paystubs for the most recent 30-day period and W-2s for the most recent two-year period Up to two years' tax returns for individuals earning more than 25% of their income in commissions. Their tax returns must document receipt of commission payments for a period of up to 12 months. Up to two years' tax returns for individuals who own more than 25% of a business Comprehensive documentation relevant to the type of income received for individuals who earn non-taxed income such as Social Security, public assistance, or disability income

Learning Objectives This chapter was created based on the Mortgage Loan Origination Activities section of the NMLS National Test Content Outline. The topics found in this chapter, as in all other chapters, could likely appear on the NMLS national test in multiple choice question format. By the end of this module, course participants should be able to:

Explain the Uniform Residential Loan Application in detail to ensure compliance Identify disclosures required at various stages of the origination process, including disclosures required for specific products Recognize some of the important financial calculations associated with the origination process Discuss the key components of a credit report Discuss appraisal requirements Analyze underwriting requirements, including specific items underwriters look for in loan files in order to anticipate and avoid problems Identify the key players and steps in the loan origination process Describe each step of the loan cycle, from origination through funding and servicing, and the roles of various individuals involved in the loan process Interpret the fundamentals of property ownership and the post-closing process Analyze two Discussion Scenarios based on concepts presented in this module

Verification of Income and Assets If a consumer relies on alimony and/or child support to qualify for a mortgage loan, creditors may rely on verifications of deposit to determine if these are reliable sources of income. Creditors may also rely on VODs to confirm that a loan applicant has actually received gift money that he or she will use to cover settlement costs.

Fannie Mae offers a VOD form (Form 1006), which consumers may use to authorize the release of account information to a lender. On this form, Fannie Mae states that in transactions for first lien mortgages, consumers cannot "hand-carry" the verification form to their banks. They may, however, personally deliver VOD forms for second lien transactions. Regardless of lien priority, depository institutions must send completed forms directly to the mortgage lender. They cannot send these forms through the loan applicant or "any other party." For example, a bank cannot email a VOD form to a loan applicant and ask the applicant to forward the form to his or her lender.

Income

Federal lending laws do not require borrowers to disclose all of their income. Instead, they are only required to disclose and verify the income on which they are relying to show that they are eligible for the mortgage loan. Generally, undisclosed income only becomes an issue in fraudulent transactions. Social Security disability income (SSDI) is a good example of income that a consumer should not include on a loan application (i.e., undisclosed income) unless it is likely to continue. Appendix Q provides guidelines for considering SSDI as income, stating that the funds must be verified by a letter from the Social Security Administration. If the letter does not state that the income will expire, a creditor will consider the income effective and likely to continue. Due to the prevalence of overstated income and the potential for tampering with income documents, many lenders require authorization from a loan applicant to conduct an independent verification of tax records. This independent verification is often performed for self-employed borrowers but is becoming more common with other types of borrowers. The IRS form 4506-T is used to obtain a transcript of tax returns. IRS form 8821 is used to authorize the release of other tax information. In addition to documentation and verification of current and past employment, income analysis can also take a number of other factors into consideration. Analysis of factors such as economic stability of a profession, potential increases in income due to education and training, relocation, and guaranteed bonuses can all be used to help a borrower work with his/her loan originator to determine the appropriate loan product for his/her circumstances.

Closing Costs and Prepaid Items

Fees associated with loan closing, fees owed to state and local government for real estate related transactions and prepaid items such as per diem interest are funds that a borrower often needs to have available at settlement. Determining the amount of money that needs to be brought to closing by the buyer in a purchase transaction or owner in a refinance transaction is calculated as follows: {Loan Amount} - {Payoff} - {Financing Costs} - {Government Charges} - {Prepaid Costs} = {Cash Needed, or Overage Available as Cash, to Borrower} If a borrower is struggling to come up with the funds to cover these costs, he or she may accept a higher interest rate in order to secure the cash needed for closing costs. These funds will appear on the Loan Estimate as a lender credit to reduce closing charges. Originators are absolutely prohibited from retaining any portion of the fee that is issued as a credit to the borrower.

Incomplete Information and Loan Status Notification

If information is missing from the application, the loan originator should make an effort to notify the applicant immediately and allow him/her a reasonable amount of time in which to furnish it. Applicants must be made aware of the status of their loan application in writing within 30 days of the date of application. Evidence of this notification must be kept in the loan file.

Assets and Liabilities

Financial statements list an applicant's assets and liabilities side by side to facilitate the lender's assessment of the applicant's financial situation. As discussed in the section-by-section review of the Uniform Residential Loan Application, the form includes multiple sections for potential borrowers to disclose their assets and liabilities in dedicated categories. Based on the information disclosed here, the consumer should be prompted to provide supporting documentation to verify the claims and assist in analysis of their qualifications.

Flood Insurance

Flood insurance is also used to protect the security of the collateral property, although its use is determined by the geographic location of the real estate. The laws that impose requirements on borrowers for the purchase of flood insurance are found under the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973. The regulations that implement these laws are found under 12 C.F.R. §208.25. Under these regulations, banks that are members of the Federal Reserve System may not extend mortgage credit that will be secured by a dwelling in a flood zone unless the loan is covered by flood insurance for its full term. Homeowners who are required to carry flood insurance can obtain it through the Federal Emergency Management Agency's National Flood Insurance Program. This program aims to decrease the socio-economic impact of flooding by promoting the purchase and maintenance of "risk insurance" - particularly flood insurance. FEMA helps to achieve this goal by offering affordable insurance. As part of the process of determining whether or not a property is suitable as collateral for the specified loan, the appraiser has a responsibility to determine the flood zone designation for the property's location. The originator, processor, and underwriter must ensure that if the property is located in a zone designated with an "A" or "V" prefix, proper flood insurance is in place. The Federal Emergency Management Agency (FEMA) has undertaken a massive effort of flood hazard identification and mapping to produce Flood Boundary and Floodway Maps (FBFMs).

Section 4: Loan and Property Information .

If the consumer is obtaining other loans secured by the same property, they will need to disclose that information in Section 4b. This may be something like a subordinate piggyback loan to help finance the down payment on a purchase transaction. If an open-end loan, the consumer will need to list the credit limit.

Mandatory Flood Insurance

Flood zones with an "A" or "V" prefix are considered SFHAs and require mandatory flood insurance under federally regulated loan programs. Other flood zones may or may not require insurance due to special circumstances. Zone V and Zone VE are the zones that correspond to areas within the 1% annual chance coastal floodplains that have additional hazards associated with storm waves. Mandatory flood insurance purchase requirements apply. Zone D designation is used for areas where there are possible but undetermined flood hazards. In these areas, no analysis of flood hazards has been conducted, but while mandatory flood insurance requirements do not apply, coverage is available. Zones B, C, and X are the zones that correspond to areas outside the 1% annual chance floodplain; areas of 1% annual chance sheet flow flooding where average depths are less than one foot; areas of 1% annual chance stream flooding where the contributing drainage area is less than one square mile; or areas protected from the 1% annual chance flood by levees. Insurance purchase is not required in these zones.

Qualified Mortgage Monthly Payment Calculations

For example, assume that a consumer applies for a 6/1 ARM with an initial rate of 3% and future rates calculated based on the SOFR and a margin of 3%. If a qualified mortgage, the originator is only required to calculate payments made at the initial 3% rate (because the rate will not adjust until the seventh year, after the five-year QM Rule requirement); its determination of repayment ability must be based only on that. Conversely, for a non-qualified ARM, the originator must consider the most expensive payments that the consumer may be required to make during the loan term. Assuming that the SOFR is 4% at the time of the first rate adjustment, when this is added to the 3% margin, the new rate at the beginning of year seven would be 7%. The creditor would also need to consider any annual adjustments that occur after the first rate adjustment when determining the ability of a consumer to repay a non-qualified mortgage. Typically, a lending agreement for an ARM will include interest rate caps to limit rate increases. The consideration of these rate caps is also different for qualified and non-qualified mortgages. If an ARM is a qualified mortgage and a creditor is calculating the maximum rate of interest and the payments that will result from that rate, consideration of periodic and lifetime rate caps is permitted. If an ARM is a non-qualified mortgage and a creditor is calculating the fully-indexed rate, consideration of lifetime caps is permitted under the ATR Rule, but consideration of periodic rate caps is not (Official Interpretations, 12 C.F.R. §1026.43(b)(3)).

Discussion Scenario: Proper Disclosure Delivery

Four days later, Michael and Hannah decide to lock their interest rate. They contact Philip, and a rate-lock agreement is issued. Two days later, they receive in the mail a revised Loan Estimate. The new Loan Estimate reflects the updated information about the appraised property value, loan amount, and newly locked-in interest rate. Closing is scheduled for April 10, and they prepare to relocate to the new home. On April 3, they stop by the new home to complete a final walkthrough. This gives them the opportunity to see the home one more time and take note of any issues that may have arisen since the last time they saw it. Unfortunately, one problem has arisen: the selling homeowners had rambunctious children, and a roughhousing incident resulted in a cracked windowpane and cosmetic drywall damage in one room. The damage is not radical, but Michael and Hannah do want the issues addressed as soon as possible and before closing. They get in touch with Philip, who works with their real estate agent and the seller's agent to negotiate next steps. It is agreed that the sellers will give Michael and Hannah a credit for the repairs. They also pass along a recommendation for the contractor. Not wanting to delay the closing process, Michael and Hannah agree to this arrangement. On April 6, Philip prepares and issues to the Gunthers a Closing Disclosure that reflects the seller credit for the repairs.

Funding

Generally, funding occurs after the recordation of documents with purchase transactions and refinances involving investment properties. Funding practices vary from state to state. If a refinance transaction involves a principal residence, the loan will fund after the three-business-day rescission period, provided the borrower does not decide to rescind the loan. When funding occurs, the lender usually wires funds to the closing agent. The closing agent is responsible for disbursing funds to the appropriate parties according to the Closing Disclosure. Payoff statements related to mortgages and to judgments and liens are generally provided to the title company by the lien holder or judgment creditor. If the transaction involves a refinance to allow the borrower to pay off debt, the borrower generally verifies credit card bills by providing the title company with a copy of the most recent bill statements. If the borrower needs to pay off any debt, the closing agent must make the check payable to the party to ensure that the lender's interest is protected. Disbursements and payoffs may include payments to the following: First mortgage payoffs Second mortgage payoffs HELOC payoffs Tax payments Municipal charges Creditors Lender fees Broker fees Judgments and liens

Priority of Liens

Generally, real estate taxes and special assessments take priority over all other liens Other liens follow in the order of recordation There are some exceptions, particularly for mechanic's liens which can relate back in time even though filed or recorded later in time Subordination agreements between lien holders can change priority (for example, a first mortgage vs. second mortgage)

Lien Theory States

In lien theory states, the borrower retains both legal and equitable title. The mortgage serves as a lien against the property. In the case of default, the lender will be required to institute a foreclosure proceeding in order to obtain legal title to the property. When the loan is paid off, the lender sends the mortgage and promissory note to the homeowner, as well as a release indicating that there is no longer a lien on the home. In some states, the lender will send the release directly to the county office recorder for the county in which the property records are kept. Best practice is to ensure that public records are cleared before documents are provided to the homeowner.

Example:

Grayson and Jennifer West are applying for a mortgage loan. Jennifer is paid a bi-weekly salary working for a biochemical research firm, while Grayson is an hourly employee at a local veterinary clinic. Grayson's hourly rate is $19 per hour. He works 40 regular hours per week and, on average, three hours of overtime per week at a rate of time-and-a-half (1.5x the normal rate). His monthly income is calculated as follows: ($19) x 40 = $760($28.50) x 3 = $85.50($845.50) x 52 = $43,966($43,966) / 12 = $3,664.83 Jennifer's salary is $2,461 every two weeks. She receives three weeks of paid vacation per year. Her monthly income is calculated as follows: ($2,461) x 26 = $63,986($63,986) / 12 = $5,332 Combined, their monthly income is $8,995.83.

Section 3: Financial Information - Real Estate Section 3 asks the consumer to list all properties that they currently own and what they owe on them, if any. If this section does not apply (i.e., the consumer does not currently own any real estate), they can indicate this immediately using the check box at the top of the page.

If the consumer does already own real estate, the text boxes in Section 3 allow them to offer more detail. Section 3a asks for information about property the potential borrower owns; if they are seeking a refinance, they are required to list the property they are refinancing first, before listing any others. The consumer should complete information about the property address, its value, ownership status (sold, pending, retained), intended occupancy (a primary or secondary residence, investment property, or other), any monthly costs not included in the monthly mortgage payment, and whether there are any mortgage loans secured by the property. Additional details are needed for a two- to four-unit primary or investment property.

Legal Title Granted via a Mortgage

Having "title" means that the consumer has the legal right to access and use his or her real property and any dwelling located on the property. A deed is a legal document that transfers title from one party to another. There are actually many different types of deeds, all serving unique purposes; in the context of an individual buying real property from a seller, the deed they will receive is formally called a warranty deed. When property is transferred without money changing hands (for example, a parent gives their child the deed to their home, or one spouse in a divorcing couple removes their name from the record on the home), this is a quitclaim deed. Colloquially, these documents are just called "deeds," but when obstacles arise in the process of searching and clearing title for a specific property, it can be valuable to understand exactly what kind of deed is in play and what it represents. When a consumer's home does not serve as security for a mortgage, and it is not subject to liens by other creditors, then a title search will reflect no recorded liens and show that the owner has "clear title" to the property. As previously stated, some states follow the "title theory" of ownership, while others follow the "lien theory."

Hazard Insurance

Hazard insurance is required to protect the security of the collateral property from damage caused by fire and other risks. It is also commonly known as homeowner's insurance. A loss payee clause, or lien holder clause, is included in hazard insurance policies in order to protect the lender. The clause requires insurance claims to be made jointly payable to the lender and the homeowner so the lender can ensure its collateral is repaired or its debt is retired in the event of damage to the property. In some cases, hazard insurance may be force-placed. This occurs when the entity that is servicing a mortgage loan obtains coverage for a home after the borrower's failure to obtain and maintain insurance. Servicers are not permitted to charge a borrower for force-placed insurance without reasonable basis for believing that the borrower has failed to obtain coverage (12 C.F.R. §1024.37). Borrowers who become subject to force-placed insurance and can show that they have provided their own coverage may have the force-placed policy removed and may have any premiums charged to them reversed.

Example Taylor and Shannon are purchasing a home with an appraised value of $280,000. The purchase price of the home is $278,000. Taylor and Shannon are making a 25% down payment, thanks in part to gift funds provided to them by Shannon's mother. In order to determine their LTV, the following calculations are completed: {$278,000} x {.25} = $69,500{$278,000} - {$69,500} = $208,500{$208,500} ÷ {$278,000} = 75%}

Here, it can be seen how a difference in appraised value and purchase price will influence LTV. While the home may appraise for $280,000, the LTV uses the lesser of appraised value or purchase price. Taylor and Shannon are purchasing the home for $2,000 less than its appraised value, meaning that the purchase price is the figure used for their LTV calculations.

Electronic Closings

Hybrid closing involves a combination of an in-person and digital closing experience. This is likely to occur in jurisdictions where the borrower can electronically sign (e-sign) documents, but notarization must be done in person, or other limitations require an in-person meeting. There may be combined use of e-documents alongside physical ones for signing. A notary signing agent (NSA) may or may not be able to complete a remote online notarization (RON) or in-person electronic notarization (IPEN), or might need to physically notarize paper documents the traditional way. In an electronic closing, or "eClosing," every step is completed digitally. All parties can appear from remote locations using audiovisual technology - generally, the borrower(s) can appear from anywhere and do not even need to be in the state where the property they are buying is located; the notary needs to be within the state. Loan-related documents, including the promissory note (an "eNote," when done electronically), are transmitted, reviewed, and signed online. The NSA is empowered by law to notarize electronically via RON. The lender provides e-documents to the borrower, and the appropriate documents are transmitted to the Office of the County Recorder for e-recording. This option has numerous benefits for everyone involved. An electronic process creates greater opportunity to catch critical errors and gaps, and it can reinforce and affirm information security. Avoiding the use of paper documents adds protection for sensitive data, and it helps borrowers avoid problems with documents (failed or delayed mailings, misplaced or destroyed documents, etc.).

Electronic Notarization

IPEN procedures would most often be used when the borrower has been able to sign some or all documents electronically, but is required to appear in person to give wet signatures on remaining paperwork or to fulfill state-specific requirements to be physically present for notarization. At the in-person meeting, the notary verifies the identity of the signor(s), reviews and verifies the authenticity of physical and electronic documents, and ensures that signatures are given voluntarily. Any physical documents signed at the time are converted to digital form (i.e., scanned into the loan origination system or eClosing platform) after signing, then incorporated into the eClosing document package. The NSA then affixes the electronic notarial seal, and if equipped or required to do so, attaches a digital certificate. Remote online notarization (RON) takes place in an entirely electronic environment, with no in-person meeting. Audiovisual technology is available to enable this, sometimes native to a lender's loan origination system. The borrower(s), attorney(s), real estate and mortgage professionals, and NSA, as applicable, may all meet from separate locations in an audiovisual environment. The notary must be commissioned in the same state where the property is located, but the signor(s) can be anywhere.

Foreclosure Proceedings

If a borrower defaults on a loan and faces foreclosure, the type of foreclosure proceedings that will take place depends on whether the home is located in a lien theory state or a title theory state. In lien theory states, foreclosure is a judicial process that is conducted through the courts. In title theory states, foreclosures are non-judicial; because they do not take place within the court system, these foreclosures are likely to proceed more rapidly.

Subordination Agreement

If a customer has a second mortgage or a HELOC that is not being paid off in the case of a refinance, a subordination agreement may be needed to ensure the lender's priority of lien. A subordination agreement is a document that changes the order of priority. If a lender wishes to maintain a first lien position, it must receive permission from the second mortgage holder to do so by requesting a subordination agreement. If a subordination agreement is needed, the originator or the title company should contact the subordinating lien holder to determine what is required to obtain a subordination agreement. In some instances, the subordinating lender may require a processing fee. The subordination agreement may be prepared by the title company or the subordinating lender. Ultimately, the agreement must be recorded with the new deed of trust to ensure priority.

