6/21/2013. Section II. The Contemporary Mortgage Loan Origination Process. Contemporary Mortgage Loan Origination Process

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1 Section II The Contemporary Mortgage Loan Origination Process Contemporary Mortgage Loan Origination Process A mortgage is an agreement between a borrower and a lender in which the borrower conveys an interest in a property to the lender as security for a loan. Mortgage bankers are not bankers, they are "financial intermediaries" that serve parties on opposite ends of the mortgage lending transaction by moving capital or money. Mortgage Lending vs. Mortgage Banking The terms mortgage lending and mortgage banking are often used interchangeably; however, there is a difference between the two: Mortgage lending: Broader industry of making funds available to borrowers Through loans o Furnished by institutions &business entities o Including banks, credit unions, thrifts, etc. 1

2 Mortgage Lending vs. Mortgage Banking The terms mortgage lending and mortgage banking are often used interchangeably; however, there is a difference between the two: Mortgage banking: Specific component of mortgage lending Banks and similar institutions fund loans with money from secondary market o Has evolved into primary means of perpetuating mortgage lending industry Cyclical process LOAN PRODUCTION SECONDARY MARKET LOAN ADMINISTRATION Process and Participants Origination is: Develop marketing plan and solicit clients Educate client about loan programs Take application and gather complete and accurate information Provide disclosures, estimates, obtain fees and get signature on dated application Prepare loan file and submit it to loan processor 2

3 Process and Participants Processing is: Review loan files and request needed documents Send client RESPA Good Faith Estimate, Truth in Lending disclosure Send deposit, employment and verification forms Credit report and appraisal per loan type Review all documents, prepare and forward loan file to underwriting Process and Participants Underwriting is: Analyze creditworthiness and willingness to pay Review property value to ensure that sufficient value exists (LTV) Match client and property data to investor requirements Review compensating factors, make final decision to approve / deny loan If denied, may submit for review by others for a second look and send to closing Process and Participants Closing is: Prepare, assemble and review closing documents Fund mortgage loan Verify that all closing conditions are met Verify that all fees, costs and premiums are collected Record deed, other required documents, release any prior liens on the property 3

4 Mortgage Loan Originators Licensing Why must MLOs be licensed or registered? Begins process of creating relationship with consumer No business transaction will result if this critical stage is mishandled PLUS: It s the law SAFE Act of 2008: unlicensed origination is illegal Work performed by an unlicensed MLO will automatically be out of compliance Mortgage Loan Originators Licensing The licensing requirements under the SAFE Act also include provisions for general character and financial fitness: License provisions for screening originators / applicants Adequate responsibility Personal credit Character (no criminal activity) 4

5 Mortgage Loan Originators Licensing The mortgage loan originator must not merely have a license application pending approval, renewal or transfer; the license status must be active before a mortgage loan originator can originate loans: Pre-licensing requirements must be met OR If federally supervised and exempt from licensure, person must register through NMLS Pre-licensing Requirements Pre-licensing requirements include: 20 hours of pre-licensing education fulfilled by this course NMLS Registration and unique identifier Passing character and financial fitness exam Background checks and fingerprints (FBI) Passing both the State and Federal exams Paying all licensing fees Use of Unique Identifier Must have unique identifier to do business: Permanently identifies loan originator Helps to track employment history Tracks disciplinary / enforcement actions On all materials Cannot use another person s or let them use yours 5

6 Customers and Kickbacks Kickback: is receipt of anything of value in exchange for referring business. Things of value include services, gifts (other than nominal gifts, such as a thank you note), business referrals (such as cross referral schemes), and promise of continued use of services in exchange for referrals, as well as the obvious gifts of monetary value Customers and Kickbacks If a lender requires a borrower to use a specific settlement service provider, unless there is an exception, it would be considered a kickback because it is an inappropriate cross-referral scheme. Customers and Kickbacks Affiliated business arrangements are, perhaps surprisingly, not kickback schemes so long as the affiliation is disclosed. To qualify, an affiliated business must be controlled by and fall under the parent business. 6

7 Advertising TILA requirements bring clarity: Simply put, advertisements must be clear and accurate Terms advertised must be the terms available Company must be identified Initial Interview Prequalification is not the same as preapproval: How much a person might be able to borrow Dry run without verification NOT credit determination Preapproval: Determination of actual amount of financing Actual credit determination Initial Interview There are 2 qualifying standards: Housing Expense Ratio: what portion of the borrower s income can be allocated to housing Total Debt-to-Income Ratio: what portion of the borrower s income is already allocated to debt repayment 7

8 Understanding Ratios Housing Expense Ratio Total of housing payment (PITI) / Gross Monthly Income Principal Interest Taxes Insurance Total housing payment should not exceed a certain percentage of gross monthly income. (Usually 28%, varies by program) Understanding Ratios Debt to Income Ratio Total of ALL debts (including PITI) / Gross Monthly Income All non cancellable debt obligations (loans, leases, credit cards) Generally, installment debt with less than 10 payments not counted Life insurance premiums, utilities, cell phones not counted Total monthly debt obligations should not exceed a certain percentage of gross monthly income. (Usually 36%, varies by program) 8

