NMLS study guide (mortgage loan origination activities)

income of self-employed applicants

applicant must show that they have maintained an income for two years in order to qualify for a mortgage loan. lenders will not rely on a VOE from self-employed applicant depreciation can usually be added to a self-employed borrower's net income from the borrower's tax returns when calculating the borrower's income for a sole proprietorship, the income, expenses, and taxable profits are reported on the profit or loss from business on the owner's individual tax return (IRS form 1040) lenders will request additional documentation to verify income: tax returns for the past two year a year to date profit and loss statement balance sheets for the past two years a self employed income analysis

section 6 of URLA

assets and liabilities is there more than one borrower? must indicate relationship if there is a co borrower and if we are using their assets looking for liquid assets- cash on hand or an asset that can be easily converted to cash cash, checking accounts, savings accounts, stocks and bonds, cash value of life insurance policies, non-liquid assets can also be listed liabilities include credit cards, mortgages, judgements, consumer loans, etc

income approach

how much income will this bring me as an investor? for income producing properties this estimates the value of real estate by analyzing the revenue or income the property currently generates or could generate normally not used in single family properties appraiser researches the rental income in the area to confirm the rent potential for the area investment properties/commercial appraisals

qualify with alimony/ child support

if a consumer relies on alimony/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 they will use to cover settlement costs Fannie mae offers a VOD form (form 1006) which consumers may use to authorize the release of account info to a lender on this form Fannie states that in transactions for first lien mortgages consumers cannot hand carry the verification form to their banks, they can personally deliver VOD forms for second lien transactions

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 applicants employer for verification of employment and income if the applicant hasn't held their current employment for two years the lender will also send a VOE to the previous employer. Lenders may also request W2 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 that he or she has received the additional income consistently for at least 2 years and the employer indicated that the overtime or bonus pay is likely to continue

commission income or self-employment

income that is not salary based will require other types of documentation 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

role of the loan originator

individual who for compensation or gain: take a residential mortgage loan application offers or negotiates terms of the loan assists the borrower in completing the loan application and collects the necessary documentation to validate info provided on the application always compliant with the ATR rule and QM rule application is completed by the borrower with the MLO assisting in data input may take place in a face to face meeting over the phone or even over the internet MLO's cannot make loan commitments a loan commitment is made by a lender

section 10 of URLA

info for government monitoring purposes (HMDA) this section is referred to as the home mortgage disclosure act (HMDA) section includes a paragraph stating that none of this info may be used to discriminate against the loan applicant applicant can opt not to complete this section- lender fills out based on observation or surname

commission income

lenders will require copies of income tax returns for the past two years and info 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 2 years of income

tax forms to know

4506-T= used to obtain a transcript of tax returns (allows lenders to gain access to transcript of tax forms) 1040= used for personal federal income tax returns filed by US residents schedule C (form 1040, profit and loss)= year end tax form used to report income or loss from a sole proprietorship or single member LLC schedule E= rental income

flood insurance

a lender will require that flood insurance be maintained if federal emergency management agency (FEMA) maps show that any improvements on the property are in a flood zone if the maps are redrawn and a property later becomes classified as in a flood zone flood insurance will be required the amount of coverage must equal the lower of 100% of the replacement cost or the principal balance and must remain in place for the entire term of the loan whether or not flood insurance is required is determined by its zone certification for example: zones A and V require flood insurance Zone A areas subject to inundation by 1% annual chance flood event zone V area along the cost subject to be inundation by a 1% annual chance flood even with additional hazards associated with storm induced waves, V is the riskiest for beach front and coastal areas zones B, X and C are low to moderate risk areas and do not require flood insurance zone x is the most common

section 9 of URLA

acknowledgement and agreement allows applicants to affirm that they understand the purpose of the loan application and any loan that is offered as a result of the application will be secured by a deed of trust on the property described in the application all applicants are required to sign

income analysis (underwriter)

all income must be supported with the proper documentation an underwriter reviews: average of income employment history and gaps review W2s and 1040s to evaluate income consistency non-taxable income

cost approach

best for relatively vacant land, new construction property or for unusual or special purpose. most often used to appraise value for new building where costs are easy to obtain and for properties such as churches and public service buildings which cannot be compared to others that have sold or to those that produce income appraiser estimates the value of the land and the depreciated value of the improvements on the land separately and then adds the two values to arrive at an estimate of the property. the depreciated value is equal to the cost to replace or reproduce the improvements minus depreciation considers the value of the land and cost of improvements to estimate considers the cost of building a substitute residence with same utility as subject property. estimate reproduction cost subtracting depreciating by all causes used to when evaluating the cost to replace property that was damaged due to natural disasters

section 3 of URLA

borrower info personal info 2 years of resident history SSN, age, number of dependents

income requirements

borrower who owns more than 25% of a business must submit up to 2 years tax returns in providing income documentation no law requires the disclosure of all sources of income individuals who earn non taxed income such as social security, public assistance or disability must provide comprehensive documentation relevant to the type of income, however they are permitted to gross up those earnings by 25% (ie multiply the income by 125%) grossing up- a borrower's non taxed income is allowed to be increased by as much as 25% (increased by 25%= multiply by 125%)

servicing

continued maintenance of a loan after closing through loan term

section 8 of URLA

declarations enable lender to determine if the potential borrower is subject to other matters that may impact his/her ability to repay the loan status of US citizenship or permanent resident alien