Servicing

If the original lender on a loan will not be servicing the loan, the borrower must be informed. RESPA's disclosure rules require lenders to identify the loan servicer for the borrower; this information is included on the Loan Estimate. The statement discloses to the borrower whether the lender intends to sell or transfer the loan servicing to another servicer. The statement must be provided to the borrower within three business days of receiving the loan application. If a loan servicer transfers, or assigns the right to service the loan, the servicer must notify the borrower at least 15 days before the effective date of the loan servicing transfer. If the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized by the new servicer. RESPA now includes servicing rules that are intended to improve the servicing of mortgage loans with requirements for crediting mortgage payments promptly, resolving errors quickly, responding to borrower inquiries within specified timeframes, and facilitating loss mitigation efforts.

Section 3: Financial Information - Real Estate

If the potential borrower owns additional properties, Sections 3b and 3c request the same information about those properties. When they are not relevant, the consumer can choose "Does not apply."

Safety Issues

If the property is a manufactured home, the underwriter will check to make sure that the manufactured home tags required by HUD are noted on the appraisal. Additionally, evidence is required to prove that the manufactured home is titled as real property and not personal property. If not, it is likely that the borrower will be required to convert the home to real property. In a very general sense, the conversion process will look something like this: The manufactured home is permanently attached to real property The certificate of title or manufacturer's certificate of origin is surrendered to the county, along with an affidavit Not all states require the homeowner to surrender certificate of title The certificate of title is cancelled An affidavit of affixture affirms the home is now real property, and a warranty deed is issued An affidavit of affixture is the recorded legal document certifying that the manufactured home is now permanently attached to land and converted to real property

Trust Information

In a refinance transaction, knowing whether a home is included as an asset of an irrevocable or a revocable trust will determine whether a transaction can proceed.

Appraisals

In addition to evaluating a loan applicant, it is necessary to evaluate the property used to secure a loan. Lenders rely on appraisals to ensure that the value of the property is adequate to serve as security, or collateral, for the loan. A licensed appraiser must prepare the appraisal. Accurate appraisals are of great importance. The overvaluation of real property used to secure home loans is an issue of great concern. Overvaluation is at the root of many predatory lending transactions and mortgage fraud schemes, allowing many unscrupulous mortgage professionals to profit at the expense of borrowers and lending institutions. Overvaluation can also result from pressure exerted by sellers who hope to sell high, or from borrowers in refinance transactions who hope to secure a generous line of credit based on the equity in their homes. These demands from consumers are often directed towards loan originators who may feel pressured to pass their clients' demands for a favorable appraisal on to appraisers.

Due from Borrower(s)

In most transactions for home purchase loans, lenders require the establishment of escrow accounts for property taxes and insurance. At closing, borrowers must make an initial deposit into the account to ensure that they can cover the costs of their property taxes and insurance premiums during the first months of homeownership. The amount of the initial escrow payment will differ from one transaction to the next, but the Real Estate Settlement Procedures Act (RESPA) and Regulation X limit this amount and the amount of scheduled payments that borrowers make to maintain their escrow accounts. Lenders may also require a "cushion" to cover unanticipated costs, such as higher property taxes or increases in insurance premiums. The cushion may not exceed one sixth of the estimated total annual payments from the account (12 C.F.R. §1024.17(c)(1)(ii)). The amount required to establish a cushion is usually due at closing. Lenders may waive their escrow account requirements, but they usually reserve this waiver for borrowers with strong credit scores who are making 20% (or greater) down payments.

Appraisal Approaches There are a number of approaches an appraiser may use to determine the value of a property. The most common method of conforming loans is the sales comparison approach, or market approach. This is based on a comparison with similar, recent property sales in the same vicinity as the subject property. The cost approach is another method. It is commonly used to appraise new home construction. Finally, the income approach is used for investment properties.

In order to comply with the Uniform Appraisal Guidelines, the appraiser must consider all three approaches. When the appraisal is completed, the appraiser must justify the use of one approach over the others in his/her final conclusion of value.

Key Elements of Title

In order to understand title, it is important to know the key components. The title history of a property is composed of recorded instruments on the land records on each property and other statutory interests, i.e., tax liens or mechanics liens. Each record tells a story on the property, such as, when the property was acquired, the amount it was sold for, etc. It is the job of the title company to review this information on the history of the property and to identify any defects that are in the title history of the property, which may include problems like undisclosed liens or delinquent property taxes. These defects must be cured prior to closing, or the title company may elect to insure over them. A defect on title can be anything from a lien or judgment to a break in the chain of title.

Calculation

In purchase transactions, the final information in Section L4 is the cash that a borrower will need to complete the deal. In transactions for a refinance, this subsection will show the amount that a borrower will receive to pay off existing mortgage and consumer debts, plus any cash back that the lender is offering through a cash-out refinance.

Reconveyance

In states where deeds of trust are used in mortgage loan transactions, the borrower conveys title to the property to the trustee (typically a title company or escrow company). The trustee then holds title for the lender. Once the borrower has repaid the debt in full, he or she is able to take back title to the property. The lender marks the note "paid in full" and delivers it to the borrower, along with the deed of trust, which is also marked "paid in full" or "cancelled" and has been cancelled at the courthouse or register of deeds. This effectively removes the trust, and the trustee no longer holds the title, which has been reconveyed to the homeowner.

The Closing Instrument

In the United States, mortgage loans are completed differently based on whether the property is located in a lien theory state or a title theory state. In lien theory states, the closing instrument for a lending transaction is a mortgage; in title theory states, the security instrument is a deed of trust. As security instruments, mortgages and deeds of trust are the documents that mortgage lenders rely on to protect their interests when borrowers default on home loans. When the security instrument is a mortgage, the signature of the borrower is required. When the instrument is a deed of trust, the lender is named on the deed of trust as the beneficiary, and the borrower signs it as the trustor or grantor. The trustee is also identified in the deed of trust. State law may require additional signatures on the mortgage or deed of trust. For example, if the home securing the loan is located in a state that is a community property state, the signatures of both spouses are required, regardless of whether both parties are legally obligated to repay the loan. Other types of state laws are also relevant; for example, dower and curtesy laws, which protect the interests of a surviving spouse. In lien theory states, lenders require additional signatures to protect against a legal claim that has priority over a mortgage lien. In title theory states, lenders want signatures from both spouses on the deed of trust to ensure that the entire property serves as security for the loan. Some lenders may have a policy of requiring signatures of both spouses, even if the home is not located in a state with laws protecting spousal interests. Lending laws do not prohibit lenders from refusing to offer mortgage credit when a borrower's spouse refuses to sign the security instrument. In any transaction for a home loan, it is critical to understand the impact of state laws and lender policies. Borrowers are likely to be confused when a lender requests signatures on security instruments that do not match the signatures on the promissory note. Loan originators should explain that requesting a spouse's signature on the mortgage or deed of trust does not obligate the spouse to repay the debt - it simply protects the lender's interest in the case of a default.

Example, cont'd

In this scenario, Kenneth complies with standards for using proper comparables when conducting an appraisal. He gives careful consideration to properties in the area as well as the home in question, ensuring that the valuation results will be compliant and usable for the transaction.

Example, cont'd

In this scenario, Walter and Felicia are subject to additional appraisal requirements due to the window of time in which they purchased - and are subsequently selling - the property. Because they are selling the home fewer than 90 days after they purchased it, and the price is 10% more than what they paid, the HPML Rule requires a second appraisal of the property before the transaction can move forward.

Proposed Monthly Payment for Property

In this section of the URLA, loan originators compile information related to loan payments and mortgage-related obligations, such as insurance premiums and property taxes. Consideration of these expenses and of subordinate-lien loans is required when conducting an evaluation of repayment ability (12 C.F.R. §1026.43(c)(2)(iv)). "Supplemental Property Insurance" includes flood insurance, earthquake insurance, and other types of coverage that a borrower must have for the home that will secure the loan. Mortgage insurance (PMI) will apply for a conventional loan when the potential borrower is making a down payment of less than 20%; on FHA loans, mortgage insurance premiums (MIP) are required for forward purchase mortgages.

Title Theory States

In title theory states, a deed of trust is executed, and the borrower (grantor) conveys legal title to the trustee while retaining equitable title. The lender is named as the beneficiary of the trust. The trustee holds title to the property until the loan is repaid, and the lender owns a beneficial interest in the property via a deed of trust until the debt is paid. Upon default, the trustee is empowered to sell the property and apply the proceeds to the debt. If there is no default when the debt is paid and satisfied, legal title is returned to the borrower on the public record either by a cancellation of the deed of trust or by the trustee recording a deed of reconveyance; the lender is responsible for ensuring that legal title to the home reverts or is returned to the homeowner. The lender, therefore, has no further legal or beneficial interest in the property. If a mortgage is used for the security instrument, the borrower (mortgagor) conveys his/her legal interest in the property to the mortgagee (lender) and retains equitable title and possession of the property. Should a default occur, unless the mortgage contains a power of sale clause allowing the mortgagee to sell the property to satisfy the debt, the mortgagee/lender must institute a foreclosure proceeding in order to sell the property and have the proceeds applied to the debt. Upon payment in full, the mortgagee must execute and record a reconveyance instrument of some sort to return full legal title to the borrower.

Energy Improvement

In transactions for home purchase loans and refinances, consumers have opportunities to secure additional funds to improve the energy efficiency of their homes. With these funds, they can make improvements ranging from replacing inefficient appliances to installing solar panels. To secure these funds, loan originators must show that the consumer savings from lowered utility bills will enable them to make larger loan payments. If a home loan will include funds for these types of improvements, loan originators should check the first box under "Energy Improvement." Consumers can also secure funds to pay for energy-related improvements with Property Assessed Clean Energy (PACE) financing. More than 30 states have passed legislation to implement this program. In the states where PACE financing is available, the PACE assessment is added as a line item in the borrower's property tax bill. Theoretically, higher assessments are justified by increased home values resulting from improvements. Since PACE assessments are bundled with property taxes, borrowers will default on PACE financing if they default on the payment of these taxes. If a homeowner fails to pay property taxes, the taxing authority can initiate a tax sale, which is similar to a foreclosure. Liens for unpaid property taxes have priority over other liens on a home, including mortgage liens.

Special Appraisal Requirements for Higher-Priced Mortgage Loans

Inaccurate appraisals are often associated with property flipping. Property flipping is not illegal, but it is illegal to purchase and resell a property using an inflated appraisal that is not based on actual improvements to the home. The rules for HPMLs address this problem by requiring two appraisals if a home is resold shortly after purchase and at a higher price than the seller paid for the home. The second appraisal requirement is applicable when: The seller acquired the home 90 or fewer days prior to the consumer's agreement to purchase it, and the price at which the consumer has agreed to purchase the home is 10% more than the price paid by the seller The seller acquired the home 91 to 180 days prior to the consumer's agreement to purchase it, and the price at which the consumer has agreed to purchase the home is 20% more than the price paid by the seller When mortgage funds were easier to obtain, unscrupulous property flippers worked with appraisers who were willing to provide inaccurate valuations. Property flipping occurred on such a wide scale that it led to inflated home values across the real estate market, and contributed directly to the market's ultimate collapse.

Example: Victoria is applying for a mortgage loan to purchase a home for herself and her two young children. Divorced for two years, she is relying in part on alimony and child support to qualify for a mortgage. Her loan originator explains that in order to be able to rely on this non-employment income, Victoria must be able to show that she has received it consistently for the past 12 months. In response to her loan originator's request for a verification of deposit, Victoria signs a Form 1006. Her loan originator then forwards the form to the bank where Victoria maintains her checking and savings accounts.

Income from sources such as child support and alimony may be used to qualify for mortgage loans, but like other income sources, must be verified as consistent and reliable for specified periods of time. This helps to ensure the safety of the investment not only for the lender, but also for the consumer.

Verification and Documentation The Official Interpretations provide examples of "reasonably-expected income." These can include a verified annual bonus or a verified salary for a position that a consumer has accepted and will assume after completing a degree. Anticipated bonuses or pay increases that are not verified are not reasonably-expected income.

Income that is not salary-based will require other types of documentation. These include: Commission income or self-employment: lenders ask for additional documentation when calculating the income of loan applicants who earn commission income and when calculating the income of self-employed loan applicants. Commission income: lenders will require copies of income tax returns for the past two years and information on current income if commissions represent 25% or more of an applicant's annual income. In order to account for the variability of an applicant's commissions, lenders will average the past two years of income. Income of self-employed applicants: a self-employed applicant must show that he/she has maintained an income for two years in order to qualify for a mortgage loan. Lenders will not rely on a verification of employment from a self-employed applicant. Lenders will request additional documentation to verify income. These documents may include: Tax returns for the past two years A year-to-date profit and loss statement Balance sheets for the past two years A self-employed income analysis

Power of Attorney

Individuals who may serve as the borrower's agent or attorney-in-fact include a spouse, child, other individuals related by blood, adoption, or legal guardianship, and a fiancé or domestic partner. The agent or attorney-in-fact may not be: The loan originator The lender or an affiliate or employee thereof The title company or an affiliate or employee of the title company that provides title insurance for the home securing the loan A real estate agent with a financial interest in the transaction Freddie Mac has established similar guidelines for uses of a POA. Following Fannie Mae and Freddie Mac guidelines is critical to ensuring that the GSEs will purchase a loan with closing documents that were signed by an agent or attorney-in-fact.

The Credit Score and Credit Risk

Industry consolidation has whittled what used to be scores of local and regional credit bureaus down to the "big three" of today: Equifax, Experian, and TransUnion. Equifax, Experian, and TransUnion are three separate and competitive companies. As such, they do not share information. It is very unlikely that a potential borrower's credit report is the same at all three credit bureaus because: Not all lenders report to all three of the CRAs: lenders are not required to report to all three CRAs. Therefore, there will usually be omissions in an applicant's credit history at one or more of the credit bureaus. Even if every lender DID report to all three CRAs, the information would probably be different: lenders that do report to all three credit bureaus do so by sending data tapes to them each month. Credit bureaus do not receive or "run" the tapes at the same time. As such, account information may be different at each CRA depending on the time of the month. Not all lenders pull a credit report from all three credit bureaus when they are processing a credit application: a lender will likely pull only one credit report when an applicant applies for a credit card or auto loan. This means that the "inquiry" is only going to show up on one of the three credit reports. The exception to this rule is a mortgage application. Most mortgage lenders will pull all three credit reports during their loan processing practices.

Disclosures to Inform the Consumer about the Costs of a Loan Post-closing disclosures include:

Initial Escrow Account Statement: required by RESPA and due 45 days after closing, this disclosure is often provided at the time of closing and provides an estimate of escrow payments (taxes, insurance, etc.) that will be required in the first 12 months of the loan (12 C.F.R. §1024.17(g)). Annual Escrow Account Statement: required by RESPA, this disclosure on the amounts needed to cover escrow disbursements is due annually (12 C.F.R. §1024.17(i)). Escrow Closing Notice: this notice is required prior to the closing of an escrow account. When a borrower requests cancellation of an escrow account, the notice is due three business days before the closing of the consumer's escrow account. When a creditor or servicer cancels an escrow account, the Escrow Closing Notice is due no later than 30 business days before the account closes (12 C.F.R. §1026.20(e)(5)(i), (ii)). Initial Rate Change Disclosure: this is a disclosure that TILA requires for ARMs, and it is intended to provide borrowers with information to prepare them for interest rate adjustments that will result in changes in payment amounts. The disclosure must also provide an explanation of how the rate is calculated, disclose the index and margin used to make this calculation, and identify any caps that will limit the increase in the rate. It must be provided at least 210 days, but no more than 240 days, before the initial rate change occurs and the first payment based on the new rate is due. This disclosure may be made at consummation if the first rate and payment changes are due within 210 days after consummation (12 C.F.R. §1026.20(c)(2)). Although it will be servicers or lenders, and not loan originators, that will provide these disclosures, loan originators should advise borrowers with ARMs to look out for this important notice. They should also advise them that subsequent rate change disclosures are generally due no less than 60 days, and no more than 120 days, prior to an interest rate and payment change (12 C.F.R. §1026.20(d)).

Indian Country Land Tenure

Innumerable ethical issues surround the banishing of American Indians from the land that they inhabited prior to colonization, the loss of millions of acres of trust land over decades of continued encroachment by non-natives and the federal government, and the ongoing limitations that these groups face in the use of their sacred tribal lands. American Indians also face the unfair challenge of restricted access to mortgage credit and the obstacles that these restrictions create for homeownership; demographic data collected under HMDA confirms that "...self-identified American Indian, Alaska Native, and Native Hawaiian borrowers living in Native Communities have been less able to access home mortgages from mainstream lenders than borrowers statewide." [1] With all of their inherent complexities, these transactions require specialized knowledge and training. They also require an understanding of tribal government and sensitivity to the ethical issues that surround the conveyance of land in Indian Country.