9 Initial Interview Enough information must be gathered to determine which type of loan (generally) and which specific loan program best suit the borrower s interests, objectives, and qualifying ability. What Must Happen in Interview The loan type and program selected must be selected to suit the borrower: Borrower must have final say in loan program type and loan product type At least 3 options is the golden rule, creates safe harbor Choosing a Mortgage Program Type There are conventional and non-conventional loan programs available to borrowers: Conventional: Institutional lenders o Guidelines of Fannie / Freddie Additional features: higher loan limits, etc. Nonconventional: government loan, not private lower loan maximums but less stringent credit qualifying 9

10 Choosing a Mortgage Program Type Conventional loans are not guaranteed / insured by federal government: Financed solely by a bank / institutional lender May require Private Mortgage Insurance (PMI) o IF amount exceeds 80% of property value Choosing a Mortgage Program Type The characteristics of these loans are: Traditional conventional loans are usually fixed rate, long-term and fully amortizing Loans with terms other than a fixed rate 30 year term are considered nontraditional Choosing a Mortgage Program Type Long term loans usually spread payments over (even 40) years. Conforming loans meet the requirements set by Freddie Mac or Fannie Mae to be sold on the secondary market 10

11 Choosing a Mortgage Program Type Fully amortizing loans (or self-liquidating) include payments which fully pay down the entire loan balance (principal and interest) over the life of the loan Fixed rate loans have set interest rates that remain the same for the duration of the term Choosing a Mortgage Program Type 15 year mortgage loan characteristics are: Better interest rates o Shorter terms & reduced risk to lender Payments are higher o Borrower s tax deduction declines more rapidly o Less interest is paid each year as principal is reduced more quickly Bi-weekly payment plans may be used Choosing a Mortgage Program Type Loan-to-Value Ratio is used to classify: 80% LTV Conventional Loan (20% down payment) 90% LTV Conventional Loan (10% down payment) 95% LTV Conventional Loan (5% down payment) 11

12 Government Loan Products FHA loans are insured by the Federal Housing Administration against loss by foreclosure: Mortgage insurance premium (MIP) Up-front / monthly installments Included in maximum mortgage amount Public-sector mortgage insurance is required o Due to high loan-to-value ratio Government Loan Products The FHA insures loans for single and multi family homes made by approved lenders: Good protection against losses when borrowers default FHA loans are not dependent on income level Overseen by HUD o Sets regulations for approval Government Loan Products The standards for evaluation of an application for an FHA loan include the following (The 4 C s of FHA underwriting): Credit history of the borrower Capacity to repay the loan Cash assets Collateral 12

13 Government Loan Products Eligibility of the property is important. The following help determine whether the property, in addition to the borrower, will be eligible for an FHA loan: The condition of the property The maximum mortgage amount allowed property based upon its location Occupancy of the property Government Loan Products The following property types may be eligible for FHA loans and include 1 to 4 family dwellings of the following types: Detached or semi detached dwellings Row houses Multiplex dwellings Individual condominium units Some manufactured housing Utilities & condition of property Government Loan Products Loan regulations: FHA loans also require a borrower to have a minimum investment in the property and place some restrictions on the loan, such as restricting the assumability of the loan and secondary financing in relation to the loan. 13

14 Government Loan Products VA-guaranteed loans are government-guaranteed loans: Veterans Benefits Administration of the VA To help eligible veterans who have served or who are currently on active duty US Armed Forces, Coast Guard, Reserves, National Guard Government Loan Products The VA rarely lends money directly to borrowers: Except in isolated areas with scare financing Must borrow funds from VA approved lender Lenders may become automatic endorsers o Allows authority to close VA loans without prior approval Government Loan Products The most important requirement to be approved for a VA loan is the borrower's military eligibility: Military eligibility: o Length of continuous active service o When enlisted o If served during wartime PLUS Credit history, income, etc. Spouses can be eligible 14

15 Government Loan Products The VA doesn't limit the price a veteran can pay for house, but it does limit the amount it will guarantee in case of default to 25% of the purchase price or of the established reasonable value whichever is less. Government Loan Products The total debt-to-income ratio is used in VA loans: An important difference from conventional loans: VA loans do not typically employ housing expense ratio Instead, underwriter's look at total debt to income ratio when evaluating a borrower Government Loan Products Housing & Community Facilities Programs (HCFP) under USDA Rural Development has programs: For low-income buyers in rural areas Referred to as Section 502 loans For single-family homes Guaranteed loans from private lenders, OR Direct loans to borrowers 15

16 Government Loan Products These Section 502 loans (USDA Rural Development Programs) can be used to: Purchase an existing home Renovate or repair an existing home Relocate an existing home Construct a new home Purchase and prepare a site (including water and sewage) for a home Government Loan Products Homes must meet certain requirements in order to be eligible: Modest in design and cost Not possessing market value over loan limit Applicants must also meet income requirements based on the area median income (AMI) for the region Nonconforming Loan Programs These are large loans that exceed the maximum conforming loan limits of Fannie Mae and Freddie Mac OR accommodate slightly higher-risk borrowers than what GSE standards would allow. They include: Jumbo loans Alt-A A- loan Sub-prime loans (Seller-financed and other creatively-financed loan programs) 16

