Chapter 8: Underwriting and Financing Residential Properties

• What are the Classifications of Mortgage Loans?

o 1. Conventional Mortgages o 2. Insured Conventional Mortgages o 3. FHA Insured Mortgages o 4. VA Guaranteed Mortgage Loans

• What are the other payment obligations in the Underwriting Process?

o Auto loans o Credit cards o Mortgages o Alimony o Child support

• What are the key characteristics explained in the Underwriting Process?

o Borrower Income o Verification of Borrower Assets o Assessment of Credit History o Estimated Housing Expense o Other Obligation Payments o Compensating Factors

• What are the Primary Underwriting Criteria?

o Borrower's ability to pay Credit history Payment-to-income history o Security Loan-to-value ratio = Loan amount value of the collateral

• What are Insured Conventional Mortgage Loans?

o Conventional lenders will not normally lend in excess of 80% LTV without some form of default insurance (mortgage insurance). o Conventional lenders will make loans as high as 90-95% if the borrower qualifies and pays for mortgage default insurance that covers the loan amount above 80%LTV

• What are VA Guaranteed Mortgage Loans?

o Department of Veteran Affairs (use to be called the Veterans Administration) o Covers the top part of the loan ... about 25%. o Can result in very low-down payment (even zero down) o No insurance premium required from borrower. o Loan guarantee amount usually limited to the CRV (certificate of reasonable value - like an appraisal).

• What are FHA Insured Mortgage Loans (Federal Housing Administration)?

o FHA is a government agency. FHA does not make the loans; it only insures them. o FHA insurance covers the entire loan amount, not just the top 15% or so as is the case with private mortgage insurance. o FHA collects insurance premiums from borrowers up front and with the payments. o Loan amounts are limited, causing those wanting more expensive homes to use conventional mortgage loans.

• What is some of the criteria used in The Underwriting Process?

o LTV ratio: a measure of the amount of collateral securing the loan. o Payment to income ratio: a measure of the borrower's ability to make monthly house payments. o For conventional loans: Max PITI-to-Income = 28% of gross income Max total payments = 36% of gross income o Credit history of the borrower. o Assets of the borrower

• What are some Compensating Factors in the Underwriting Process?

o Money in the bank o Very low LTV ratio

• What are the characteristics of the Assessment of Credit History?

o New emphasis on credit o Reporting agencies - Experian, Equifax and Transunion. o Past 10 years o Payment habits o Bankruptcy

• What are the sources other than regular employment with borrower income verification?

o Part-time employment o Working spouse o Rentals o Alimony or child support o Commission o Self-employment o Bonuses o Dividends or interest o Retirement annuity o Social security o Public Assistance o NOTE: Best verification source is tax return for past two years.

• What are the items that are likely to be included with Estimating Housing Expenses?

o Principal & interest (PI) o Mortgage Insurance o Property Taxes o Hazard Insurance o Owners' Association Dues

• What is The Underwriting Process?

o Regardless of the type of mortgage (conventional, conventional insured, FHA, or VA), much of the underwriting process is common to all types of mortgage loans. The underwriter begins by collecting data to determine whether credit should be extended. The goal of this process is to determine whether the loan-to-value ratio, the payment-to-income ratio, assets of the borrower, and borrower credit history are acceptable to the lender or the lender and insurer.

• What are the Terms of a Conventional Mortgage Loan?

o Terms of the loan, e.g., interest rate and maturity, are guided by the market, but technically and legally terms are completely negotiable between the borrower and lender. Obviously, the lender is usually in the stronger negotiating position

• What is a Conventional Mortgage Loan?

o The thing that distinguishes conventional mortgage loans is that they have no government insurance (FHA) or guarantee (VA). These loans are offered by mortgage bankers and depository institutions

• What is Default Insurance?

o The underwriter may require a borrower to pay for default insurance if the loan is within the guidelines, but the risk is judged to be moderate to high

• What does the Underwriter (Loan Officer) do and what is it based on?

o The underwriter performs the evaluation in the context of the lender's guidelines and policies based on... The loan application submitted by the borrower, and The appraisal of the property

• What is the purpose of the Verification of the Borrower's Assets?

o The verification of the borrower's assets must be sufficient to pay closing costs and make a down payment o Question that comes up is... Source of down payment issues • Where did the money come from? o Verification forms

• What is Underwriting?

o This is the process of evaluating a borrower's loan request in terms of 1. Potential Profitability 2. Risk

• What is the criteria of Borrower Income Verification? (Primary Employment Income)

o Verification of place of employment. o Verification of wages (via W-2 forms, paycheck stubs, etc.) o Likelihood of continuing employment