Example

Jackson is purchasing a home for $200,000, and he is making a $15,000 down payment. His loan is a fixed-rate, 30-year mortgage with an interest rate of 6%. His LTV ratio is 93%, meaning that he is required to pay PMI at a rate of 0.78%. Property taxes are $1,500 annually, and Jackson's homeowner's insurance premium is $800 per year. His PITI payment is calculated as follows. His loan amount {$185,000}, loan term {30}, and interest rate {.06} are plugged into the financial calculator to solve for a P&I payment of $1,109.17. Jackson's monthly property taxes are calculated as follows: {$1,500} ÷ {12} = {$125} Jackson's monthly homeowner's insurance is calculated as follows: {$800} ÷ {12} = {$66.67} Jackson's monthly PMI is calculated as follows: {$185,000} × {.0078} = {$1,443}{$1,443} ÷ {12} = {$120.25} The PITI payment is calculated as follows: {Monthly P&I} + {monthly taxes} + {monthly homeowner's insurance} + {monthly PMI} = {PITI payment}{$1,109.17} + {$125} + {$66.67} + {$120.25} = {$1,421.09}

Example

John and Mary Smith are borrowing $280,000 toward the purchase of a home. The loan is a 3-1 ARM with a start rate of 5.625%, a periodic rate cap of 2% thereafter, and a lifetime rate cap of 6%. They want to know the highest interest rate that could be charged in the fifth year of the mortgage loan. This calculation is done as follows: First, the maximum rate must be determined by adding together the start rate and the lifetime rate cap: {5.625%} + {6%} = {11.625%} Because the Smiths are obtaining a 3/1 ARM, by their fifth year, the Smiths' rate would have adjusted twice (once after the third year and once after the fourth year). To determine these rate adjustments, the following calculations must be completed: First, the maximum periodic adjustments for the initial two adjustments is determined: {2} × {2%} = {4%} Next, the maximum periodic adjustment and the start rate are added to determine what the new rate for the fifth year of the loan term would be: {5.625%} + {4%} = {9.625%}

Examples

Kenneth is an appraiser working on a job in a Texas suburb. The subject property is a 1,200 square foot rancher built in 1990. The home is situated on a 10,000 square foot lot in an established residential subdivision. Kenneth runs a comparable sales search through the local database and a multiple-listing service to which his company is subscribed. He finds ten comparable sales in the area. They are all situated in the same subdivision, ranging in gross living area from 1,000 square feet to 1,400 square feet. All of the comparable homes range in age from 15-30 years old, and they are situated on lot sizes ranging from 5,000 to 15,000 square feet. All sales closed within the past six months. From this selection, Kenneth analyzes the properties and chooses three that best represent the subject property in terms of lot size, room count, gross living area, and amenities. Thanks to the comparable sales' similarities to the subject property, Kenneth feels that only minimal adjustments would be necessary, and he is confident that they are reliable to use for this transaction.

Example Lauren has been approved for a loan to purchase a new home in Maryland, and her closing date is set. Three days before, Lauren learns that she must travel out of the country for work; due to the urgent nature of this trip, she must leave immediately and cannot reschedule. When she calls her loan originator, Bill, she learns that rescheduling closing will delay completion of the transaction for three weeks. As she has already sold and moved out of her former home, Lauren does not want to wait. She asks her sister, with whom she has been living while she waits for her transaction to go to closing, to represent her at the settlement table. Lauren and Bill work to determine the proper power of attorney form, which Lauren completes and Bill has notarized.

Lauren's situation may help illustrate how power of attorney is used to facilitate mortgage loan transactions. Many states, including Maryland, require specific forms where power of attorney is concerned, so it is vital that mortgage professionals make absolutely certain they are using the appropriate form if POA is to be used.

Float Agreements

Lenders may allow loan applicants to lock in an interest rate without locking in the points. This type of float agreement benefits the loan applicant if points fall. However, if interest rates also fall, the lender may charge extra points to make more money from the mortgage transaction. Lenders may agree to float both the interest rate and the points, allowing the loan applicant to lock in the rate and points between the time of the loan application and the date of closing. The applicant can choose to lock in the rate and points at the time that appears most advantageous.

Indian Country Land Tenure

Lending transactions involving land held in trust are subject to restrictions, including those that limit eligible purchasers of the land to tribal members. Even if located on a reservation, fee land is not subject to the restrictions that apply to land held in trust, and eligible buyers may include individuals who are not American Indians. The reference on the URLA to "Alaska Native Corporation Land" concerns land claims under the Alaska Native Claims Settlement Act (ANCSA), which attempted to settle legislatively the legal property rights of Alaska's indigenous people and their land ownership. This established 12 Alaska Native regional corporations and over 200 village corporations. Due to the divided ownership of surface and subsurface rights, easements, and land management responsibilities, the sale and transfer of ANCSA land involves multiple layers of complexity. Alaska Natives are also currently pursuing efforts to secure additional protections for their land by placing some of it in land trusts.

Liens

Liens are monetary claims that may provide the creditor with the right to foreclosure. Liens can come in the form of voluntary liens or involuntary liens. Voluntary liens are liens in which an owner has given consent to having the lien attached to his/her property. A mortgage is a perfect example of a voluntary lien. An owner consents to the terms of a mortgage and understands that there is a lien on the property until the mortgage is paid off. An involuntary lien is a lien that is imposed on the property for the owner's unpaid debt. Lien priority is important since it determines the order in which creditors or other lien holders are paid for debt that is secured by real estate. For example, when a property is foreclosed to satisfy a lien for mortgage debt, the debt related to a first mortgage is paid before funds are used to satisfy other debts, such as a second mortgage or a lien for unpaid income tax. Since there is only a limited amount of value in a property, a higher-priority lien is more likely to be satisfied than a lower priority. This is why lenders always require that prior liens be paid off as a condition of closing. In a purchase transaction, the primary lender always requires that its mortgage is in first lien position.

Section L2: Title Information

Life Estate: the consumer owns the property only through the duration of their life - this may also be called a "tenant for life," or "life tenant." When homeowners set up a life estate, they name themselves as life tenants in the deed to their home and name their children and/or other beneficiaries as "remaindermen." This allows the property to pass to its intended beneficiary upon death without needing to be incorporated into an estate; however, it does mean that any heirs who are not the remainderman do not get to sell the property or benefit from it upon death of the tenant. While the life tenant is still alive, both they and the remainderman have an ownership interest in the property; the life tenant is the person responsible for property upkeep until their death.

Amortization Type and Loan Features

Loan originators are more likely to use this section of the URLA to show that a loan applicant is paying points to secure a temporary buydown that will result in lower interest rates and smaller payments during the earliest years of a loan's term. The 3-2-1 buydown is a popular option that results in the mortgage payment in years one, two, and three being calculated at rates 3%, 2%, and 1%, respectively, below the rate on the loan. Though mortgage loan originators must record the initial buydown rate on the form, it is important to note that the GSEs do not permit lenders to qualify a consumer for a loan based on his or her ability to make payments calculated using the "bought-down" interest rate. Lenders must qualify borrowers based on the note rate and may not factor in any bought-down rate (Fannie Mae Selling Guide B2-1.3-05).

Transaction Detail Construction-Conversion/Construction-to-Permanent: construction loans provide short-term financing for the cost of building a home. Borrowers may obtain and close on one loan for the construction of a new home and then apply for and close on a separate loan for permanent financing, in a two-closing process. The less complicated - and less risky - option is to choose a single-closing loan that converts from construction financing to permanent financing after the construction of a home is complete. A single-closing arrangement also tends to be less expensive, as borrowers only have to pay one set of closing costs.

Loan originators must indicate on the URLA whether the loan is a single-closing or a two-closing loan. Other information required includes building costs and the cost of a lot that is the site for new construction. Fraud related to construction loans is not uncommon, particularly when the housing market is slow. Often, fraudulent activity is carried out by builders who are in desperate need of financing to complete projects for new developments.

Lock-In Agreements

Lock-in agreements, also known as rate-lock agreements or rate commitments, are agreements made by a lender to hold an interest rate and a specified number of points while processing an applicant's loan. Lock-in agreements should be made in writing. Lenders may charge a flat fee or a percentage of the mortgage amount, payable upfront or at the time of closing, as a lock-in fee. Some lenders may finance the fee by adding a fraction of a percentage point to the interest rate. Lock-in fees may not be refundable. Lock-in agreements may be effective for as little as seven days from the date of loan approval up to 120 days; most are effective for 30 to 60 days. If an applicant's loan is not settled and funded within the period of time that the agreement is effective, he or she will obtain a loan at the current rate. Lock-in extensions must be approved by the lender, and a fee is charged for the extension, but it is usually worth the effort and cost so that the applicant is guaranteed the interest rate to which he or she agreed.

Section 2: Financial Information - Assets and Liabilities For a one- to four-unit principal residence with an LTV of 80% or less, borrower contributions are not required, and all funds needed to complete the transaction can come from employer assistance. This is also true of transactions for one-unit principal residences with LTV ratios greater than 80%. For a two- to four-unit principal residence, if the LTV is greater than 80%, the borrower must make a contribution of at least 5% in order to use employer assistance.

Lot equity: also called land equity, the value of unimproved land that a potential borrower owns might be acceptable to use for qualification purposes. If the applicant owns the land outright already (i.e., it is not affected by any outstanding liens), they will potentially be able to use the value of that land as collateral to obtain a construction loan and build a home. The ability to use land equity will depend on other factors, like the value of the home the consumer wants to build, their credit qualification, the loan program, and their down payment. Relocation funds: similar to down payment assistance offered by an employer, relocation funds (or "relo funds") might be offered by an employer to incentivize an employee or group of employees to relocate. Relocation mortgages are an alternative loan product that is often offered by specialized teams or companies focused solely on relocation lending. These are often part of a signing package and used to ease the burden of moving and homebuying costs. Employers offering relocation assistance will often contribute, helping to fund closing costs, reduce rates, or otherwise lighten the financial load of having to buy a new home.

Section 4: Loan and Property Information

Manufactured homes are built entirely in a factory on a chassis, then transported to the home site. FHA loans further distinguish between manufactured homes, which are built entirely in one piece, and modular homes, which involve constructing segments (modules) of the home in separate components, transporting them separately to the build site, then permanently attaching them there and affixing the assembled home to the ground. Manufactured homes are usually treated as mobile homes - and personal property - and titled as such, until they go through the legal process of conversion to real property. This process involves the home being permanently affixed to the ground, usually through permanent hookup to water and electricity. Lenders need to know if a consumer wants to use a manufactured home to secure a loan, as many mortgage programs require conversion before approval. Modular homes are considered to be real property, permanently attached to the ground from the start, and are valued and titled the same way as stick-built homes. Lender policy and specific loan program requirements will dictate how manufactured and modular homes are treated.

Tax Liens and the Credit Score

Many consumers do not think about the impact their taxes have on their credit and are actually not aware that an impact even exists. When taxes go unpaid, the IRS can place a lien on a consumer's assets. If tax liens go unpaid, they will remain on a credit report for 15 years or more. Paid tax liens remain on a credit report for seven years.

Example

Max and Phoebe are purchasing a home and have been working with a mortgage broker, Cooper. On closing day, Max and Phoebe meet with Cooper in his employer's office. He closes the loan in his own name using funds provided by the lender, Maplewood Mortgage Financing. Immediately after closing is complete, Max and Phoebe's loan is transferred to Maplewood Mortgage Financing.

Discussion Scenario: Proper Disclosure Delivery

Michael and Hannah Gunther have been renting an apartment and saving up for the past six years. Now, they have enough money in savings to make a down payment and become homeowners for the first time. They meet with a mortgage loan originator, Philip Haas, from PDE Mortgage Financing. Philip takes down some information about the Gunthers, including their names, Social Security Numbers, and employment information. Both have been steadily employed for the past few years and have good credit and little debt. The Gunthers also eagerly inform Philip that they have already found their dream home in a small Ohio suburb: a two-story, three-bedroom home with a landscaped yard and a small garage, located close to their workplaces. The home is selling for $259,000; after their down payment, the Gunthers need a mortgage loan of $239,000. Philip Haas has Michael and Hannah sign the completed loan application. Before they leave his office, Philip gives them a booklet called "Your Home Loan Toolkit." He also provides a completed Loan Estimate, which he reviews with them. The Gunthers sign the Loan Estimate and verbally indicate their intent to proceed with the transaction. Philip also provides a packet of additional disclosures and information. This packet includes a list of homeownership counseling organizations in the area; Philip advises them to obtain homeownership counseling as part of the transaction. The packet also includes a notice of their right to receive a copy of the appraisal that will be conducted on the property securing the loan. Several days later, the Gunthers receive copies of their credit scores in the mail, along with a notice explaining the scores and advising them to contact their lender with any questions. At the end of that week, the Gunthers receive the results of the appraisal conducted on the home - it appraised for slightly less than the sales price, so after some negotiation, the price is lowered to meet the new appraised value. Shortly thereafter, they receive a Notice of Action Taken explaining that their loan application has been approved and the transaction can officially proceed. Michael and Hannah visit Philip at the office and sign a loan commitment.

Disclosures Relating to Loan Servicing RESPA creates a set of disclosures to ensure that borrowers receive notification if there are any changes related to the servicing of their loans.

Mortgage Servicing Disclosure Statement: required by RESPA and due three business days after completion of a loan application (12 C.F.R. §1024.21(b)). This disclosure now appears on page three of the Loan Estimate. Servicing Transfer Statement: required by RESPA and due 15 days prior to the effective date of the transfer (12 C.F.R. §1024.21(d)) If certain circumstances change during the negotiation and processing period of a loan application, the creditor may be allowed or required to provide revised disclosures. Revised disclosures related to closing costs are subject to restrictions under 12 C.F.R. §1026.19(e) and are outlined in the Federal Mortgage-Related Laws module of this course. These restrictions encourage accuracy in providing Loan Estimates and discourage making changes to stated settlement cost estimates. There is one circumstance in which a creditor must provide a revised Loan Estimate; this occurs if the rate was not locked at the time the original Loan Estimate was issued. When the rate is subsequently locked, the creditor must provide a revised Loan Estimate listing the locked interest rate and any other rate-dependent charges and terms. This is due no later than three business days after the date on which the rate is locked (12 C.F.R. §1026.19(e)(3)(iv)(D)). There are other circumstances in which new disclosures may be required. For instance, TILA requires re-disclosure of the APR if it varies by more than one eighth of 1%. This re-disclosure is due at least three business days prior to closing. New disclosures may also be required if the potential borrower decides to switch from a fixed-rate loan to one with an adjustable rate. In this scenario, the potential borrower would need to receive an updated Loan Estimate, as well as the CHARM Booklet and the program disclosures related to adjustable-rate mortgages.

Mortgage Insurance

Mortgage insurance premium (MIP): MIP is required on all FHA loans and is intended to serve the same purpose that PMI serves for conventional loans. Upfront MIP is collected on all FHA loans, in addition to annual MIP, which is collected on a monthly basis. For FHA case numbers assigned on or after June 3, 2013, the following rules for MIP apply: Mortgages involving an original principal obligation less than or equal to 90% LTV will be subject to an annual MIP that "...will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first." Mortgages involving an original principal obligation with an LTV greater than 90% will be subject to an annual MIP "...until the end of the mortgage term or for the first 30 years of the term, whichever occurs first." There are a few exceptions to this rule, including one for home equity conversion mortgages (Mortgagee Letter 2013-04).

Calculating Mortgage Insurance

Mortgage insurance varies based on the borrower's loan-to-value ratio and the type of loan being originated. Fixed-rate loans will have a different mortgage insurance rate than adjustable-rate loans. This is true for both private mortgage insurance (PMI) and FHA mortgage insurance premiums (MIP). HUD sets the rates for FHA insurance. Changes to MIP rates are made through the issuance of Mortgagee Letters, and loan originators should visit HUD.gov to follow these and other changes related to FHA lending. Private mortgage insurance (PMI) is used to cover the risk of making a loan to a consumer who lacks the cash for a significant or sufficient down payment. In transactions where a lender requires the borrower to obtain PMI, premiums will be calculated on a monthly basis. This calculation is made until the LTV reaches 78%, unless the borrower requests and qualifies for cancellation of insurance at 80% LTV. The monthly cost of PMI is calculated by finding the rate for the specific loan product and multiplying it by the loan amount, to determine the annual PMI. The annual amount is then divided by 12 to arrive at the monthly PMI amount. The formula is as follows: {Loan Amount} × {Mortgage Insurance Rate} = {Annual PMI} {Annual PMI} ÷ {12} = {Monthly PMI} Monthly PMI can be added, along with monthly taxes (and monthly homeowner's insurance), to a P&I payment to arrive at a PITI payment.

Verification of Income and Employment When a consumer is relying on income from employment to show that he or she can repay mortgage debt, the creditor must verify the consumer's employment (12 C.F.R. §1026.43(c)(2)(ii)). Employers may give verbal verification of a consumer's employment, but federal regulations require verification of employment income using reliable third-party records (12 C.F.R. §1026.43(c)(4)).

Mortgage loan originators will typically offer consumers a Request for Verification of Employment Form (Fannie Mae Form 1005). With this form, the consumer authorizes his or her employer to provide information regarding the position held, income earned, and the probability of continued employment. Federal regulations state that creditors may obtain third-party records directly from the consumer. However, if the creditor intends to sell a loan to an investor, delivery of the information by the consumer may not be permitted. For example, Form 1005 includes instructions stating that for first lien mortgages, the consumer may not deliver the verification form to the employer; for second lien mortgages, this is permitted. In transactions for both first and second mortgages, Fannie Mae requires the employer to mail the completed verification form to the creditor. Delivery of completed forms by loan applicants is prohibited. This requirement for direct delivery of completed documents between employer and lender offers a greater degree of assurance that the information on the form is accurate.

Amortization Type and Loan Features

Most borrowers will seek fixed-rate mortgage loans. Adjustable-rate mortgages (ARMs) have their appeal in the form of upfront savings with a lower interest rate. However, they are usually only appropriate for borrowers who either have a short-term interest in the property and plan to sell before the rate can adjust, plan to refinance, or can afford loan payments at a higher rate down the line. While federal law creates no obligations for mortgage loan originators to act as a consumer's fiduciary, guiding them toward only the most suitable loan product (this duty is imposed in some states, but not all), licensees can still encourage applicants to educate themselves and evaluate all potential options before making this kind of choice. Mortgage professionals can encourage sound choices between adjustable- and fixed-rate products by: Noting that an ARM is most financially suitable for borrowers who intend to live in a home for only a few years Strongly encouraging loan applicants to read the Consumer Handbook on Adjustable-Rate Mortgages (CHARM Booklet) so that they can gain an understanding of how rates for ARMs are adjusted and the payment shock that they may experience when rate adjustments lead to more expensive monthly payments Suggesting that loan applicants pay particular attention to the Adjustable Interest Rate (AIR) Table and the Projected Payments Table on the Loan Estimate so that they can see how rate adjustments for their loans will be calculated and the projected impact of these adjustments on periodic payments This area of Section L3 also reviews any unique loan features. Many of these are not common in loans today, but may still arise in certain unique cases. For instance, interest-only payments are exceedingly rare, as they put borrowers in danger of negative amortization and ultimately being unable to repay, a risk that lenders do not want to take. Balloon payments may be present where the product has an adjustable interest rate, or where the payment schedule is adjusted to accommodate seasonal or irregular income and the borrower wants to make bigger payments at certain points in time.