17 Nonconforming Loan Programs These are not inherently bad loans, but simply loans which carry more risk for the borrower and will carry more regulation and more documentation when determining if one of these loan types is in the borrower s best interests. Nonconforming Loan Programs Private Jumbo Conduits have grown much larger and more important since mid 80s: Provide source of funds for jumbo loans (over lending limits of Fannie and Freddie) Most use GSE guidelines Also have their own special rules Nonconforming Loan Programs A-minus conventional and Alt-A loans allow slightly higher risk to borrowers, but: Gives opportunity for loans considered salable on secondary market o Even with slightly at-risk borrowers Float between average risk and high risk loans Special markets for these 17

18 Nonconforming Loan Programs Subprime Loans are suited to borrowers with less-than-perfect credit scores or other elements of risk to lenders: Rarely seen in today s markets Higher-than-typical interest rates Loan originator must conduct and document thorough risk-benefit analysis Added disclosure requirements Choosing a Mortgage Loan Product Once loan type is chosen, specific loan product must be chosen, considering: Borrower s purpose and needs Income to debt ratio How much borrower can afford to pay each Month Length of loan Variable payment amount Fixed-Rate Mortgage (FRM) A fixed rate loan is a mortgage loan in which the interest rate and payments remain the same for the life of the loan: Usually fully amortize The most conservative Monthly payments will fluctuate the least Rates usually higher than variable rate loan Lender carries this risk Because the interest rate is fixed, it also cannot go down 18

19 Fixed-Rate Mortgage (FRM) Other considerations of fixed-rate loan products are: Some APR loan rates may decrease o When market drops Can get a slightly more expensive loan with a variable rate APR o Since initial payments will be lower If income will increase in a few years o Fixed-rate may not be in borrower s best interest Adjustable-Rate Mortgage (ARM) An Adjustable-Rate Mortgage (ARM) is a mortgage with an interest rate that increases or decreases: Over life of loan Based on market conditions o Determined by easily definable financial index, such as prime rate posted by Federal Reserve Bank, Treasury Bills, etc. Also called Variable Rate Mortgage (VRM) Adjustable-Rate Mortgage (ARM) Typically the initial rate is fixed for a certain amount of time: During a rate adjustment period, the rate may be adjusted up or down, can then lock again Typically have slightly lower initial rates than fixed rate loans Payment amounts can change over life of loan Can be an excellent choice for borrowers looking to sell or repay loan before initial period expires BUT a fixed-rate loan is probably better for those who plan to hold the loan for full term 19

20 Balloon Features Balloon features may be included in variable or fixed rate loan products: May be included in variable / fixed rate loan products Series of equal monthly payments, and A large final payment due at specified date Good for those expecting to sell or refinance at certain time Reverse Mortgages Reverse mortgages are for Seniors 62 years and older: Take advantage of equity they have built up in their homes Proceeds available are dependent on age, interest rate & value / maximum loan amount in the area Option to those wishing to remain in homes with cash flow issue / need for lump sum / medical / annuity purposes Reverse Mortgages There is a possibility of abuse: Easy to qualify Proceeds have no restrictions Counseling session required Seniors are made aware in advance of the costs, alternatives, and uses for the funds 20

21 Reverse Mortgages Loan does not have to be repaid until borrower dies, sells home or moves away: Borrowers still responsible for payments, taxes and insurance Can pay off or refinance any time When no longer primary residence for 1 year o Loan is due and needs to be repaid Reverse Mortgages Popularity of reverse mortgages is increasing: Aging population and increased consumer awareness Growth in the number of lenders and brokers offering this option BUT Critical to evaluate all options available to assist seniors with their financial needs Reverse mortgage has effects on different family members Good for seniors to get third-party information to make an informed decision Home Equity Loans and Credit Lines A home equity loan is a loan secured by real property a person owns, such as a primary residence: 2 types: Fixed-rate home equity loan HELOC ( Home Equity Line of Credit) o Adjustable rate, often tied to an index such as prime rate 21

22 Home Equity Loans & Credit Lines A fixed rate home equity loan is good for a borrower who needs a lump sum: To be repaid at a fixed payment and rate over a certain period of time o Ranging from 5-30 years Security of knowing payment and rate will not change Home Equity Loans and Credit Lines HELOC s are mostly variable rate loans: Like a credit card secured by equity in home Access credit line over and over and also write checks or use ATM card Payments are commonly based on interest only amount o Draw period is 5-10 years then repayment period of up to 20 years (including principal) Home Equity Loans and Credit Lines Other characteristics of HELOCs are: Lenders offer options such as rate locks on different balances within the line of credit They can usually be obtained for low to no cost Interest paid on a home equity loan may be tax deductible as is interest on most other types of mortgages 22

23 Construction Loan A construction loan covers land development / building construction: Disbursed in several ways: o Short term (usually 3 years) o At completion of construction stages o As-needed basis o Mutually-agreed upon schedule o Upon a condition, such as completion of home Interest-Only Loan An interest-only loan is a type of adjustable-rate mortgage: Borrower makes no payments on principal for specific amount of time Then borrower responsible for making fully amortized payments o Both principal and interest Like a student loan, standard mortgage or car loan Interest-Only Loan The advantages of interest-only mortgages are: During interest-only period, monthly payments are very affordable Income increase results in more money available for next home Payment flexibility o Option to payoff part of principal during interest-only period without being penalized 23