section 7 of URLA

details of transaction purchase price- sale price of the property outlined in the sales contract alterations, improvements, repairs- estimated costs for these are estimated land- cost of land, if purchased separately from the cost noted in the purchase price refinance- debts to be paid off in a refinance transaction estimated prepaid items estimated closing costs private mortgage insurance discount total costs subordinate financing borrower's closing costs paid by seller other credits PMI MIP, funding fee financed loan amount cash from/ to borrower

pre approval

determining if potential borrower can be financed and for what amount- rendering a credit decision, may be binding- only done by a lender- triggers mandate disclosures with completed applications

requests of verification of deposit (VOD)

document signed by the loan applicant's bank or other depository institution verifying the applicant's balance in the account and the account history

section 4 of URLA

employment info 2 year of employment history if applicant is self-employed this must be specified years in line of work, continuous employment in the same industry

role of the underwriter

evaluates the documentation, borrower info and various risk factors to make decision: automated- info fed into automated underwriting system manual- done by individual who works for lender past credit performance is is the most useful guide in determining a potential borrowers attitude toward credit obligations and future actions. the underwriter will examine overall pattern of credit behavior and any derogatory credit certain types of income may be grossed up during underwriting. underwriters may gross up social security income, child support, public assistance, disability and other forms of income, subject to limitations based on product type and other guidelines because they are not taxed. Alimony is taxed, therefore is not grossed up

underwriter

evaluating and deciding whether to make a new loan for a borrower ensures that the proposed loan meets the requirements by the investor who will purchase the mortgage confirm that potential borrowers have sufficient case assets available to close the mortgage major areas that an underwriter examines are credit, income assets and collateral (security) does not need to be licensed, unless independent contractor

uniform residential loan application (URLA) (form 1003)

form 1003 is comprised of 10 sections that cover different info about the borrower

section 5 of URLA

monthly income and combined housing expense info calculate the applicant's front end housing ratio and back end debt to income ratio may use multiple sources, all sources should be listed in this section full time, part time, social security, child support, investment/ rental income, etc

consummation/closing/settlement

occurs when the consumer becomes contractually obligated to the creditor or the loan

pre qualification

pre determining what a potential borrower may be able to borrower- does not gaurantee approval; not biding- done by a mortgage loan originator- does not require disclosure

section 2 of URLA

property info and purpose of loan property address for the loan collateral or address of property used to secure loan indicate whether purpose of application is to purchase, construct or refinance a home state whether home will be primary, secondary or investment property manner in which title will be held: fee simple-the most you can own a home, entitled to entire property with unconditional power of disposition leasehold- an estate under a lease and estate for a fixed term or years. (not likely an originator will encounter this transaction) source of down payment, settlement charges and or subordinate financing

hazard insurance (homeowner's insurance)

protects the borrower a lender will require a borrower to maintain hazard insurance on the property securing the borrowers residential mortgage loan, if they don't keep insurance, the lender may force-place a policy to protect its interests the cost of the policy is determined by the replacement cost of the property the amount of coverage is determined by the: lesser of 100% insurable value of improvements established by the insurer or unpaid principal balance of the loan, as long as it equals the minimum amount necessary to compensate for damage or loss on a replacement cost basis

the ATR/ QM rule

require verification of current or reasonably expected income or assets using: need full documentation: tax return transcripts issued by the IRS IRS w2 forms payroll statements financial 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

predominant value

the most common sales price for the neighborhood refers to the price or price range appearing most frequently in the market area defined by the appraiser in the report, based on comparable sales

mortgage loan origination

the process of making/originating the loan with the customer the process has to include financing, if there is no financing it is not a mortgage loan origination

appraisals

the standard appraisal form used to appraise single family homes is called the uniform residential appraisal report or URAR also known as the 1004 because it is fannie mae form 1004 the appraisal is an estimate or opinion of value of a certain date that is supported by objective data the processor orders the appraisal and the appraisal is valid for 12 months, however it must be recertified if the appraisal will be 4 months old or more at closing appraisal would happen after an offer has been made purchases from servicemembers (military) are not subject to the requirement for two appraisals

subject property collateral (security) (underwriter)

the underwriter must ensure that the property is eligible and meets lender guidelines for collateral underwriter relies on the appraisal report, preliminary title report and any inspection requested by the prospective borrower or required by the lender. underwriter goes into deep detail to make sure everything is correct as far as being compliant with guidelines, reading entire appraisal, confirming what the processor said was correct

section 1 of URLA

type of mortgage and terms of loans: type of loan (conventional or government) loan amount case numbers interest rate and length of time (term) amortization type (fixed, adjustable, graduated)

deed of trust

used to secure a note mortgage or trust deed secures repayment of the note. housing costs, including principal, interest, taxes and insurance are not typically specified on the deed of trust deed of trust would include the legal description, loan amount, and the borrowers name the deed of trust may contain a requirement for the borrower to occupy the property within 60 days of closing

sales comparison approach

value is determined by looking at the recent sales price of similar properties often used in evaluating residential property according to fannie mae the appraiser's opinion of value must be developed from at least three comparable sales that have closed within the past year must use minimum of three comparable sales in most recent 6 months most reliable method for appraising single family homes and land

role of the processor

verify the info collected by the MLO such as check stubs, W2 forms, copies of bank statements and other documents take documents like the URLA1003 and borrower documents like drivers license and compare them to each other send verification forms to the appropriate parties order credit report- if not done by the MLO and prepare preliminary title report order appraisal- contact appraisal management company to appraise the property

processing

verifying data in loan file; coordinating loan process does not need to be licensed, unless you are an independent contractor