Using the Appraisal to Calculate the LTV Ratio

Most lenders that offer conventional conforming mortgages will not allow the LTV to exceed 80% because Fannie Mae and Freddie Mac will not purchase a mortgage with an LTV over 80%. However, Fannie Mae and Freddie Mac will purchase a mortgage with an LTV that exceeds 80% if the borrower purchases mortgage insurance in the amount prescribed by these agencies' guidelines. For example: If the loan applicant in the preceding example had a down payment of only $35,000, the lender would make the following calculations: {Purchase Price} - {Down Payment} = {Mortgage Amount} {$350,000} - {$35,000} = {$315,000} {Amount of Mortgage} ÷ {Purchase Price} = {LTV} {$315,000} ÷ {$350,000} = {90%} With an LTV of 90%, the lender would not be likely to make the loan unless the borrower purchased private mortgage insurance. With mortgage insurance, the lender knows that it is possible to sell the mortgage in the secondary market, and insurance will mitigate additional risks that the lender incurs when making a loan with a high LTV.

Refinances

Net tangible benefit requirements are intended to discourage the unethical practice of "loan churning," which is the repeated refinancing of mortgage debt without any benefits to borrowers. There is no federal requirement for lenders to conduct net tangible benefit analyses in all transactions for home loans. However, numerous state legislatures have passed laws that include net tangible benefit requirements for some or all mortgage loan transactions; when accepting an application for a refinance, loan originators must consider whether a net tangible benefit requirement applies under the applicable state law.

Section 1b

Next, the applicant can use Section 1b to add information about current employment and income. The consumer is prompted to include information about gross monthly income, including their base pay, plus any overtime, bonuses, and commissions, and any other relevant income. They will also need to specify whether they are self-employed or own a business, and their ownership share and monthly income, if any, from that venture.

Disclosures to Alert Consumers about the Status of a Loan Application

Notice of Action Taken: required by ECOA and due no later than 30 days after the receipt of a loan application (12 C.F.R. §1002.9(a)(1)(i)) Notice of Adverse Action: required by ECOA and due no later than 30 days after the receipt of a loan application (12 C.F.R. §1002.9(a)(1)(iii)) Notice of Incomplete Application: required by ECOA and due no later than 30 days after the receipt of an application (12 C.F.R. §1002.9(a)(1)(ii))

Disclosures to Alert Consumers of Their Rights The purpose of some disclosures is to alert consumers that they have legal rights that they are entitled to exercise within a particular time frame.

Notice of Right to Receive Appraisal Report: creditors must provide loan applicants with notice of their right to receive a copy of the appraisal, and this disclosure is due no later than three business days after a creditor receives an application for credit that will be secured by a first lien on a dwelling (12 C.F.R. §1002.14(a)(2)). Notice Regarding Monitoring Programs: rRequired by ECOA and due when obtaining information on race, ethnicity, sex, marriage, and age (12 C.F.R. §1002.9(b)) Notice of Right to Rescind: required by TILA and due at the time of closing in transactions that are not related to a home purchase or to a refinance with the lender who made the loan being refinanced (12 C.F.R. §1026.23(b)) Notice of Right to Cancel PMI: required by the Homeowners Protection Act at the time of closing and required in annual disclosures. The annual disclosure must be in writing and must remind the borrower of the right to cancel PMI. It must also provide an address and phone number that the borrower can use to contact his or her loan servicer to request information about the cancellation of PMI (12 U.S.C. §4903(a)). Notice of Right to Receive Credit Score and to Dispute Its Accuracy: required by FACTA and due during the loan transaction (15 U.S.C. §1681(g)) Notice of Right to Financial Privacy and Right to Opt Out of the Sharing of Personal Information: required by the GLB Act at the time of establishing a customer relationship (at the time of application) (15 U.S.C. §6802(b))

Delivery Method

Numerous disclosures that are required under TILA and RESPA are due within three business days after completion of a loan application. When these disclosures are provided via the Postal Service, receipt by the consumer is considered to take place three business days after the disclosures are placed in the mail (12 C.F.R. §1026.19(e)(1)(iv)). The E-Sign Act allows creditors and other mortgage professionals to make disclosures electronically when a consumer consents to the electronic receipt of disclosures. When disclosures are provided electronically, they are considered received when acknowledged (opened) by the consume

Uniform Residential Loan Application - Lender Loan Information

Once the Borrower Information component of the URLA is complete, it is the mortgage loan originator's responsibility to complete the Lender Loan Information component. This component is divided into five sections: Section L1 requests a description of the type of real property that will secure the loan and an indication of whether the transaction involves a construction loan, a refinance, or an energy improvement loan Section L2 requests title information, including the name(s) of the homeowner(s) and the manner in which they will hold title Section L3 indicates whether a consumer is applying for a conventional or nonconventional loan, a fixed or adjustable interest rate, or a loan with nontraditional features; this section also shows the length of the loan term and the proposed interest rate and monthly payment Section L4 compiles information on closing costs, discount points, credits, and loan amounts to compute the minimum amount that an applicant will pay at closing or any cash back that an applicant may receive from a refinance Section L5 requests information about the loan applicant's participation in HUD-approved loan counseling or education

Servicing

Once the file is returned to the lender by the closing agent, loan servicing begins. A loan servicer is the company who will be responsible for accepting loan payments. In addition to accepting loan payments, the servicer is responsible for: Disbursing funds out of the escrow account to pay taxes and insurance Maintaining records related to payments and balances Managing delinquent accounts Helping borrowers to identify loss mitigation options when delinquencies and defaults occur

Flood Insurance

One of these areas is a Special Flood Hazard Area (SFHA), which is defined as an area of land that would be inundated by a flood having a 1% chance of occurring in any given year. This is also referred to as the base or 100-year flood. All flood zones with an "A" or "V" prefix fall into this area. Development may take place within an SFHA if the development complies with local floodplain management ordinances that meet minimum federal requirements. Flood insurance is required for insurable structures within an SFHA to protect federal financial investments and assistance used for acquisition and/or construction purposes within communities participating in FEMA's National Flood Insurance Program (NFIP).

Origination Fees

Origination fees are the amounts that borrowers pay to creditors/loan originators for the work performed to carry a transaction to completion. These include factors like processing fees, underwriting fees, and related charges. The amounts that can be charged as origination fees will vary depending on the type of loan - for instance, limitations apply for origination fees collected on VA loans.

Section L1: Property and Loan Information

Ownership interests in a property are determined in part by state laws. Nine states have community property laws; these laws provide that each spouse has an equal interest in a home, even though both may not have their names on the title or an obligation to repay the mortgage debt. When loan originators conduct transactions in which community property laws are relevant, they must obtain a credit report for the spouse who is not involved in the lending transaction. The credit score of the non-purchasing spouse is not considered when determining loan eligibility, but the underwriter will look for the additional obligations that may impact the debt-to-income ratio of the spouse who is assuming the mortgage debt.

Ability to Repay

Payments for qualified mortgages must be calculated based on the maximum interest rate that may apply to the loan within the first five years after the date on which the first regular periodic payment is due (12 C.F.R. §1026.43(e)(2)(iv)). Payments for non-qualified mortgages must be based on the fully-indexed rate, which takes into account potential rate changes for the entire loan term.

Interest Per Diem

Per diem, or daily interest, is calculated by dividing the annual interest rate by the number of days in a year, then multiplying the result by the outstanding balance of the loan. Many lenders will use 360 days, but some require the use of 365/366 days. The lender will provide information on which calculation is correct. Others allow the use of either number. A mortgage loan originator must be sure to know what his/her lender requires before making the calculation. The formula is as follows: {Interest Rate} × {Loan Balance} = {Annual Interest} {Annual Interest} ÷ 365 = {Daily Interest Amount} If the loan is amortized, the per diem interest will change every month as the loan balance declines. For the figures included on a Loan Estimate, the calculation is made on the anticipated loan amount. Generally, loans are amortized using a 30-day month or 360 days in a year, and interest is collected in arrears. Therefore, to get the loan on schedule with the payments, per diem interest is collected at closing to put the loan on schedule.

Common Features of ARMs Rate adjustment caps help lenders to sell ARMs. With the use of caps, they can assure borrowers that there is a limit to how much their interest rates can increase. Caps come in several forms, and they include:

Periodic rate adjustment caps: a rate adjustment cap focuses on the amount that the interest rate is allowed to change from one adjustment period to the next, and creates a limit on the size of the change. For example, assume that a borrower has a 3/1 ARM with a fixed rate of 2.5% for the first three years of the loan. The index is the three-month SOFR, and the margin is 3%. The loan also includes a periodic rate adjustment cap of 2%. When the rate adjusts for the first time, the SOFR is 2.75%. Adding this rate to the 3% margin results in an adjusted rate of 5.75%. However, with the cap on periodic adjustments, the rate may only increase to 4.50%. Lifetime caps: a lifetime cap establishes a maximum amount that the interest rate may increase over the life of the loan. For example, assume that a borrower has a 3/1 ARM with a rate of 2.5% for the first three years of the loan term, and a lifetime cap of 9%. If rates rise by 2% each year, the fifth adjustment would result in an interest rate of 12.50%; however, the lifetime cap would limit the rate to 11.50%. Payment caps: during the lending boom, payment caps were used in some loans. However these caps come with a significant risk to the borrower. If payments are capped and interest rates continue to rise, monthly payments may not be sufficient to cover the interest due, and the lender will add this unpaid interest to the principal. This results in negative amortization. Payment programs that lead to negative amortization are no longer allowed for: HOEPA high-cost home loans, and Qualified ARMs Remember that before a first-time borrower accepts a loan that includes a negative amortization feature, the borrower must complete counseling with a HUD-approved counselor (12 C.F.R. §1026.36(k)).

Section 5: Declarations

Potential borrowers should be reminded of the importance of answering these questions honestly. Some consumers seeking to buy second homes or investment properties may be tempted to increase their chances of approval by claiming that the property will be a primary residence. This is a form of mortgage fraud, and loan applicants should be made well aware of the consequences of dishonest responses, even if their intentions are relatively innocent. It is also essential for consumers to be honest about their funding sources. Potential borrowers who receive gift funds from loved ones will probably be required to produce a gift letter confirming that the money is indeed a gift, not a personal loan that the individual expects to be repaid. Accepting funds as a loan from a loved one and representing them to the lender as a gift is, again, a deliberate misrepresentation that puts the consumer in line for fraud charges and endangers their ability to repay. Similarly, obtaining secondary financing from elsewhere - usually to pad down payment funds - and failing to disclose it (known as a "silent second" loan) can bring the same serious consequences.

Disclosures to Inform the Consumer about the Costs of a Loan Disclosures regarding the cost of a loan and the fees associated with its closing are intended to provide the consumer with information that he/she can use to shop competitively for a mortgage loan and for settlement service providers. Other disclosures are intended to help consumers anticipate costs associated with a loan that will occur after closing and throughout the loan term.

Pre-closing disclosures include: Loan Estimate: this disclosure provides information on the estimated cost of credit and settlement services for a mortgage loan transaction. As discussed in a previous module of this course, there are limitations on the differences allowed between the estimates provided on this disclosure and the actual costs of services provided in a transaction. The Loan Estimate must be delivered or placed in the mail no more than three business days after receiving a loan application and no later than seven business days prior to consummation. Closing Disclosure: this disclosure states the actual costs of a loan and settlement fees. The Closing Disclosure is due no later than three business days prior to consummation. If a revised Closing Disclosure is issued, it must be provided at or before consummation and within three business days of receiving the information prompting the revision. Certain changes (APR, prepayment penalties, or loan product changes) would require a new three-business-day waiting period before consummation could occur. Affiliated Business Arrangement Disclosure: required by RESPA and due at the time of referring a loan applicant to a settlement service provider, this disclosure advises the consumer that the referring party and the settlement service provider share an ownership interest and the potential to realize some profit as a result of that ownership interest (12 C.F.R. §1024.15(b)). Re-disclosure of APR: for a regular transaction, re-disclosure is required at least three business days prior to closing anytime the APR varies by more than one-eighth of 1% (12 C.F.R. §1026.22(a)(2)). For an irregular transaction, re-disclosure is required if the APR varies by more than one-fourth of 1% (12 C.F.R. §1026.22(a)(3)).

Due from Borrower(s) "Closing costs" generally refers to fees, other than prepaid items and initial escrow payments, that are specifically referenced throughout the URLA - these can include, but are not limited to, fees for origination and underwriting, appraisal fees, flood zone determination fees, and fees for title search and title insurance. Borrower closing costs in Subsection F also include the cost of:

Private mortgage insurance, when the transaction involves a conventional loan Upfront premiums and annual mortgage insurance premiums for FHA transactions Funding fees for VA and USDA loans Prepaid items are the costs that borrowers incur before the first mortgage payment and other mortgage-related expenses are due. The most common prepaid item is prepaid interest, which is interest that accrues between consummation and the end of the month in which closing occurs (also called per diem interest, discussed in more detail in a later section of this course).

The Application Interview Mortgage loan originators must confer with loan applicants to complete the Lender Loan Information component of the URLA, giving originators the opportunity to:

Provide professional insights that loan applicants can use to make sound decisions about mortgage credit Encourage loan applicants to read the disclosures that they will receive Collect the information needed to ensure that a lending decision is based on an applicant's eligibility for mortgage credit and not on a discriminatory assessment related to personal characteristics Explain to loan applicants that they have both legal and ethical obligations to provide accurate information on an application for mortgage credit Warn loan applicants that they are violating criminal laws when they include false information on a loan application

Mortgage Insurance

Remember, while these two forms of insurance - MIP and PMI - have similar names and functions, it is absolutely essential to understand that they are not the same. They operate under different requirements and hold different relationships to LTV ratios and loan terms, and they are connected to entirely different lending programs. For instance, borrowers with conventional loans subject to PMI can cancel their mortgage insurance after a certain period; however, many FHA loans require MIP for the entire loan term. Separating these divergent forms of mortgage insurance is vital to understanding how they affect loan-related costs for the consumer, as well as basic compliance with the law.

Electronic Notarization

Remote ink-signed notarizations (RIN) are less common than IPEN or RON procedures, but do still occur. The borrower receives the paper loan package in advance, and they sign the documents on camera while the notary watches from a separate location. These documents are then sent by courier, faxed, or scanned and transmitted electronically to the NSA, who notarizes them.

A contract for deed is relevant to a transaction for a mortgage when a borrower wants to secure a loan to pay off the debt owed to a seller. With funds provided by a mortgage lender, the borrower pays off the balance owed to the home seller and secures the title to the property. Once the borrower has the title to the home, the seller can no longer use it as collateral for their own debts. When a loan applicant is applying for a mortgage to pay off a contract for deed, a careful title search is critical, since it will show whether the seller has encumbered the property with additional debts.

Renovation: consumers may apply for renovation loans when they are purchasing a fixer-upper, or when they want to complete improvements on a home that they already own. Home equity loans are often used to finance the costs of renovations, but these loans are not available to homebuyers who have no equity in a home that they have recently purchased. Homebuyers may consider options such as Fannie Mae's Homestyle Renovation Loan or the FHA's 203(k) Renovation Loan. With these products, eligible consumers can borrow more than a home is currently worth if the improvements will increase its appraised value. These products are ideal for consumers who want to take on renovations as soon as a home purchase is complete. In essence, the borrower rolls the cost of the property purchase and planned renovations into one loan, to be repaid over time. Program requirements vary based on product type, and they may be more burdensome than the average loan - for instance, FHA 203(k) loans specifically permit and prohibit certain planned improvements, require submission of proposals for renovations, and involve the use of a 203(k) consultant to prepare project specifications, analyze costs, complete draw request forms, and conduct onsite visits to monitor progress.

Complete each of the following calculations. Scenario 1: Steve Stephens is a draftsman for a local architectural firm. He works 40 hours each week and is paid an hourly wage of $21.85 with no history of overtime. He receives a two-week paid vacation each year and has been with the company for six years. What is his monthly qualifying income? Scenario 2: a property is valued at $342,000. There is a first and second mortgage with a CLTV of 85%. The second mortgage has an 8% LTV. What is the approximate amount of the first mortgage? Scenario 3: Jamie James is a mid-level executive with a local utility company. She is paid bi-weekly. Her paystub shows a base rate of $2,307.89 per pay period. It also shows a discretionary bonus income with a year-to-date total of $4,500. What is her monthly qualifying income? Scenario 4: Tommy Thomas is a maintenance worker for a local sign company. He is paid a weekly salary of $965, and he works an average of 46 weeks each year. What is his qualifying income? Scenario 5: the Gonzales family is closing on a 30-year 1/1 ARM of $295,000 with rate caps of 1 and 6. The start rate is 6.125%. What is the most the interest rate could be following the third adjustment? What is the most the interest rate could be in the second year of the loan? Scenario 6: Cassie Cassidy is a self-employed graphic artist. Her tax returns show net taxable earnings of $59,540 for 2019 and $67,890 for 2020. The returns also show she is depreciating her studio, which she owns at a level annual rate of $6,700. What is her qualifying income? Scenario 7: assume that a creditor offers a loan applicant a 7/1 ARM with an introductory rate of 3%, with future rates based on a margin of 3.5% plus the LIBOR, which is 4% at the time that the creditor offers the loan. How must the loan applicant demonstrate eligibility for the 7/1 ARM? How does the analysis of eligibility differ for qualified and non-qualified mortgages?