24 Interest-Only Loan The major disadvantage of interest-only loans is payment shock : Once interest only period is over Responsible for making fully amortized payments to cover interest and principal Planning ahead is required Interest-Only Loan Another disadvantage is: During Interest-only period, no progress on paying down principal No equity accrued Could owe more in principal than house is worth if depreciation Bridge Loan A bridge loan is a short term loan taken out by a borrower against their current property to finance the purchase of a new property: Swing loan, gap financing, interim financing Typically good for a 6-12 month period Interest rate usually about 2% above average fixed-rate and has equally high closing costs Planning to purchase larger home and hasn t sold current home Bridges the gap 24

25 Bridge Loan Purchase Contract Contingencies allow buyer to agree to terms only IF certain things occur: For example, buyer may not be required to buy new home until they sell old one o Protects them in case no one buys 1st home Bridge Loan If seller won t accept buyer s contingency, then bridge loan might be solution: May include enough principal to pay off current property May act as second loan on top of first May include amount for down payment on second property Bridge Loan Bridge loans which refinance the whole property have these payment characteristics: No monthly payments on bridge loan Mortgage payments on new home Once the first house sells o Uses proceeds to pay off bridge loan o Including interest and remaining balance 25

26 Bridge Loan Bridge loans as 2nd / 3rd lien on 1st home require the borrower to: Make payments on o Old mortgages o New mortgage attached to your new property Borrower must be certain of ability to take on such payments for a year Bridge Loan During a boom, bridge loans aren t necessary and during a recession they are more risky: Borrower should be hesitant: To take on new loan o With high interest rate o No guarantee old property will sell within short life of the bridge loan Prepayment penalties possible if paid off too early Information Required on Application The primary application type will be the uniform residential loan application: Before appointment to take Uniformed Residential Loan Application (URLA or 1003) and during initial interview: o MLO should request borrower assemble required information in advance o To expedite process 26

27 Information Required on Application Required information includes: Full legal name Number of dependents Social Security number Primary addresses for past 2 years Current primary address and phone number Other property information Income and employment, job title Employer name, address, phone number Information Required on Application NOTE: Notify the Applicant(s) that if they have not been at their current employment for two years, they will need to provide the above for all previous employment and any other employers that they are currently employed with. Employment Verification Applicants should provide copies: 1 month s worth current YTD pay stubs 2 year s W2 forms or 2 years 1040 Tax Returns if self employed with all schedules For investment properties, copies of lease agreements to verify rental amount collected For those self employed or who own corporation, all 1020 Tax Returns and riders, including YTD Profit and Loss Statement 27

28 Employment Verification Applicants should provide copies: If fixed income (ex: Social Security, Child Support, Pension, Annuity, Dividends, etc.) Proof of receipt of funds & continuation of fixed income for minimum 3 years NOTE: If there are any rental properties and the Applicant is a wage earner, employed by a company Tax returns with Schedule E is required for the previous 2 years to calculate net rental income. Asset Verification Applicant(s) should provide complete two months statements of all information pertaining to liquid assets and the financial institutions the money is deposited: Checking Accounts Savings Accounts Money Market Accounts Certificate of Deposits Investment Accounts 401K/IRA Accounts Asset Verification NOTE: If business bank statements are provided, applicant must provide proof of ability to withdraw funds. 28

29 Asset Verification IF applicant is qualifying for a residential loan, the following documentation is required: Copy of Gift Letter signed by Donor of funds. (Note: Gift funds can only be given by a family member and funds cannot have any stipulation that the funds are to be returned in any manner) Copy of deposit of the gift funds stated on the gift letter Donor should provide source of withdrawal of funds donated as Gift Negative / Derogatory Credit Items Any Negative / Derogatory Credit Items must be included: Judgments (Proof of release of lien) Collection Accounts (Proof paid) Bankruptcies (Proof of filing date and release) If bankruptcy is Chapter 13, must provide copy of proof of pay history to Trustee Applicant should also provide Letter of Explanation (LOX) on any late payments on revolving, installment or mortgage accounts Information Required on Application Other information must be included: If no mortgage history on credit report, applicant must provide information for current Mortgage Servicer/Lender If applicant has applied for any recent credit, proof of accounts established and inquiries on credit report to be explained on LOX 29

30 Information Required on Application An applicant renting an existing primary residence must provide: Landlord name, address and telephone number 12 months cancelled checks to support pay history o If Landlord is not management company that will be verifying rental history What Must Happen During Interview The mortgage loan originator must keep the borrower s best interests in mind: Avoid providing opinion Listen to the borrower s: o Objectives o Needs o Likely qualification abilities Determine a number of options which might suit the borrower s needs (at least 3) What Must Happen During Interview MLOs should: Present each option to borrower in response to criteria provided by borrower: Option 1 because you were interested in lowering monthly payment, etc. Explain how loan product will help or make sense 30