Scenario 1: The calculation for Mr. Stephens's income is fairly straightforward. In the example, it is fine to use 52 weeks per year since we know his vacation is paid. The basic calculation is as follows: (Hourly Rate × Hours Worked Per Week) × Weeks Worked Per Year = Annual IncomeAnnual Income ÷ 12 = Monthly Qualifying Income Mr. Stephens's calculation: ($21.85 × 40) × 52 = $45,448$45,448 ÷ 12 = $3,787.33 Steve Stephens's monthly qualifying income is: $3,787.33. Scenario 2: the calculation is fairly straightforward - the second mortgage LTV can be subtracted from the combined loan-to-value ratio, and the resulting percentage can be used to determine the amount of the first mortgage. The calculation is as follows: 85% [CLTV] - 8% [2nd mortgage LTV] = 77% [1st mortgage LTV]$342,000 [property value] × .77 [1st mortgage LTV] = $263,340 The approximate value of the first mortgage is: $263,340. Scenario 3: In the calculation for Ms. James, it is important to note that she is paid bi-weekly. This means she receives 26 paychecks per year. (Alternately, someone who is paid semi-monthly receives 24 paychecks per year.) With regard to her bonus, it would not be used for qualifying income since it is noted that it is "discretionary" (meaning the amount can change or she may not receive it at all), and we do not have evidence that there is a two-year history of receiving the bonus. The calculation is as follows: Bi-weekly Pay Amount × 26 = Annual Salary Annual Salary ÷ 12 = Monthly Qualifying Income Mrs. James's calculation: $2,307.89 × 26 = $60,005.14$60,005.14 ÷ 12 = $5,000.43 Jamie James's monthly qualifying income is: $5,000.43. Scenario 4: Mr. Thomas's calculation is fairly straightforward. However, it is important to remember that we have been told he works 46 weeks per year. It is easy to forget and perform the calculation based on 52 weeks. The basic calculation is as follows: Weekly Salary × Weeks Worked Per Year = Annual Salary Annual Salary ÷ 12 = Monthly Qualifying Income Mr. Thomas's calculation: $965 × 46 = $44,390$44,390 ÷ 12 = Monthly Qualifying Income Tommy Thomas's monthly qualifying income is: $3,699.17. Scenario 5: the calculations for the Gonzales' scenario are very simple - you just need to be clear on what is being asked. Since the ARM has a cap of 1% on the annual adjustment (referenced by "1" in "rate caps of 1 and 6" - "6" refers to the lifetime cap), each annual adjustment cannot exceed 1%. So, beginning with a start rate of 6.125%, the highest that the third adjustment could be is 9.125%. For the second question in the scenario, you need to reference the fact that it is a 1/1 ARM - the interest rate is 6.125% for the first year of the loan. In the second year, it will begin adjusting. Again, referring to the annual rate cap, the most the interest rate can be in the second year of the loan is 7.125%. Scenario 6: Ms. Cassidy's calculation has a twist - you are dealing with annual salaries based on tax documents along with self-employment expenses, versus straightforward payroll documents. The basic calculation is as follows: (Year One Net Income + Year Two Net Income) ÷ 24 Months = Monthly Income If we assume that the studio depreciation can be applied to both years, it would be added to the Net Income: ((Year One Net Income + Depreciation) + (Year Two Net Income + Depreciation)) ÷ 24 Months = Monthly Income Ms. Cassidy's calculation: (($59,540 + $6,700) + ($67,890 + $6,700)) ÷ 24 Months = $5,867.92 Cassie Cassidy's monthly qualifying income is: $5,867.92. Scenario 7: if the 7/1 ARM is a non-qualified mortgage, the loan applicant must be able to show that he or she currently has the ability to make equal monthly amortizing payments at the fully-indexed rate of 7.5%. If the loan is a qualified mortgage, the applicant may demonstrate eligibility based on his or her ability to make payments at the introductory rate of 3%, because the QM Rule only requires evaluation based on the first five years of the loan term, and the rate would not adjust until after that point.

How Is Credit Identified?

Scores are developed through a statistically validated system designed to evaluate any available information about an individual's payment history. The score assigns a number to this objective analysis. The report also contains relevant information beyond the score that is supportive of the loan origination and underwriting process. The ability to cross verify information that the repositories report with the information the customer provides is key to loan integrity and fraud prevention. The credit report will provide the following: Applicant information Content summary of the report Credit scores All known public records Filed collections actions data Derogatory trade lines information Credit inquiries Fraud verification alert information It is important for applicants to realize that having negative information on their credit report does not mean they are doomed forever. Despite late payments—or even bankruptcy—they can still make credit their friend. In general, account information, including late payments and other adverse information reported by creditors, is kept on a credit report for no longer than seven years. However, there are certain exceptions to this rule: Bankruptcy information may remain on credit reports for up to 10 years Certain states require that adverse credit information remain on credit reports no longer than five years

Section 1: Borrower Information

Section 1a of the URLA invites the borrower to provide their basic identifying information, as well as details of the kind of credit they are seeking. This is also where any co-borrowers will be identified by name, which can influence what other application information might be necessary.

Section 4: Loan and Property Information Section 4 asks about the purpose of the loan that the borrower is potentially seeking, as well as the property they are planning to use to secure it.

Section 4a collects basic information about the transaction: loan amount sought, its purpose (purchase, refinance, other), the address of the property that will secure the loan, its value, and its occupancy status (primary residence, second home, investment property). This section also prompts the consumer to indicate whether the property will be a mixed-use property (e.g., the borrower will live in the property and also operate a business from it), or whether the property is a manufactured home.

Section 4: Loan and Property Information C

Section 4c is used when the consumer is attempting to purchase property from which they will earn rental income. This section is relevant when the property is a two- to four-unit primary residence (i.e., the borrower will live in one unit as their primary residence and rent out the others) or an investment property. The consumer is prompted to list the expected monthly rental income, and the lender adds the expected net monthly rental income.

Section 4: Loan and Property Information 4D

Section 4d lists gifts or grants that the potential borrower plans to use for the loan. Many borrowers utilize gift funds offered by relatives or employers to help afford a down payment; in addition, numerous states and nonprofits offer grants, particularly to first-time homebuyers, to incentivize purchasing a house. Consumers need to list these funds, if they have received any, here, and indicate the source and cash market value.

Section 7: Military Service

Section 7 collects information about the consumer's military service or, if applicable, that of the consumer's deceased spouse. Here, the consumer indicates whether they or their spouse ever served or is currently serving in the United States Armed Forces. If yes, the consumer is prompted to add more detail about their service or discharge status.

Due from Borrower(s) First, lines A-H focus on totals due from the borrower, itemized as follows:

Subsection A: Sales Contract Price: In Subsection A, loan originators must list a home's price as it is stated in the sales contract. Subsection B: Improvements, Renovations, and Repairs: As discussed earlier, certain products, such as a Fannie Mae HomeStyle Renovation Loan or an FHA 203(k) Renovation Loan, allow borrowers to secure funds that exceed the purchase price of a home. The amount entered in Subsection B will indicate the costs of these items when they are included in a transaction

Section 8: Demographic Information

Section 8 of the URLA asks about the consumer's ethnicity, sex, and race. This information is collected in compliance with federal law - specifically, the Home Mortgage Disclosure Act (HMDA) - to monitor lending practices and deter discriminatory actions in lending. The section begins with a notice to the consumer as to the purpose of information collection, explaining that none of the collected data can be used to discriminate against the loan applicant, and the applicant can opt not to complete this section. If the applicant decides not to furnish this information, the loan originator must collect the demographic data based on visual observation or surname. This includes scenarios in which an application is accepted through electronic media with a video component (e.g., Skype, Zoom, FaceTime, or similar videoconferencing platforms). In such cases, a loan originator must treat the application as if it was taken in person. If demographic information is collected in this way, the loan originator is prompted to indicate that at the bottom of the page. This section also asks how demographic information was provided (face to face, including via video chat; telephone; fax or mail; or email or internet).

Section L3: Mortgage Loan Information

Section L3 creates an opportunity to gain a better understanding of the type of mortgage loan that will meet the consumer's needs. Loan originators should encourage applicants to take advantage of the disclosures and informational booklets that they will receive throughout the loan application process, so that they can make sound borrowing choices. By encouraging the use of these resources, mortgage loan originators protect both their clients and their employers from the risk of default.

Section L4: Qualifying the Borrower

Section L4 provides a high-level calculation of the funds that will be due from or to the borrower(s), based on total transactional costs, the amount of the mortgage loan, and any applicable credits. Most consumers conduct a limited number of transactions for home loans over the course of their lives and are not aware of the many costs associated with home loans or the opportunity to use discount points to lower their interest rates.

Simultaneous Loans When evaluating a consumer's ability to repay a mortgage, a creditor is required to consider any simultaneous loans that it knows of or has reason to know will be made (12 C.F.R. §1026.43(c)(2)(iv)). Federal regulations define a simultaneous loan as a loan that will be:

Secured by the same home Made to the same consumer, and Consummated at the same time or prior to the principal transaction, or made immediately after the principal transaction in order to cover its closing costs Simultaneous loans are typically second lien transactions that provide supplemental financing for a home purchase (e.g., piggyback loans). Tightened regulations surrounding repayment ability require lenders to consider all existing mortgage obligations, making it more difficult for some consumers to qualify for piggyback loans.

Self-Employed, Commissioned, and Trade Workers

Self-employed, commissioned, and trade workers are treated in much the same way. Their income is usually averaged over a two-year period. For the self-employed, the originator uses the income shown on the individual's tax return. For commissioned and trade workers, the originator uses the income shown on their W-2 form. In both cases, the calculation begins with adding the income from the previous two years and dividing it by 24. The formula is as follows: {year one income} + {year two income} = {income base} {income base} ÷ 24 = {monthly income} This more restrictive standard is used because the income of these workers is less stable than the income of hourly or salaried workers. Therefore, a lender must be more cautious when evaluating the capacity of these prospective borrowers' ability to repay a loan. When evaluating a person's tax returns, remember to add back into the annual income those expenses that will not recur and any depreciation taken on capital expenditures. For example, a person might have relocated his or her office, which would be expensed and lower the net income. However, this expense is unlikely to recur, so the originator can add those costs back into the net income when determining the applicant's annual income.

Total Credits

Seller credits are borrower costs that are paid by "interested party contributions" (IPCs). Fannie Mae defines "interested parties" to include property sellers and builders/developers. IPCs are calculated as a percentage of the sales price of a property. For a conventional loan, the amount that a home seller can contribute to closing costs depends on the size of the down payment that the homebuyer is making. The maximum range for a principal residence or second home is anywhere from 3% to 9%, based on LTV. In transactions for FHA loans, there is a 6% limit on the amount that sellers can contribute toward closing costs. Seller contributions for USDA loans are also limited to 6% of the sales price, and the limit for VA loans is 4%.

Power of Attorney For nonconventional loans, such as FHA and VA loans, there are some additional requirements that lenders may need to meet. These are outlined in the HUD Handbook and in VA lending regulations. Prior to advising a borrower on the use of a POA, loan originators should verify that these requirements will be satisfied.

Some states require the use of a specific form when granting a POA to another individual, and use of an incorrect form can prevent closing from taking place. Closing agents and lawyers strongly discourage the use of POA forms found online, as they can be inaccurate; in order to avoid problems, it is imperative to complete and notarize the correct form prior to closing. At the same time, lenders will not accept a POA form that was signed too far in advance and that fails to cite specific details that link use of the POA to a particular transaction.

Adjustments to Comparable Sales

Specific guidelines have been set for adjustments regarding proximity to subject, date of sale, and net or gross adjustments: Proximity to the subject property: sales should be located within one mile of the subject. Date of sale: comparable sales should have closed within 12 months of an appraisal's effective date. Net & gross adjustments: adjustments are changes in the value of a comparable property made when comparing the features of the comparable property to the subject property. A net adjustment is the positive or negative value assigned to each feature. The gross adjustment is the sum of those values for each property. Sales or financing concessions: the dollar amount of sales or financing concessions paid by the seller. Examples of sales or financing concessions include interest rate buy downs, loan discount points, loan origination fees, and closing costs customarily paid by the buyer. The appraiser must obtain this information from the individual who is a party to the concessions. The dollar amount of the concessions is adjusted negatively in the sales grid. Sales concessions are limited on conforming loans based on loan-to-value (LTV). Transactions with LTV over 90% are limited to 3% seller concessions. Concessions on loans with LTV under 90% are limited to 6%.

Assets - Cash to Close the Transaction

Stocks, bonds, 401Ks, and retirement accounts may be counted, but the percentage that can be used as an asset may vary. Fannie Mae and Freddie Mac guidelines state that, when used for reserves, these can be considered at 100% of their value. If any of these accounts are to be used for the purchase of the home, the underwriter may ask for the current statements along with proof of liquidating the account, stock, or bond. Fannie Mae guidelines state that when used for down payment or closing costs, if the value of the asset is at least 20% more than the amount of funds needed, documentation of the borrower's receipt of funds realized from the sale or liquidation is not required. If the assets are used for reserves, liquidation is not required (Fannie Mae Selling Guide, B3-4.3-01). If the applicant intends to sell personal property items (cars, RVs, etc.) to obtain funds to close the transaction, the applicant must provide satisfactory evidence of the actual cash value of the property being sold. This estimated cash value must be realistic and at the current market value. If the estimated value of an item being sold seems unrealistic, the underwriter may ask to see an appraisal of the item or further documentation to provide evidence of the higher value. If the prospective borrower is using rent credit (a portion of monthly paid rent credited towards his or her down payment by the seller), it must be documented. The underwriter may ask for verification of rent paid and applied towards the credit. If credit has been for a specific term, the underwriter may ask the prospective borrower to provide proof of residency in the form of utility bills or other documents such as bank statements for the term of the credit given.

Section 2: Financial Information - Assets and Liabilities Section 2c looks for credit card, debt, and lease liabilities that affect the consumer's finances. Common liabilities include:

Student loan debt Credit cards Mortgages Judgments Consumer loans Medical debts Alimony payments Child support payments The URLA splits liabilities across two sections; Section 2c focuses on revolving debts (e.g., credit cards), installment-based debts (e.g., student loans; car loans), open accounts, non-real estate leases, and similar.

Total Mortgage Loans

Subsection I asks for a breakdown showing the base loan amount that loan applicants hope to obtain and the amount of mortgage insurance that they want to finance, if mortgage insurance is required. Before completing this section of the URLA, originators must ask applicants how much cash they have set aside for a down payment. The down payment amount will determine whether a borrower must purchase mortgage insurance. In conventional transactions, when borrowers make down payments of less than 20%, they will have an LTV ratio of more than 80%, which requires the purchase of private mortgage insurance. Borrowers might be able to agree to pay a slightly higher interest rate to secure lender-paid mortgage insurance (LPMI), thereby financing the cost of their mortgage insurance. In transactions for FHA loans, borrowers can finance the cost of upfront mortgage insurance, which is 1.75% of the loan amount and due at closing. Applicants for VA loans can finance the funding fee that is due at closing, and those who are submitting applications for USDA loans can also finance the upfront guarantee fee. When relevant to a transaction, these fees are listed in Subsection I. The column to the right of Subsection I should show the sum of the base loan amount plus any financed mortgage insurance.

Total Mortgage Loans

Subsection J is relevant when a consumer may be obtaining a subordinate loan (i.e., a piggyback loan) to finance a portion of their down payment obligation. These piggyback loans do allow borrowers to completely avoid the purchase of PMI. However, the cost of PMI depends, in part, on the contribution that the borrower makes toward a down payment; a borrower who makes a 15% down payment will pay less for PMI than a borrower who makes a down payment of 10%. The "other new mortgage loans" referred to in Subsection J should match the information entered in Section 4b of the borrower's component of the URLA, where loan applicants disclose "Other New Loans on the Property You are Buying or Refinancing." When completing the lender's component of the URLA, mortgage loan originators have the opportunity to remind loan applicants that they have a legal obligation to disclose piggyback loans, and to warn them that the omission of this information is illegal and can result in criminal penalties.

Rent credit: rent credit occurs when consumers are living in rent-to-own properties - i.e., they began by renting a property, and they now wish to purchase it for good. When consumers enter rent-to-own contracts, the agreement may provide that a portion of their rent payments is set aside and applied to the property purchase price, thus creating the rent credit. The consumer pays for this by making larger-than-average rent payments for the market and area, with the overage going to rent credit.

Sweat equity: this generally refers to the non-monetary contributions a person has made toward a venture or investment. In mortgage terms, it usually refers to a person having completed maintenance, repairs, and/or renovations on a property they are now looking to buy. The value of the work completed replaces a monetary investment, in whole or in part - for example, if a property requires $5,000 in repairs, but the consumer is able to do the majority of that repair themselves and supply materials, their work could replace the $5,000 cash needed. Whether sweat equity is acceptable when trying to qualify for a loan will depend on the loan product or program, lender policy, and how well the consumer is able to document and substantiate their claim of the value of work done.

Disclosures Related to Reverse Mortgage Loans TILA disclosure requirements for standard mortgage transactions also apply to reverse mortgage loans. Disclosures for open-end, closed-end, and variable-rate mortgages must also be provided as applicable to reverse mortgage loan applicants.

TILA also requires that a loan cost disclosure form be provided to reverse mortgage borrowers. This form discloses the total annual loan cost, which incorporates all of the following: Upfront costs, for example, the origination fee, the third-party closing fee, and any upfront mortgage insurance premium Interest Ongoing charges (e.g., monthly service charges)

Table Funding

Table funding is a process that allows a broker to originate and close a loan under his/her name. However, at the time of closing, the loan is transferred to a lender who provides the funds for disbursement. This scenario and similar situations occur when a broker has correspondent lender status or is accessing a line of credit for the purposes of closing the loan.