31 What Must NOT Happen During Interview MLOs must not do: Cannot accept any fee or thing of value Never mislead a borrower A borrower can be misled when a MLO fails to understand his / her needs and recommends an unsuitable loan product What Must NOT Happen During Interview These are Prohibited Acts: Accepting any fee prior to submission of GFE after application and borrower s express intent to proceed with loan application Steering borrower to loan benefitting originator Misleading borrower, creating false expectations Making misrepresentation borrower could rely upon in choosing loan, to his / her detriment What Must NOT Happen During Interview These are Prohibited Acts: Suggesting borrower default on existing credit obligation Insinuating / suggesting affiliation with government / with borrower s current lender unless true Stating you can counsel borrower / provide debt relief Making improper referral that would result in a kickback 31

32 What Must NOT Happen During Interview These are Prohibited Acts: Asking prohibited question which could be construed as discrimination Failure to provide disclosure Failing to communicate information accurately Failing to identify one s self / employer What Must NOT Happen During Interview These are Prohibited Acts: Failure to get permission to communicate electronically Committing / allowing fraud Failure to report red flags / identity theft risks Failure to ensure personal information kept secure Application Accuracy and Required Information (Form 1003) The URLA contains information about the borrower: Uniform Residential Loan Application (URLA): Information about borrower, property and loan transaction 1003 is the most common loan application Also form 65 (Freddie Mac form) 32

33 When an Application Has Been Completed An application is completed when the borrower s information is submitted in anticipation of a credit decision. Application Accuracy and Required Information (Form 1003) Borrower Information and Co-borrower Information includes: Name of applicant, current address, Social Security Number Employment history, salary and income Borrower's assets and liabilities Whether borrower has any public records such as judgments, foreclosures and bankruptcies Borrower's current housing expenses Rent / mortgage payment information Borrower / Co-borrower Information A co-borrower is someone who accepts joint obligation to pay a debt. The obligation usually creates a joint and several liability between the co-borrowers who are equally responsible for the obligation with neither one having greater or lesser obligation. So, unless it states otherwise in the contract, if there is a co-borrower, all borrowers are co-borrowers. Joint and several liability means that if a default occurs, the creditor can come after either one of the borrowers (several) or the borrowers together (jointly) for the entire obligation due. 33

34 Joint and Several Liability If one borrower has fewer assets and the creditor only recovers a small percentage from that person, the creditor may seek repayment of the greater some from the other borrower: Creditors may seek repayment from both Risk in co-signing Must be explained to borrowers If not spouses, may need 2 application forms Borrower / Co-borrower Information Borrowers will have to provide employment information: Verification of past and current employment for last 2 years For a self-employed borrower, more information will be required o Self-employed if they own 25% or more of a corporation Application Accuracy and Required Information (Form 1003) Borrowers will have to provide property information: Address of property Legal description of property Number of units Age of the property Whether primary / secondary residence (FHA requires occupancy as primary residence within 60 days) 34

35 Application Accuracy and Required Information (Form 1003) Titles must be considered (must be decided, or else no submissions): If two or more holders, MLO must not assume how it will be held nor advise on topic Two or more unmarried borrowers are joint tenants Married couple are tenants by the entireties o Automatically vest 100% in surviving spouse o May be joint tenants instead Share of the deceased to pass on by will (devise) / by law (descent) Application Accuracy and Required Information (Form 1003) Borrower interest must be determined: Fee simple (all rights) Some rights Impacts nature of the security interest Application Accuracy and Required Information (Form 1003) Loan and Transaction Information must include: Loan type and program Loan amount and interest rate Proposed housing expenses Purpose of the loan and amount sought Details of the transaction 35

36 Required Disclosures Once application prepared and borrower working with processor / through MLO, disclosures are required: Disclosure timing considerations come into play Upon submission: o Copy of following within 3 days o Unless exempt Required Disclosures Good Faith Estimate of settlement charges (GFE) is required by RESPA: Offer must remain good for ten (10) days assuming borrower qualifies No fees until GFE received and borrower indicates intent to pursue loan Special Information Booklet for all federally-related transactions Required Disclosures The Truth in Lending Statement (TIL) is required by TILA: Clearly and conspicuously explains the APR and cost of the loan Notifies borrower they may not be able to refinance the loan Discloses all costs of the loan in a form for the consumer to use when loan shopping for easy comparison 36

37 Required Disclosures HUD settlement disclosure statement must include: Details all costs and requirements Specifies who pays them and how they will be paid Mortgage Servicing Disclosure Statement: whether or not the serving of the loan may be sold after closing For open-ended credit: Your home is on the line booklet (RESPA) Discount Points Discount points allow a borrower to get a lower interest rate on their loan by paying cash up front to pay less interest each month during the term of the loan: 1 point = 1% of principal amount o For $100K loan, 1 point = $1,000 Discount Points Paying discount points is good for those planning to keep mortgages for long time: Paying points: o Lower monthly payment o Tax incentives Extended repayment multiplies the advantage of paying upfront points since the lower interest rate will be enjoyed over a longer period of time 37

38 Discount Points Other characteristics of discount points include: Seller may pay some points for borrowers, to allow borrower to qualify for better loan o Helping seller to offload home Allow lender to get return-on-investment up front (otherwise lost in lower rate loan) Must be fully disclosed MUST actually reduce rate Origination Points Origination points are different than discount points: Origination points are part of the fee disclosed on the GFE WHILE: Discount points are listed as part of the borrower s charges Yield Spread Premiums The yield spread premium is money or rebate paid to a mortgage broker for giving a borrower a higher interest rate in exchange for lower up front costs: Different than discount points and have the reverse impact Increasing (vs. decreasing) monthly payment amount to reduce the up-front costs of getting the loan 38

39 Yield Spread Premiums There are new rules which affect originator compensation: Prohibit loan originators from being compensated in this way, BUT Allow consumers to get a credit from lender for paying higher rate in exchange for lower closing costs Disclosed on GFE as a credit to the borrower for selecting the higher rate Borrower s Financial Picture Lenders may use underwriting standards for resale to Fannie / Freddie: Because most loans will be sold Consideration of borrower s income, assets, & liabilities & new circumstances which will occur if loan granted, including payment of principal, interest, taxes & insurance (PITI) for new mortgage Borrower s Financial Picture Income must be durable: At least 2 years and likely to continue for 3 more years IF not considered durable, may still factor into lender s decision to extend credit, even though not directly used to compute income of borrower 39

40 Borrower s Financial Picture Income types are subject to durability analysis: Secondary income (investment, part time employment, alimony, overtime, disability, social security, child support, rental income, etc.) Primary source = stability analysis o Employment history o At least 2 years Borrower s Financial Picture Stricter standards are in place per Dodd-Frank: MLO must verify that borrower has a reasonable ability to repay the loan according to its terms. Neither MLO nor borrower can hide, alter, exaggerate / otherwise manipulate data during analysis o Otherwise, it is mortgage fraud Loan Processing, Underwriting and Insuring Income, Assets and Liability Certain mortgages provide a safe harbor for the lender and originator because they are considered safer: More consumer friendly Qualified mortgages Limits or eliminates lender s / originator s liability for failing to adequately determine borrower s ability to repay Definition changed in early

41 Income, Assets and Liability An asset is and item of value such as cash on hand checking or savings account, stock, bond, cash value of insurance policy, equity and real estate, retirement fund, automobile, and personal property. Liabilities are financial obligations of borrower. Income, Assets and Liability Debts are re-occurring payment obligations (bills): Installment loans Credit cards Mortgages Collections Slow pays Judgments Student loans, et cetera Payments for debts with < 10 months left not an issue Income, Assets and Liability The amount owed on any asset is the liability: Asset value = asset SO True net worth = asset value minus remaining liability PLUS Borrowers must also reveal alimony or child support as a liability 41

42 Net Worth Determination Net worth is a good indicator of credit worthiness: High net worth shows an ability to manage money Liquid assets that can be sold in an emergency to make payments can give a lender and added feeling of security Credit Reports and Scoring Credit history shows facets of a person s financial activities and behavior: reveals a great deal about how person will perform as borrower Credit history is an indicator of willingness to repay debt Likelihood of successfully paying off loan Credit Reports and Scoring Analysis of creditworthiness is important: Payment history and extent of obligations in relation to applicant's income and assets Special attention to repayment of mortgage loans Lenders use credit reports to get information about an applicant's credit history 42

43 Credit Reports and Scoring There are different sources of credit information: Formal o Credit companies and mortgage lenders Alternative o Landlords, utilities, government taxing authorities, etc. Credit score based off statistical analysis of items in credit report Credit Reports and Scoring The credit score represents a person s credit profile and creditworthiness. A higher number is indicative of a potential borrower who is a better credit risk. A lower number represents a higher risk of default. Credit Reports and Scoring Credit scores are evaluated by scoring systems: Number of open accounts Types of credit Total credit limit Length of credit history Total amount of outstanding debt 43

44 Credit Reports and Scoring Credit scores are evaluated by scoring systems: Number of late payments in the past 1-3 months Number of recent credit inquiries Adverse public records Re-establishment of positive credit history following past payment problems Credit Reports and Scoring Problematic items can affect a credit score negatively: Borrowers should explain instances honestly o There might be legitimate reasons When borrowers fail to accept responsibility for instances of derogatory credit this results in a negative effect Credit Reports and Scoring All information discovered during the credit and legal reviews must be reported subject to the Fair Credit Reporting Act: Notice to the Home Loan Applicant Credit Score Information Disclosure must be provided to borrowers o Per Fair and Accurate Credit Transactions Act of

45 Bankruptcies Bankruptcies are important events in credit history: Can remain on credit report 10 years maximum Chapter 13 requires repayment over 3-5 years and may not appear after 7 years o As incentive for consumers to repay Credit Reports and Scoring Other credit events that negatively affect credit rating are: Foreclosures Late payments Collections Unpaid tax liens (which remain on the report indefinitely) Credit Reports and Scoring Other credit events that negatively affect credit rating are: Bill consolidations and refinancing: o Not equal to bankruptcies / foreclosures o Viewed with some concern o Suggest pattern of living above means o Classified as a marginal risk 45

46 Qualifying Ratios The 3 main ratios used in determining an applicant s mortgage payment are: Housing-to-income Debt-to-income Loan-to-value Qualifying Ratios Upon first consulting with a potential borrower, a loan originator usually analyzes: Monthly housing expense analysis o Based upon debt & gross income 2 ratios: Housing expense (or front-end) ratio Total debt-to-income (or back-end) ratio Gross income & Principle, Interest, Taxes & Insurance (PITI) payment are used to formulate the ratios Housing-to-Income Ratio Total Housing Expense Gross Income = Ratio % Indicates a prospective borrower's ability to maintain fixed monthly mortgage expenses. (Other costs may be included when applicable, like special assessments, homeowners association fees, and mortgage insurance.) 46