Verification and Documentation

The ATR Rule and the QM Rule require verification of "current or reasonably-expected income or assets" using: Tax return transcripts issued by the IRS IRS W-2 forms Payroll statements Financial institution records Employer records Records from a federal, state, or local government entity stating the consumer's income from benefits or entitlements Receipts from a check cashing service or funds transfer service (12 C.F.R. §1026.43(c)(4))

Ability to Repay

The Ability to Repay (ATR) Rule requires residential mortgage lenders to consider the borrower's ability to repay before extending credit. These rules are applicable to most residential mortgage transactions; the only mortgage loans that are not subject to the Rule are: Open-end home equity plans Reverse mortgages Bridge loans with terms of 12 months or less Construction loans Loans made by a housing finance agency All other mortgages, including those secured by non-owner-occupied homes and loans secured by subordinate liens, are subject to the ATR Rule. If a creditor wants to obtain the protections from liability that come with the origination of a qualified mortgage, it must comply with the requirements to assess the ability of a borrower to repay a loan and meet the product feature prerequisites of the Qualified Mortgage (QM) Rule. This means that the loan may not: Have a term of more than 30 years Feature negative amortization, interest-only payments, or balloon payments There are some limited exceptions to the balloon payment prohibition Include points and fees that exceed the set cap, based on the loan amount (generally, this cap is 3% of the loan amount)

Uniform Residential Loan Application - Borrower Information

The Borrower Information component of the URLA is available as a dynamic form, adjusting automatically in real time in response to the information that the applicant provides. Sections 1 through 8 of the URLA collect borrower-specific information about the proposed transaction. The borrower's name should be populated at the bottom of each page.

Combined Loan-to-Value Ratio (CLTV)

The CLTV is a ratio which lenders use when an applicant requests a second mortgage. Lenders calculate the CLTV by combining the cost of all mortgages on a home and comparing the combined cost to the value of the home securing the loans. The lender will perform the following calculation: {(First mortgage + Second mortgage)} ÷ {Appraised value of home} = {CLTV}

Continuation Sheet

The Continuation Sheet is available as a supplemental form. It is to be used if more space is needed to complete the URLA. The form makes space for identifying information for the loan file, the borrower's name, and whatever additional information needs to be given. The form also features an acknowledgment requesting that the applicant reaffirm their understanding of the criminal consequences of knowingly making false statements. The Continuation Sheet may be found online. [1]

The TIL Disclosures and the HUD-1/HUD-1A As previously noted, since 2015, the Truth in Lending (TIL) Disclosure and the HUD-1/HUD-1A Settlement Statement have been replaced by the Loan Estimate and Closing Disclosure in most mortgage loan transactions. However, in certain transactions (specifically, reverse mortgages, HELOCs, chattel-dwelling mortgages, and loans made by entities that are not creditors under Regulation Z), the TIL Disclosure and the HUD-1/HUD-1A are still used.

The TIL Disclosure provides consumers with the cost of credit expressed as a dollar amount (the finance charge) and an annual percentage (APR). The Initial TIL Disclosure is due within three business days after receiving a completed application; the Final TIL Disclosure is due no later than the seventh business day before settlement. The HUD-1 Settlement Statement is due at closing, but may be requested by the consumer one day prior to settlement. The HUD-1A is used for refinance transactions. This disclosure conveys to the borrower the final costs related to the mortgage loan transaction. The HUD-1 lists fees and charges related to the loan, including buyer's debits and credits, amounts due from the borrower, the sales price, settlement charges, yield spread premiums, and more.

Transaction Detail

The Transaction Detail area of Section L1 collects additional details if a transaction is for renovation, construction, or a contract for deed agreement. Contract for Deed: a contract for deed is also known as a "land contract" or an "installment land contract." The homebuyer takes possession of the real estate and makes monthly payments to the seller, who holds the title to the property until the borrower has completed payment of the purchase price. The advantages of a contract for deed is that: It provides a financing option for consumers who are not eligible for mortgage credit It does not include closing costs, and The time to complete a transaction is minimal, since it does not require underwriting There are also significant risks involved in these arrangements. Sellers can demand immediate repayment of the debt when a borrower defaults, and if payment is not made, the seller can repossess the property without going through foreclosure proceedings. Another downside is that unethical sellers may use the property (to which they still hold title) as a security for their own loans. Due to the risks associated with contracts for deed, some states have adopted laws to protect consumers when they enter these transactions.

Income Borrower income is an important consideration for almost all loan types.

The amount of income the borrower makes in a month is analyzed against the total amount of debt he/she currently has as well as the prospective mortgage payment. This is called the debt ratio. Conventional/ conforming loans and nonconventional government loans have different standards as to what constitutes an acceptable ratio. Fannie Mae, Freddie Mac, and lenders establish guidelines for acceptable debt-to- income ratios in order to control the degree of risk associated with lending transactions. When the Qualified Mortgage Rule was introduced, among its underwriting requirements was a 43% debt-to-income ratio limit. Many lenders are motivated to offer qualified mortgages, as they would benefit from the safe harbors of compliance with ability-to-repay requirements. However, the 43% debt-to-income (DTI) ratio proved more of a barrier to borrowing than anticipated, as it locked many perfectly qualified borrowers out of obtaining a QM simply because of higher DTI ratio. In response, the CFPB redeveloped its definition of a general QM, and beginning October 1, 2022, there is no longer a hard cap on debt-to-income ratios. Instead, borrowers must be evaluated on a fuller picture of creditworthiness and using an APR threshold that adjusts in relation to loan amounts. This is anticipated to be a much more holistic view of borrower qualifications that will make more loans available to more people.

Using the Appraisal to Calculate the LTV Ratio

The amount of mortgage insurance that the borrower must purchase depends on the LTV; a higher LTV will require more insurance. The LTV for FHA loans and VA loans is higher than the LTV for conventional mortgages. The LTV for FHA loans can be as high as 96.5%, although the FHA published a notice in February 2013 soliciting comments on its proposal to limit the LTV for loans in excess of $625,500 to 95%. The LTV for some VA loans is 100%. Two additional ratios that compare the loan amount to the value of the property are the combined loan-to-value ratio and the high loan-to-value ratio.

In Section 1e,

The consumer is prompted to list income from other sources, if they receive any. This might be alimony, child support, disability income, capital gains, public assistance, income from a trust, interest on investments, pension, or other forms of income. Keep in mind, ATR Rule requirements outline what income can be relied on when determining the borrower's ability to repay and how they need to document it. As with the prior sections in this area of the URLA, Section 1e is dynamic; if the consumer does not receive any income from any of these sources, they can check "Does not apply."

The Underwriting Review of the Appraisal

The appraisal report is used to determine the value of the property being mortgaged and to identify deficiencies. The underwriter looks to confirm that the names, address, and property description are accurate. The loan originator should check this information before submitting the loan application. Errors caught upfront will eliminate problems during underwriting. The underwriter will also compare the location of the subject property with the location of the comparable properties (comps) used. A review appraisal by another appraiser may also be required to confirm that the first valuation is accurate. An underwriter will look at the floor plan (footprint) to check for functional obsolescence of the property. Photos will also be carefully examined. The underwriter is looking for any visible signs of health and safety hazards or damage to or near property that may affect the lender's collateral. The effective age will be reviewed. The last thing that a lender wants is collateral with a remaining economic life less than the term of the loan. The underwriter will also verify that a licensed appraiser has completed the appraisal and that it is correctly signed and dated by the appraiser.

Adjustments to Comparable Sales

The appraiser's analysis must take into consideration all factors that have an impact on value, recognizing that a well-informed buyer will not pay more for this property than the price he/she would pay for a similar property of equal desirability and utility. To accomplish this, the appraiser must analyze all closed and settled sales, contract sales, and current listings of properties that are the most comparable to the subject property. Because the appraiser's estimate of market value is no better than the reliability of the comparable data that is utilized, the appraiser must exercise diligence to ensure that the comparable sales data is reliable. The appraiser must report each comparable sale on the appropriate appraisal report form and must report a minimum of three comparable sales as part of the sales comparison approach. Each comparable sale that is utilized must be analyzed for differences and similarities between it and the property being appraised. The appraiser must make appropriate adjustments for location, terms, and conditions of the sale, date of sale, and physical characteristics.

Evaluating Applicants Using the Back End Ratio

The back end ratio, which is also known as the total debt ratio, compares the total monthly obligations to gross monthly income. Lenders calculate total monthly obligations by adding monthly housing expenses and all recurring debt such as car payments, credit card payments, child support, and student loans. Lenders who make conventional loans that conform to Fannie Mae and Freddie Mac guidelines have traditionally used a maximum back end ratio of 36%. That limitation is now only used for loans that are manually underwritten, with flexibility for a ratio of up to 45% if the borrower has compensating factors (i.e., credit score, reserves); otherwise, the Fannie Mae Selling Guide recommends a maximum ratio of 50%. The back end ratios for FHA loans and VA loans are less difficult to meet. Applicants for FHA loans must meet a back end ratio of 43%. The back end ratio for VA loans is 41%. Some lenders of nonconforming loans have allowed the back end ratio to be as high as 55%. Under the current QM Rule, a mortgage cannot be a qualified mortgage if the consumer's debt-to-income ratio exceeds 43% (12 C.F.R. §1026.43(e)(2)(vi)). The specific information required for the calculation of debt-to-income ratios for qualified mortgages is found in "Appendix Q to Part 1026 - Standards for Determining Monthly Debt and Income." Use of this Appendix is mandated by a provision in the QM Rule which states that in making a qualified mortgage, creditors must verify "The consumer's current debt obligations, alimony, and child support in accordance with appendix Q...." (12 C.F.R. §1026.43(e)(2)(v)(B)). The standards set forth in Appendix Q are based on FHA standards, which are outlined in the HUD Handbook that is used to verify monthly debt and income when underwriting FHA loans.

Assets - Cash to Close the Transaction

The cash investment in the property must equal the difference between the amount of the mortgage and the total cost to acquire the property. All funds for the applicant's investment must be verified and documented. If the applicant has placed an earnest money deposit, the underwriter may ask to see a receipt from the escrow company holding the funds. This is to verify that the monies are in escrow and whether they have already been removed from any bank statements that are being submitted as evidence of funds available to close the transaction. During the underwriter's examination, an applicant's saving history and use of funds will also be reviewed. The underwriter will look for insufficient funds, use of credit lines, undisclosed loans, large deposits, and debits that may suggest undisclosed debts. These areas need to be addressed by the applicant and originator in the loan file. If funds are proceeds from the sale of the loan applicant's current home, the underwriter may ask to see evidence in the form of a closing statement. If the property has not sold at the time of underwriting, loan approval may be conditioned upon verifying that the applicant has actually received the proceeds.

Qualifying Ratios

The evaluation of an applicant's ability to qualify for a loan involves the consideration of his/her income, credit history, credit scores, assets, and liabilities. Lenders require documentation and verification in order to verify that a loan applicant has accurately represented his/her qualifications. After this information is assembled, the lender applies mortgage industry formulas, such as debt-to-income ratios, to determine the size of the loan for which a loan applicant may qualify. Other numerical assessments, such as credit scores, help lenders to determine whether the loan applicant is likely to repay the loan in accordance with the terms in the lending agreement, and this determination directly impacts the interest rate charged on the loan.

Income Calculations

The first calculations an originator typically makes during the loan interview regard income. Most applicants are paid on either an hourly basis or a salary. The salary might be given on an annual, monthly, or bi-weekly basis. Applicants who are self-employed or commissioned sales people require special considerations. This discussion will follow standard conforming guidelines in the consideration of income. A pay stub will provide most of the needed information. However, the originator will need to ask questions about the frequency of any overtime pay, how the employer handles vacation time, and when the potential buyer last received a raise. Once these questions are answered, the rest is just basic math!

How Is a Credit Report Evaluated?

The first step of an evaluation is to carefully check all the identifying information. Multiple name spellings, addresses, or Social Security Numbers suggest errors in the report or possible identity theft. Loan originators should alert loan applicants of these types of discrepancies. After reviewing the report itself, loan originators should compare it to information provided by the loan applicant in the loan application and discuss any discrepancies with the applicant. If the report includes liens, debts, or judgments that the loan applicant believes to be paid off, the loan originator may need to solicit the help of a title agent and/or a court clerk to resolve inaccuracies. If a lender decides not to make a loan based on information found in a consumer report, the Fair Credit Reporting Act requires the lender to advise the loan applicant that: The CRA did not make the decision to deny the loan application The consumer has a right to a free copy of his/her credit report The consumer may contact the CRA to dispute the accuracy and completeness of the report

Bi-Weekly Salary To compute a bi-weekly salary, the only information required is the applicant's salary and how the applicant's vacation time is treated. If the applicant receives a paid vacation (as most do), the calculation is simple. Remember that there are 26 bi-weekly pay periods in a year.

The formula is as follows: {bi-weekly salary} x 26 = {annual income} {annual income} ÷ 12 = {monthly income} If the applicant does not receive a paid vacation, determine the typical amount of days that he or she takes off each year and subtract that income from the annual income before calculating the monthly income. There is a difference between bi-weekly payments of salary and semi-monthly payments. While a bi-weekly payroll has 26 pay periods, one that is semi-monthly has 24 pay periods. Therefore, computations of income will differ for loan applicants who are paid on a bi-weekly payroll and those that are paid semi-monthly.

Debt-to-Income (DTI) Ratios

The front end ratio (or housing ratio) is calculated by adding all monthly housing-related expenses and dividing them by the gross monthly income. Expenses that are added include the proposed PITI payment, subordinate financing, housing association dues, and any other fixed housing expense. Utilities and maintenance costs are not included. This basic calculation is: {Housing Expense} ÷ {Income} = {Front End Ratio} However, experience has shown that the front end ratio is not the most important ratio. The back end ratio, or total debt ratio, is far more predictive of future default, because it includes ongoing financial obligations in addition to those represented by the mortgage loan. It is calculated by adding the payments for all long-term debts, which are generally defined as those that will take more than ten months to repay using the standard or minimum payment. That calculation is: {Total Monthly Debts} ÷ {Income} = {Back End Ratio}

Evaluating Applicants Using the Front End Ratio

The front end ratio, which is also known as the housing ratio, is a calculation that allows lenders to compare the monthly housing expense that a loan applicant will assume with a new mortgage to his/her income. This may include flood insurance, homeowners' dues, condo assessments, or PUD assessments. The lender calculates the ratio by dividing the monthly housing expense by gross monthly income. In order to accurately calculate the monthly housing expense, the lender adds the following expenses, which are collectively referred to as PITI: Principal, Interest, Taxes, and Insurance. For conventional mortgage loans that conform to Fannie Mae and Freddie Mac guidelines, the maximum front end ratio has traditionally been 28%. Front end ratios for FHA loans and VA loans are less difficult to meet. Applicants for FHA loans must meet a front end ratio of 31%. Lenders who make VA loans look primarily at the back end ratio.

Section 6: Acknowledgments and Agreements Section 6 concerns the legal obligations that the consumer takes on when they sign the application. In basic terms, there are six acknowledgments/agreements that the consumer makes when they sign:

The information provided on the application is true, accurate, and complete as of the date of signing, and the consumer agrees to provide updated/supplemental information if anything changes before closing. In this section, the consumer is also reminded of their civil and criminal liability if they made any intentional or negligent misrepresentations of information in the application. The loan will be secured by a mortgage or deed of trust, which gives the lender a security interest in the property described in the application Any appraisal or value of the property obtained by the lender is for use by the lender and other loan participants, and no representation has been made about the property, its condition, or its value The lender may keep paper or electronic records regardless of whether the loan is approved, and if the application was completed electronically, the consumer consents to the use of electronic records and signatures The lender may report information about the consumer's account to credit reporting bureaus, and that late or missed payments and other defaults will be reflected in a credit report and may impact the consumer's credit score. In this section, the consumer also learns they can contact a HUD-approved housing counseling agency if they have trouble making payments. The lender and other parties are authorized to obtain, use, and share with each other, to the extent needed to process and underwrite the loan, verify data, and fulfill other loan-related obligations and processes, the following: The loan application and related information and documents A consumer credit report, and The consumer's tax return information

Electronic Closings

The mortgage industry has increasingly shifted to online interactions and electronic closings. The implementation of digital methods for part or all of a mortgage loan transaction depended on a number of factors, including consumer choice, internal standards, and jurisdiction. Today, depending on lender and location, a borrower might see their loan close in the traditional way, in person at a title or real estate office; elsewhere, though, a borrower might take part in a partially or entirely electronic closing process, using advanced loan origination systems, videoconferencing technology, and specially certified closing agents. To conduct any element of a loan process electronically, the borrower must first give their consent to sign, receive documents, and store records using electronic means. This active consent requirement is imposed by the federal E-Sign Act. Today, most consumers are prompted to give this consent upfront when they begin their loan applications online, though some lenders encourage repeated consent sporadically throughout the process. Also vital is the presence of state law permitting some or all parts of closing to occur electronically; at this time, not all states have passed legislation allowing for electronic signing and notarization of closing documents, and there is not yet federal legislation on the books. Some states will allow, at minimum, a hybrid closing process.

Title Insurance Fees

The person responsible for paying the costs of title services and insurance in a mortgage loan transaction varies by state. In some states, the borrower will pay the costs for both the lender's title insurance and owner's title insurance. In other states, the seller will pay title insurance fees, or responsibility for title insurance costs may be negotiated between the borrower and the seller.

Providing Truthful Information The gravity of failing to provide truthful information on a loan application is emphasized in Section 6 of the URLA, where borrowers are prompted to acknowledge their understanding that "Any intentional or negligent misrepresentation of information may result in the imposition of civil liability on me...and/or criminal penalties on me...." Included in this warning is a reference to 18 U.S.C. §1001 of the United States Code, also known as the Federal False Statements Act.