47 Housing-to-Income Ratio Total Housing Expense Gross Income = Ratio % = 1,085 housing expense 65,000 / 12 = 5,417 monthly gross income 1,085 / 5, 417 = 20% housing-to-income ratio Debt-to-Income Ratio Total Debt Gross Income = Ratio % Indicates an applicant's ability to cover the housing AND living expenses adequately during the month. Total obligations include the monthly housing expenses, plus any debts or loans with remaining terms over six to twelve months, depending on the investor's or insurer's requirements Debt-to-Income Ratio Total Debt Gross Income = Ratio % 1, = 1,700 total debt 5,417 / 1,700 = 31% debt-to-income ratio 47

48 Loan-to-Value Ratio Loan Amount Appraised Value */ Sale Price * = Ratio % (* = whichever value is less) Evaluating collateral (value of property being financed) is also used to calculate a mortgage payment schedule & is achieved by using loan-to-value ratio. This tool is used in conventional loan programs as well as in secondary financing. To calculate LTV, the underwriter divides loan amount by appraised value / sale price, whichever is less Loan-to-Value Ratio Loan Amount Appraised Value */ Sale Price * = Ratio % (* = whichever value is less) 192,000 / 260,000 or 240,000 = 80% LTV Lower risk. 80% magic number 200,000 / 245,000 or 250,000 = 82% LTV Higher risk: 82% = over magic #, so greater % borrowed = higher costs / fees & mortgage insurance Loan-to-Value Ratio Lower LTV = less risk to lender: Larger down payment by borrower, and therefore higher equity in the property and is more apt to protect investment The more equity the applicant has in the property, the less risk the lender/investor has in the event of foreclose on the loan 48

49 Loan-to-Value Ratio Generally, higher loan to value ratio = higher risk of default: Borrower has less investment in loan with higher LTV ratio. Mortgage insurance is required for loans with LTV ratios of 80% and above Mortgage insurance protects lender in case of such a default Compensating Factors All agencies have maximum limits for their respective qualifying ratios: Max. limits are the norm for qualifying ratios HOWEVER Higher ones can be accepted if there are compensating factors Compensating Factors Some compensating factors that can justify higher qualifying ratios for an applicant include: A large down payment Demonstrated ability to save Significant liquid assets and reserves for contingencies Demonstrated excellent long term credit use 49

50 Compensating Factors For example: Applicant with 30% housing to income ratio & 38% total debt to income ratio may qualify for 95% loan to value, whereas Someone with same ratios but with an 85% LTV may not qualify Applicant for 95% LTV loan may have significant compensating factors: large savings account balance and excellent credit score Considerations for the Self-Employed The self-employed borrower is more carefully scrutinized: Considered self-employed when he or she owns 25% of a business enterprise Must provide 2 years of tax returns and other data o Financial statements showing assets and liabilities for business Considerations for the Self-Employed The self-employed borrower is more carefully scrutinized: Must have operated business with a net income for 2 years If self employed for less than 2 years, there can be difficulty o Unless mitigating factors: Transition from similar business Similar income / substantial net worth 50

51 Calculations and Payments Loan Amount (ex. $150,000.00) 1,000 = 150 Amortization Term (15, 20, 30 years, etc.) Interest rate for this example is 4% 30 years is a factor of 4.77 Multiply the (loan amount / 1000) by the factor 4.77 x 150 = $ Add in monthly share of taxes and insurance by dividing them by 12 mo. Taxes at $1, per year = $100 / month Insurance at $600 per year = $50 / month $ $150 = $ monthly payment Calculations / PMI MIP LTV PMI Rate for 30 year mortgage PMI Rate 10, 15, 20 year mortgage 80.01% - 85% % % - 95% % - 97% % down on the $150, year loan PMI rate is 0.78 $150, x 0.78 = PMI rate of $1,170 per year 12 + principal and interest payment $ $ monthly payment = $ Calculations: Principal and Interest Payments 15 year fixed rate for $100, % down payment Taxes are $ per year Insurance = $1,200 per year Interest is 5% P&I factor for rate for 15 years =

52 Calculations: Principal and Interest Payments Loan amount of $100, divided by 1,000 = 100 X 7.91= $791 Taxes = 800/ 12 $66.67 Insurance = 1200/12 $100 PMI =.23 x $100,000.00/100 $230/12 $19.17 So, our total payment amount is $ Calculations: Down Payments [Dollar amount to put down] = what percent of $100,000.00? [$12,000.00] = Y/100 * $100, Solve for Y. First, multiply both sides by 100 1,200,000 = Y * 100,000 Divide 1,200,000 by 100,000 for %, or Y Y = 12% Calculations: Down Payments OR: Home = $123, Borrower has $14, to put down What percentage is this? Solve for Y. [$14,250] = Y/100 * $123,500 52

53 Calculations: Down Payments Answer = 11.54% Advise borrower to consider putting down 10% since extra 1.54% won t reduce PMI required They can use this for closing costs / decide to go ahead and apply it to principal Calculations: Fully-Indexed Rate of ARM YEAR 1 5% RATE (2% annual cap) 2 5% + 2% = 7% 3 7% + 2% = 9% 4 9% + 2% = 11% 5 11% + 2% = 13% Index is added to margin: Index = 4%, margin = 2%; fully-indexed = 6% (4% + 2% - 1% discount = 5%) Calculations: Fully-Indexed Rate of ARM YEAR RATE (2% annual cap) 1 5% 2 5% + 2% = 7% 3 7% + 2% = 9% 4 9% + 2% = 11% 5 11% + 2% = 13% Adjustment cap + starter rate: cap = 2%; 5% plus 2% = fully-indexed = 7% Now: 1st year = 5%, rate cap = 2%,??? = max rate? 53

54 Calculations: Fully-Indexed Rate of ARM YEAR RATE (2% annual cap) 1 5% 2 5% + 2% = 7% 3 7% + 2% = 9% 4 9% + 2% = 11% 5 11% + 2% = 13% 5% lifetime cap (hit in year 4) Instead of 9% going up to 11%, it can only increase 1% since cap = 5% SO Rate = 10% Appraisals: Analyzing Property Value The process of valuing real estate is called appraising. Real estate appraisers must be licensed and are required to adhere to the uniform standards of professional appraisal practice (USPAP) as well as state laws governing appraisal. Appraisals: Analyzing Property Value Appraisal = the process of developing an opinion of value or as an opinion of value. Appraiser = one who is expected to perform valuation services competently and in a manner that is independent, impartial and objective. 54

55 Appraisals: Analyzing Property Value Accuracy of appraisals is critical: Values not guaranteed BUT Values must be based on objective data Appraisal locked in time SO Date of appraisal is important Appraisals: Analyzing Property Value There are 3 approaches to generating appraisals: Sales comparison approach: o Assigns value of property by comparing that property to other similar ones in that area o Comparable sales are used and analyzed to develop the value Appraisals: Analyzing Property Value There are 3 approaches to generating appraisals: Cost Approach: Calculates: Land cost Cost of improvements Cost to build a structure on locations Depreciation cost Best for new construction or special purpose properties 55

56 Appraisals: Analyzing Property Value There are 3 approaches to generating appraisals: Income approach (or capitalization approach): Derives value of property by analyzing current income generated by property or that which COULD be generated and Compares this to similar properties. Best for commercial or investment properties Appraisals: Analyzing Property Value The sales comparison approach is most common: Database & county sales records disclosure forms used Appraiser will look at a number of similar properties comparable to: o Subject property, or the property being appraised Appraisals: Analyzing Property Value The appraiser will then make adjustments: Adjust price based upon number of bedrooms, baths, new roofing, date of sale, etc. SO It is critical NOT to influence opinion of appraiser Fair Market Value reached by appraiser 56

57 Appraisals: Analyzing Property Value The Fair Market Value of the subject property is the price which a willing buyer would pay a willing seller with neither one being forced to sell or selling under some special condition, such as to a family member. Appraisals: Analyzing Property Value There are appraisal options: Borrower may have property appraised, too Borrower can choose type of appraisal o Based upon intended use of property Appraisals: Analyzing Property Value What CAN be discussed with appraiser: Request more information Provide comparable sales Payment of appraiser must never be contingent upon result of appraisal 57

58 Insurance: Hazard, Flood It is important for the mortgage loan originator to remember: Borrower cannot be required to buy insurance that exceeds property value in its cost OK for lender to require borrower to maintain insurance on improvements up to amount of the fair market value Insurance: Hazard, Flood Flood insurance can be required when property is on flood plain: To allow lender protection against harm being caused to improvements (buildings and other structures) which serve as collateral to loan Keeps other insurance requirements under control Clear to Close or Not? The final decision following evaluation (underwriting) of the information provided and substantiated will be one of 3 things: Reject the loan Make the loan on the terms applied for Make the loan on different terms (which is essentially a rejection of the initial loan coupled with a pre-approved offer for a new loan) 58

59 Clear to Close or Not? Underwriting determinations are final, so MLO must have all documentation in order: Underwriter assesses property & borrower If loan approved, closing can be scheduled If terms changed, new disclosures required o Within 3 days of MLO awareness of change o At least 24 hours before closing Clear to Close or Not? If the loan is rejected, the MLO must: Inform borrower in writing Return all borrower funds in escrow and documents Appraisal, credit report and score to borrower Show rejection based on risk due to lack of income, assets, too much debt, or issues with property Preparing to Close: Disclosures and Timing Final HUD statement to be sent at least 24 hours prior to closing: Unless borrower waives due to emergency Most GFE figures cannot change o Unless updated, but must be before HUD statement is sent Tolerances must be met 59

60 Preparing to Close: Fees and Down Payment MLO must verify borrower funds for closing: Via submission of 1-2 mos. bank statements OR VOD Lender will confirm Preparing to Close: Fees and Down Payment The lender will also consider the age of the account: Current balance higher than average? Seasoned accounts preferred: o Do not reflect borrowed funds, one-time funds or new accounts o More secure investment portfolio 90 days may be adequate to season account Preparing to Close: Document Requirements The closing agent will ensure all is in place for closing: Organize documents and review file Signed copies Review calculations Disbursal plan for escrow Notify MLO / borrower of exact funds to bring 60