The mortgage loan originator is also required to sign and essentially verify that all of the questions were asked, answered, and recorded properly. By signing, the loan originator indicates responsibility for his or her actions in completing the application. When asking loan applicants to sign this acknowledgment, loan originators should explain that under Title 18, Section 1001 of the United States Code, it is a crime to knowingly and willfully make any verbal or written statement to the government that is materially false, fictitious, or fraudulent. A loan application constitutes a statement to the government because it is used to secure a "federally related mortgage." A false statement on a loan application is "material" if it is intended to influence the recipient of the application to grant credit for the applicant. A violation of Title 18, Section 1001 may lead to a five-year jail term. In conjunction with the loan application, some lenders may provide borrowers with the FBI Mortgage Fraud Warning Notice, which includes the following language: Mortgage fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30 years in federal prison or $1,000,000, or both. It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution. Use of the FBI Warning Notice is not mandatory and is completely voluntary. It is up to the lender as to whether the form is used.

The Ability to Repay Rule and Loan Suitability

The most critical component of long-term loan suitability is matching a borrower with a loan that he or she can repay. Today's laws and regulations, including the ATR Rule, make it illegal to approve a consumer for a loan based solely on his or her ability to make the initial payments calculated at the introductory rate. The ATR Rule prohibits a creditor from entering a consumer credit transaction that is secured by a dwelling "...unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms" (12 C.F.R. §1026.43(c)(1)). The Rule also provides that a creditor's "reasonable and good faith determination" must be based on verified and documented information (12 C.F.R. §1026.43(c)(2)).

Terms of Loan and Mortgage Lien Type

The note rate for a loan is the interest rate that a borrower agrees to pay when signing a promissory note. If an applicant is applying for an ARM, the note rate entered on the URLA should be the initial introductory rate. "Loan Term" refers to the loan's amortization period, expressed in months - i.e., a 15-year loan would have a term of 180 months; a 30-year loan would have a term of 360 months, etc. For a loan that ends in a balloon payment, the amortization term entered must be that on which the payment is based - i.e., the five- or seven-year term (on average) that elapses before the balloon payment comes due. Under "Mortgage Lien Type," the application asks whether the loan sought would be a first lien or a subordinate lien. Most lenders require mortgage loans to be the first lien on a property, guaranteeing they will be repaid if the borrower goes into foreclosure. Second and subsequent mortgages are classed as subordinate liens.

Periodic Interest

The periodic interest rate, also referred to as the nominal rate, is the amount of interest calculated each payment period (like monthly) when the payment periods occur more frequently than the quoted rate. Since mortgage payments are calculated monthly but based on an annual rate, this is the method used to calculate the interest collected on mortgage payments. The annual rate must first be converted to a "periodic rate" in order to calculate the interest due for that month. The formula to calculate the "periodic rate" is as follows: {Annual Rate} ÷ {Number of Payments in a Year} = {Periodic Rate} For the purpose of these calculations, when multiplying percentages, the percentages will be converted to decimals. This is done to demonstrate how to complete these calculations by hand, using mental math, or using a basic-function calculator. Remember that to convert a percentage in this way, the decimal is moved two positions to the left. For instance, 20% (i.e., 20.0%) converted to a decimal would be .20. Keep this in mind while working through the following examples. Example: a mortgage has an annual interest rate of 6% and is due monthly. What would the periodic rate be? {.06} ÷ {12} = {.005}, or .5%} Once the periodic rate is established, the interest compounded for that month is determined by multiplying the periodic rate by the balance of the loan. {Periodic Rate} x {Loan Balance} = {Periodic Interest} Example: what is the periodic interest due on a mortgage loan balance of $106,000 with a 30-year rate of 5.325%? First, find the periodic rate, as shown below: {.05325} ÷ {12} = {.0044375} Then, multiply the periodic rate by the current loan balance, as shown below: {.0044375} x {106,000} = {470.375}, or $470.38 Credit card payments also use the "periodic interest" formula; however, the interest is often compounded "daily" and based on the APR, so the formula would look like this: {APR} ÷ {365} = {Periodic Rate} Example: what is the interest on a credit card compounded daily with an APR of 22% and a balance of $1,100? First, find the daily periodic interest, as shown below: {.22} ÷ {365} = {.0006027} Next, multiply the periodic rate by the current balance, as shown below: {.0006027} x {1,100} = {.66297}, or 66 cents

Section L2: Title Information

The person who holds title to real property has the right to take possession and make use of that property. The title to real property is documented in a deed, which identifies the individual or individuals who hold title and the manner in which it is held. Loan originators should anticipate questions from consumers about title information. Consumers are not likely to know the differences between a deed, a mortgage (or a deed of trust), and a promissory note, or to know that these documents will not necessarily include the same signatures. While completing Section L2 of the URLA, loan originators will have an opportunity to explain to loan applicants that: Mortgages and deeds of trust are security instruments that pledge a borrower's home as collateral for a loan A promissory note acknowledges a borrower's legal obligation to repay mortgage debt A deed indicates who holds the legal title to a home and the right of ownership

Informational Disclosures to Educate the Consumer

The reason for requiring informational disclosures is that the information contained in the disclosures can educate consumers, and educated consumers may make better decisions when choosing between different mortgage products. Your Home Loan Toolkit: A Step-by-Step Guide: this disclosure is required by RESPA and is due three business days after the completion of a loan application for a purchase transaction. This booklet reviews the settlement process and outlines the rights and protections that the law creates for borrowers (12 C.F.R. §1024.6(a)). Consumer Handbook on Adjustable-Rate Mortgages (CHARM) Booklet: required by TILA within three business days of application for all ARMs, this booklet alerts consumers to the risks of accepting an ARM (12 C.F.R. §1026.19(b)(1)). When Your Home Is on the Line: What You Should Know About Home Equity Lines of Credit: this booklet is required by TILA for loan applicants who are considering home equity loans, and it is due at the time an application is provided to a potential borrower (12 C.F.R. §1026.40(b)). List of homeownership counseling organizations: RESPA requires that loan applicants receive a clear, conspicuous list of homeownership counseling organizations no later than three business days after a completed application is received. The organizations must be local to the consumer and provide relevant counseling services. The list may not be more than 30 days old when it is provided.

Electronic Notarization

There are two basic forms of electronic notarization (e-notarization): In-person electronic notarization (IPEN): an electronic notarization conducted in person Remote online notarization (RON): an electronic notarization conducted remotely online using audiovisual technology Based on jurisdiction, applicable laws and regulations may allow one, both, or neither of these methods to be used. Depending on state law, a person who already holds a notarial commission might need to undergo extra training and certification in order to legally offer electronic notarization services. They typically need to, at minimum, obtain a digital version of their notarial seal to add to digital documents.

Closing Agent

The settlement agent may be responsible for providing the Closing Disclosure to a consumer on the creditor's behalf. The settlement agent must also be identified on the Disclosure (12 C.F.R. §1026.19(f)(1)(v)). Verifying the identity of parties to a transaction has become an issue of increasing concern since the number of cases of mortgage fraud has reached epidemic proportions. Parties have the right to give power of attorney to another individual and may not be present at closing, and all documents and disclosures prepared for closing may be signed before a notary and returned to the loan originator. If loan originators never meet the borrower and there are other indicators that the lending transaction is suspicious, it is advisable for the loan originator to alert the office manager or underwriter and to contact an attorney to determine what legal obligations he/she may have to report suspected fraud to banking regulators or to other enforcement authorities. Reports go to the Financial Crimes Enforcement Network (FinCEN), which will involve the FBI if appropriate.

Income Analysis

The underwriter looks not only at the length of time that the prospective borrower has been working, but also how long he or she has been with the same employer. The originator should document the reason for any job gaps or lack in length of time on the job. The underwriter will review W-2s and 1040s to evaluate income consistency. This is particularly important when calculating commission and self-employed applicants. If the applicant is self-employed or commissioned, the underwriter will be looking at the 1040s for the non-reimbursed employee expenses or Schedule C and the adjusted gross income. Any substantial increase or decrease in income must be addressed. The underwriter may even ask for current profit and loss statements. If the income shows considerably greater or lower than what is supported by the previous year's tax returns, the underwriter will ask for an explanation of the increase or decrease. Also, if the applicant must pay quarterly taxes, then the originator must include proof that estimated taxes were paid as required.

The Subject Property Collateral

The underwriter must ensure that the property is eligible and meets lender guidelines for collateral. To do this, the underwriter relies on the appraisal report, preliminary title report, and any inspections requested by the prospective borrower or required by the lender.

Flood Zone Verification

The underwriter will also verify the flood zone. This is necessary to ensure that if the property is in a flood prone area, that the proper flood insurance is in place to protect the lender's collateral and the prospective borrower's purchase.

Assets - Cash to Close the Transaction

There are two broad categories of assets - liquid and non-liquid. "Liquid" assets are those that are readily accessible. Liquid assets include: Cash Checking and savings accounts Stocks and bonds, and the loan applicant can state how much he or she believes they are worth. If the value of these assets becomes an important factor in securing the loan, the lender may ask for an investment statement. Cash value of life insurance policies Deposit or "earnest money" held in escrow toward the purchase of the home Non-liquid assets can include: Real estate Retirement accounts (such as IRAs, 401Ks, etc.) Net worth of businesses Automobiles These assets are regarded as "non-liquid" because they are not readily converted into cash.

Income Analysis

The underwriter will calculate other non-taxable income and confirm that the correct adjustments have been used. One area that originators must pay attention to is the term "grossing up." The originator should be careful that the correct grossing up percentages are used. The underwriter will look for documentation to support income. This includes, but is not limited to, W-2s, paycheck stubs, 1040s, retirement statements, Social Security awards benefit letters, divorce decrees, and settlements. The underwriter will also review the 1040s for other income or expenses not documented in the loan file. This may include rental income (Schedule E), self-employment tax and income (Schedule C), farming expenses and income (Schedule F), and corporate or partnership returns. If an originator reviews the tax returns before submission, he or she should address any items that may become concerns for the underwriter. For rent received for properties owned by the prospective borrower, the originator must include documentation to support the rental amount. Documentation may include a current lease or rental agreement. As a standard rule, the underwriter will use 75% of rental income stated on the rental or lease agreement unless otherwise documented by 1040s. If 1040s are provided and the underwriter verifies less than 75% adjusted rental income, then the lower amount must be used for qualification purposes. If there is a negative rental income, the negative income will be considered a liability and treated as a debt.

Insurance: Hazard, Flood, Mortgage

There are a number of different types of insurance which are required in conjunction with the origination of a mortgage loan. Hazard, flood, mortgage and title insurance are four common types. The beneficiary of the insurance depends on the purpose of the insurance.

URAR/1004

There are a number of forms used by appraisers, and it is important to be able to identify them. The lender's underwriting guidelines for the specific property type is the driving force behind what forms must be included in the appraisal order. Credit and valuation models will also affect what is required of the appraiser. The Uniform Residential Appraisal Report (URAR), or 1004, is the most common and comprehensive appraisal form. It is generally used on all single family homes and may also be used for row homes and townhouses if the property is situated on a fee simple lot. Other commonly-used appraisal forms include: 1004d: used to update appraisals and report certifications of completion 1007: used for single-family properties which are intended as investment properties 1025: used for two- to four-unit properties which are intended as investment properties 1073: used for condominiums, PUDs, and row homes/townhouses situated on common ground It should be noted that additional or alternate documentation may be required in certain cases for FHA and VA loans. A property inspection waiver is occasionally permitted instead of a full appraisal for certain refinances. The waiver would be granted for a borrower who is refinancing his or her property within a specified time after a previous loan transaction. Under these circumstances, a conventional lender may permit an abbreviated or "drive by" appraisal if it is comfortable with existing data on the subject property.

Intermediary States

There are also intermediary theory states. In these states, the borrower holds title to property but expressly agrees that the lender can take back title when the borrower defaults. Hawaii, Maryland, New Hampshire, Oklahoma, and Rhode Island are some examples of intermediary states.

Common Features of ARMs

There are many types of ARMs, but all have common features. These include: Periodic adjustments or changes in the interest rate after the initial rate expires An adjustment period that determines how often the interest rate will change The use of an index and margin to calculate the new interest rate The use of rate adjustment caps The adjustment period for an ARM may be defined as the period between one rate change and the next. Typical adjustment periods range between six months and five years. The adjustment period of an ARM may be used to distinguish different ARM products. For example, a loan with an adjustment period of one year may be referred to as a "one-year ARM," and one with an adjustment period of five years may be referred to as a "five-year ARM."

Types of ARMs

There are numerous types of ARMs. True ARMs have rates that adjust every year of the loan's term. Hybrid ARMs have an initial period during which the interest rate (and payment) is fixed and not subject to adjustment. Once the initial introductory period is over, the loan rate and payment adjust annually. These popular loan products are usually characterized or described through a fraction or ratio. For example, hybrid ARMs include a 3/1 ARM, 5/1 ARM, and even 7/1 and 10/1 ARMs. With a hybrid ARM, the first number indicates the period of time during which the rate is not subject to adjustment. The second number refers to the time period, after expiration of the introductory rate, in which the rate is permitted to adjust. For example, a 3/1 ARM would have an initial rate not subject to adjustment for the first three years, after which the rate would adjust on an annual basis for the remainder of the loan term.

Mortgage Insurance

There are two different types of mortgage insurance: private mortgage insurance and FHA's mortgage insurance premium policy. Private mortgage insurance (PMI): generally required by lenders on conventional loans when the loan-to-value (LTV) is higher than 80%. The intention of PMI is to provide some security to the lender in the event of default, the theory being that higher LTV poses a greater risk of default. Borrowers also qualify for a loan with a lower down payment when they are willing to pay PMI. Per federal legislation known as the Homeowners Protection Act (HPA), borrowers may request discontinuation of PMI when they reach 20% equity position. HPA requires automatic discontinuation once the loan has reached 78% LTV. When the borrower requests discontinuation at 80% LTV, it is at the lender's discretion to grant the request. The law allows lenders to consider the payment history of the borrower in determining whether to discontinue PMI at the higher LTV. A good payment history includes no payments that were more than 30 days late in the 12-month period immediately preceding the request, and no payments more than 60 days late in the period beginning 24 months prior to the request.

Loan-to-Value (LTV, CLTV, Total LTV)

There are two loan-to-value (LTV) calculations. The first describes the relationship between the first, or primary, mortgage and the property's value. This is the LTV ratio. The second describes the relationship between all liens and encumbrances and the property value. This is called the combined loan-to-value ratio, or CLTV ratio. The LTV formula is as follows: {Loan Amount} ÷ {Lesser of the Property Value or Purchase Price} = {LTV} The CLTV formula is as follows: {1st Loan Balance} + {2nd Loan Balance} + {All Other Lien Balances} = {Total Encumbrance} {Total Encumbrance} ÷ {Lesser of the Property Value or Purchase Price} = {CLTV} A property with only one mortgage or lien will only have an LTV. The CLTV applies only when subordinate financing is, or will be, in place.

Real Property vs. Personal Property

There is a major difference between real property and personal property. Real property is comprised of land and anything that is affixed to the land. Personal property is anything that is transitory and can be moved. Title to real property is maintained at local county courthouses and recorders' offices. These courthouses have collected information on every property in the United States since the early 1800s. As previously discussed, there may be a question as to whether a manufactured (mobile) home is considered real property or personal property. If the mobile home is affixed to the land in a permanent fashion, it may be considered an improvement and would be considered real property. It is important to note that the mobile home must also be properly converted from personal property to real property for title, tax, and insurance purposes. If the mobile home is not affixed to the land and has not been properly converted from personal to real property with the appropriate documentation, it is considered to be personal property.

Ability to Repay The underwriting requirements for non-qualified mortgages, made in compliance with the ATR Rule, and qualified mortgages, made in compliance with the QM Rule, have some similarities.

These include requirements to consider the loan applicant's: Current and reasonably-expected income or assets, other than the value of the property securing the loan Employment Credit history Current debt obligations, including alimony and child support Mortgage-related obligations for the loan sought Payments on any simultaneous loans that are or will be secured by the same dwelling

Uniform Residential Loan Application - Unmarried Addendum

This addendum is used when the potential borrower indicates that their marital status is "Unmarried" in Section 1. Information collected here is used when state law may affect property rights for unmarried individuals cohabitating in a residence - for example, those who are unmarried but in civil unions, domestic partnerships, or registered reciprocal beneficiary relationships. Some states may impose different requirements on ownership rights based on the type of relationship that exists between cohabitants, and it is important to understand this to ensure clear title. On this addendum, the applicant must indicate whether there is a person who is not their legal spouse but currently has property rights "similar to those of a legal spouse," and if so, the nature of that relationship in legal terms.

Cost Approach

This approach assumes that a potential purchaser would consider building a substitute residence that has the same utility and use as the subject property being appraised. The appraiser arrives at the indicated value of the property by estimating the reproduction cost of improvements, subtracting the amount of depreciation by all causes, and adding the estimated value of the site as if it were vacant. The appraiser estimates land value by analyzing comparable sized land sales.

Sales Comparison Approach

This approach is an analysis of recent sales that are the most comparable to the subject property. An appraiser must analyze a minimum of three comparable sales that were settled or closed within the last 12 months. An appraiser must comment on sales that are more than six months old.

Uniform Residential Loan Application - Additional Borrower

This document is a separate form that should be used in conjunction with the URLA if there is an additional borrower on a proposed transaction. This form is largely identical to the Borrower Information sections of the URLA concerning the primary borrower, asking the same details about personal information, employment and income (including self-employment and supplemental income), and more. Sections 2, 3, and 4 (Financial Information - Assets and Liabilities, Financial Information - Real Estate, and Loan and Property Information, respectively) are abbreviated; the co-borrower is expected to have given this information in combination with that of the primary borrower on the URLA. Instead of providing it all again, they simply add the name of the co-borrower as a reference point. The co-applicant must make the same declarations in Section 5, and signs an abbreviated acknowledgment/agreement statement for Section 6. Military service declarations (Section 7), demographic information (Section 8), and loan originator information (Section 9) are also collected. A blank version of this URLA can be viewed online. [1]

Example Monet is obtaining a 30-year, fixed-rate mortgage loan for $220,000, with an interest rate of 4%. Monet's closing date is set for July 27, and she must pay per diem interest for the remainder of the month. The per diem interest for Monet's loan is calculated based on a 365-day year (31 days per month). At closing, she pays $120.55 in per diem interest to cover interest for the end of July.

This scenario is helpful in understanding how per diem interest is calculated, using a 365-day year and a 31-day month. Monet must pay per diem interest for the remainder of the month of July - meaning July 27, 28, 29, 30, and 31. The total she must pay is determined by calculating the daily interest amount and multiplying that figure by the number of days for which interest must be paid.

Section 2: Financial Information - Assets and Liabilities

This space is also where the potential borrower would need to disclose bridge loan proceeds, if they have obtained or are going to obtain bridge financing for the transaction. The consumer should list the account type, the financial institution where the account is held, the account number, and its cash or market value. There is also a space for the total held in all listed accounts.

Example: Nathan is trying to purchase his first home, but he is in need of an additional $5,000 in order to satisfy the lender's down payment requirement. His sister offers to loan him the money if he will agree to pay her $140 per month for the next three years. Nathan reports this offer to his mortgage loan originator, but she tells him that he will have a higher debt-to-income ratio, and thus a higher interest rate, if he takes on this additional financial obligation. When Nathan shares this information with his sister, she offers to write a gift letter and work out the details for repayment later, after he has settled into the new home. When he next meets with his loan originator, Nathan produces the gift letter from his sister and bank statements showing the withdrawal from her account and deposit into his. The loan originator reminds Nathan of his ethical obligations to provide truthful information about his ability to qualify for the loan, but allows the transaction to proceed.

This transaction illustrates some of the difficult questions that arise when a loan applicant produces a gift letter, including those that relate to supporting documentation. Gift letters can place originators in the uncomfortable position of questioning the truthfulness of the loan applicant and, by extension, the donor. In Nathan's transaction, the mortgage loan originator relied on the overall strength of his application when deciding to accept the gift letter as one that was genuine. If Nathan were a less creditworthy borrower, the originator may have responded differently.

Understanding Title Documents

Throughout the United States, regional custom affects how various title documents are referred to in a transaction, which can make it difficult to know with certainty what document is being referred to from one place to another. What is known in one area as a "title abstract" might be a "title binder," "title report," "preliminary report," or "title commitment" elsewhere. While these terms are often treated interchangeably, it is important to remember that a title abstract and a title commitment are actually two fundamentally different documents. For the purposes of this course, the terms will be used separately and distinctly from one another: A title abstract gives a detailed report of the chain of title on a specific piece of property A title commitment outlines the terms for establishing title insurance coverage A title binder is an interim title insurance policy used for some transactions, offering temporary coverage; these are short-term policies (two years in duration, on average) and usually used for property flips or similar situations in which the buyer plans to resell before the interim coverage would expire

Hourly

To compute the income of an hourly worker, the following information must be known: the base hourly rate of pay, the number of hours worked in a typical week, the number of overtime hours received on average, and the number of weeks worked each year. The formula is as follows: {base rate} x {hours} = {weekly base income} {OT rate} x {OT hours} = {OT weekly income} {weekly base} + {OT income} = {weekly income} {weekly income} x {weeks worked} = {annual income} {annual income} ÷ 12 = {monthly income} Overtime income can only be used to qualify for a loan if the applicant can show a history of receiving overtime and the employer verifies that overtime is likely to continue. Two continuous years typically constitutes a history of overtime. Annual vacation days are included at the base rate.

Example

Tom is applying for a second mortgage loan for $60,000. He has a $200,000 mortgage loan on his home, which has an appraised value of $310,000. In order to determine Tom's CLTV, the lender completes the following calculation: {$200,000 + $60,000} / {$310,000} = 84% Because Tom's CLTV is more than 80%, the lender imposes a slightly higher interest rate on the second mortgage loan.

Borrower Use of Gift Funds

Verification of this information is also requested. For example, a lender may ask for a copy of the gift donor's bank statement, a withdrawal receipt, a deposit receipt, and a copy of the applicant's bank statement showing that the funds are in his or her account. If a lender is making a loan that will be sold to Fannie Mae, it is important to also be aware of the GSE's standards. Fannie Mae requires that the donor be a relative, fiancé, or domestic partner of the recipient. Gift funds from builders, developers, real estate agents, or any other party with an interest in the transaction are prohibited.

Example

Walter and Felicia inherited a significant sum of money several years ago from the death of a great aunt. The couple, looking to invest the inheritance, decided to begin renovating and flipping properties. Because they are both skilled in woodworking and home improvement, they typically complete renovations themselves, allowing for a speedy "flip" process. Their most recent flip involves a loan that qualifies as a higher-priced mortgage. They use the mortgage to purchase a small bungalow and complete a few renovations. 35 days later, the home is ready for sale. Walter and Felicia find a buyer for the house very quickly: their niece, Alice. Walter and Felicia purchased the home for $90,000, and are selling it for $100,000. Alice's mortgage loan originator explains that this scenario requires a second appraisal to be conducted on the property, because the sellers (Walter and Felicia) acquired the home fewer than 90 days prior to agreeing to resell it, and the new sale price is 10% more than their purchase price.

Special Appraisal Requirements for Higher-Priced Mortgage Loans

When Congress adopted the Dodd-Frank Act in 2010, it addressed appraisal abuses, which were particularly common with more expensive mortgage loans. Rulemaking by the CFPB has since established a category of loans known as higher-priced mortgage loans (HPMLs). It is important to remember that these products are not the same as the high-cost mortgages identified and protected by HOEPA. Higher-priced mortgage loans and high-cost mortgages have different thresholds, and they are regulated and restricted differently. It is very important not to confuse these two products, as their requirements vary. An HPML is defined as a closed-end loan transaction that is secured by a consumer's principal dwelling and has an APR that exceeds the average prime offer rate (APOR) by: 1.5 percentage points, for first-lien loan transactions 2.5 percentage points, for first-lien transactions for non-conforming loans 3.5 percentage points, for subordinate liens (12 C.F.R. §1026.35(a)(1)) When a creditor is engaged in transactions for HPMLs, the appraisal for the dwelling that will secure the loan must be: Conducted by an appraiser who is licensed or certified in the state in which the property securing the loan is located. The appraisal must be conducted in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP) and applicable requirements under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Include a physical visit to the interior of the property

Section L2: Title Information Many consumers also do not know the difference between fee simple and leasehold, or the manners in which title is held (sole ownership, life estate, etc.). Fee simple ownership is full, unconditional ownership of property, including the right to sell i t, leave it to heirs, or make changes. Most property in the U.S. is held in fee simple. Sometimes, property is instead held in leasehold, in which tenants purchase the home but not the land it is built on. The homeowner is considered a renter of the land, and they sign on to a long-term lease - often 40 years or more - in which they pay "ground rent." When the lease expires, the tenant must renegotiate the lease or vacate, or potentially buy the land, if available for purchase. Leasehold property usually comes in the form of condominiums and some townhomes, as well as commercial properties.

When a borrower does not intend to be the sole owner of a home, there are several different options for holding title to facilitate the passing of residential real estate to a surviving spouse or to other beneficiaries. These options include joint tenancy, tenancy in common, tenancy by the entirety, and a life estate. Joint Tenancy with Right of Survivorship: the most common manner in which partners and married couples hold the title to their homes. If one homeowner dies, the dwelling passes directly to the surviving partner or spouse. Holding title in this manner allows title transfer to take place without going through the legal process of probate.

Title Insurance

When a creditor is deciding whether to lend money to a consumer, it must be certain that there are no liens, judgments, or other mortgages on the property which could take a priority interest over its own. This determination is very important because lien priority will determine the order in which creditors are paid when a borrower defaults on a loan or faces bankruptcy. A clear title is also important to consumers and is particularly important in transactions for home purchases. Before securing mortgage debt with a home, a consumer needs to know that there are not any pre-existing liens, encumbrances, or title defects that may affect homeownership or personal liability. A title search can also verify whether the borrower is obtaining the title from the owner of record. Mortgage fraud is all too common and can involve false representations of homeownership in order to fraudulently secure loan funds. There are two main differences between title insurance and other types of insurance. First, title insurance protects against events that may have happened in the past, while other forms of insurance, such as homeowner's insurance, provide protection from future events. Second, with title insurance, there is only a one-time insurance premium paid at the loan closing, while other insurance types typically require ongoing payments of premiums. Title insurance is regulated by state agencies and the Department of Housing and Urban Development. Title insurance companies offer title insurance to lenders and to home purchasers. Lender's insurance protects lenders. Consumers are not required to have title insurance, but when purchasing a new home, consumers should consider its benefits. Title insurance for homeowners is known as "owner's insurance," and it may protect them against many potential liabilities, including mechanics liens (liens filed by contractors when homeowners fail to pay for materials or improvements), unreleased mortgages, zoning violations, tax liens, and other legal concerns related to prior ownership of the property.

Common Features of ARMs

When it is time for a lender to calculate an interest rate adjustment, it must add the index, which is an interest rate determined by the market, and the margin, which is a set number of percentage points that the lender selects to cover the cost of its services and to compensate it for the risk associated with the loan. Numerous indices are used to compute interest rate adjustments for ARMs, and they include, but are not limited to: The LIBOR (London Interbank Offered Rate)It is important to note that the LIBOR is being phased out of use, and will no longer be in use by 2022 The COFI (Cost of Funds Index) The COSI (Cost of Savings Index) The CMT (Constant Maturity Treasury Rate) The SOFR (Secured Overnight Financing Rate)This index, along with the CMT, is set to replace the LIBOR for many loans in the eyes of Fannie Mae and Freddie Mac Margins do vary between lenders and, since a higher margin will result in higher payments, borrowers are encouraged to look at the margin that a lender sets for a loan. Some lenders may use the borrower's credit rating to determine the margin for particular transactions. If a borrower has strong credit and the risk of default is low, the lender may use a lower margin. Higher margins allow lenders to cover the risk of transactions with borrowers who are less qualified.

Mortgage Type

When mortgage loan originators are employed by a lender that is authorized to offer government-insured and -guaranteed products as well as conventional loans, discussions regarding the type of mortgage loan that a consumer should apply for will include more options. The most common loan choices for consumers who are not servicemembers are FHA loans or conventional loans; consumers in rural areas may also consider USDA loans, though qualification standards are very specific.

Qualified Mortgage Monthly Payment Calculations

When originating qualified mortgages, creditors are required to: Calculate payments of principal and interest Take into account all mortgage-related obligations, defined to include property taxes, insurance premiums, and homeowners' association fees Evaluate income, assets, and debts based on verifiable documentation Determine an amount that will result in fully-amortizing payments that will pay off the loan balance by the end of the loan term Base payments on the maximum rate of interest that may apply during the first five years of the loan term (12 C.F.R. §1026.43(e)(2)(iv)) The greatest difference between the rules for payment calculations for qualified and non-qualified mortgages is that the QM Rule allows for lenders to limit repayment analysis to the first five years of the loan term. When a transaction involves a non-qualified mortgage, the ATR Rule requires creditors to consider repayment ability based on rate changes that may occur at any time over the entire loan term.

Required Documents When Using Property as Collateral

When real estate is used as collateral for a loan, documents are needed to verify that the value of the property is sufficient to protect a mortgage lender's investment and ensure that the borrower does not owe more on the property than it is worth. In purchase transactions, it is also important to be certain that the buyer will possess the property with a clear title. In both purchase and refinance transactions, it is critical for the lender to search the title of the property used as collateral in order to identify liens and encumbrances. An appraisal is required for every transaction involving a home purchase. However, for some refinances, new appraisals are not required. When refinancing a conventional loan, the need to have an appraisal may depend on whether the borrower will get cash back from the refinance. Transactions for nonconventional loans offer products that do not require a new appraisal. For example, the FHA's streamline refinance program does not require an updated appraisal. VA refinances, known as interest rate reduction refinance loans (IRRRLs), also do not require a new appraisal. Mortgage lenders will not refinance a loan without a new title search. This search determines whether other liens on the property exist and may have priority over a new mortgage. After any issues related to the property's valuation and title are addressed and loan terms are negotiated, the transaction can proceed to closing.

Borrower Use of Gift Funds Some consumers, especially those making first home purchases, are fortunate enough to receive gift funds to help defray mortgage costs. Gift money helps loan applicants qualify for loans by enabling them to meet down payment expenses and closing costs. For this reason, consumers who are worried about their loan eligibility are sometimes tempted to produce fake gift letters; others may misrepresent a personal loan as a gift. Both of these misrepresentations constitute mortgage fraud.

Whenever the issue of gift funds arises, loan originators should be quick to explain that there are verification requirements in play. These requirements must be met in order for the cash to be considered for qualification purposes. Lenders will ask loan applicants with gift funds to provide a letter that includes: A description of the relationship between the loan applicant and the donor A statement that the gift funds must be used for a home purchase The address of the home that the applicant will purchase An assurance that the donor does not expect repayment of the funds Identification of the source of the funds The signature of the donor

Employment Gaps

While a consistent record of employment is obviously desirable for a consumer to show a mortgage lender, a gap in employment does not mean that he or she cannot qualify to obtain a loan. Where the consumer's application does show an absence of employment for an extended period of time that presents concern, he or she may be asked to provide a letter of explanation. This letter should document the reason(s) for the gap in employment, allowing consumers an opportunity to explain their circumstances. Exact requirements for a letter of explanation, including the duration of a gap that would cause one to be requested, will vary based on lender standards and the type of loan sought.

The Sales Contract

While reviewing the sales contract, the underwriter will look for credits or personal property included in the sales contract that will affect the value of the collateral. All personal property should be excluded from the sales contract or notated that it is to be sold with no value. However, if the item being sold with property is such that value must be considered, it will affect the value and the loan amount.

Explanation of Fees and Documents

While the closing agent's responsibilities include the duty to provide a comprehensive explanation of closing documents and related fees, the borrower should not be hearing these explanations for the first time at settlement. The services of a mortgage broker or loan originator should include full disclosure and discussion of all fees and obligations with the borrower. One of the goals of the Loan Estimate is to facilitate a loan applicant's understanding of the costs of a lending transactions. Loan originators should remind loan applicants that the disclosure is for their benefit and encourage them to read it and to ask for an explanation of fees and costs that they do not understand. A number of states have amended their licensing laws to expressly provide that mortgage brokers have fiduciary obligations or agency relationships with borrowers. In these states, a mortgage broker is responsible for ensuring that its individual loan originators/employees are carrying out these fiduciary duties, which include acting in the borrower's best interests, following the borrower's lawful instructions, disclosing all material facts to the borrower, and using reasonable care in the performance of duties. Making certain that borrowers understand the fees they are paying and the documents they are signing is one way in which a mortgage broker and its loan originators can make certain that they are disclosing material facts to the borrower and using reasonable care in performing the duties associated with loan origination.

Section 9: Loan Originator Information

While this is included in the Borrower Information portion of the URLA, Section 9 is actually intended to be completed by the mortgage loan originator attached to the transaction. Here, the loan originator gives the name of their organization and its address, as well as the organization's NMLS unique identifier and state license ID. This is followed by the mortgage loan originator's individual name, unique identifier, and state license ID, as well as their signature and the date.

Credit Report

Will the prospective borrower repay the debt? In order to weigh the risk of default, creditors also look at potential borrowers' credit history: how much they owe, how often they borrow, whether they pay bills on time, and whether they live within their means. Creditors also look for signs of borrowers' stability, and these include how long they have lived at their present address, whether they rent or own their home, and the length of their present employment. Fair Isaac and Company (FICO) generates objective credit scores for American consumers based on their credit capacity, borrowing and repayment habits, and related circumstances. FICO scores are relied on for countless decisions, including eligibility for mortgage credit.

Section 5: Declarations In this section, the consumer must answer specific questions about the property they wish to buy or refinance, the funding they are using, and their financial history. In Section 5a, the potential borrower must answer the following questions, to which they can respond by selecting YES or NO and, in some cases, adding additional detail:

Will you occupy the property as your primary residence?If yes, the consumer must answer several additional questions, including whether they have owned a residence in the preceding three years and what their ownership interest was (single, owned jointly, etc.) If this is a purchase transaction, do you have a family relationship or business affiliation with the seller of the property? Are you borrowing any money for this real estate transaction or obtaining any money from another party, such as the seller or realtor, that you have not disclosed on this loan application? If YES, what is the amount of this money? Have you or will you be applying for a mortgage loan on another property on or before closing this transaction that is not disclosed on this loan application? Have you or will you be applying for any new credit on or before closing this loan that is not disclosed on this application? Will this property be subject to a lien that could take priority over the first mortgage lien, such as a clean energy lien paid through your property taxes?

Example

Zach and Annabelle Nguyen are applying for a conventional loan to purchase a home. They are particularly excited about this house, as it is situated on a waterfront and affords them beautiful views out most of the windows of the home. Their mortgage loan originator informs them that there is something important to keep in mind about this home: due to its proximity to the water, it is in an area that FEMA has designated as Zone A. This means that there is a requirement to obtain and maintain flood insurance coverage for the property. Zach and Annabelle decide that they are happy to take on this obligation to protect their home. At closing, their loan-to-value ratio is 91%. Because it is a conventional loan, this means that the Nguyens are subject to private mortgage insurance. They make each monthly payment on time, frequently paying more than is required, in the hopes of reducing their debt faster. When they reach 80% LTV, they submit a request to their lender to cancel PMI. Several days later, they receive the good news that the lender has chosen to permit cancellation of the PMI on their loan.

Section 1c

includes more complete information about the potential borrower's income from additional employment or self-employment, if any. Section 1d offers space to add information about prior employment, including self-employment.