The Mortgage Lending Process

Chapter 3 The Mortgage Lending Process 1 Chapter Objectives Define the various roles that mortgage professionals play. Distinguish between pre-approval and prequalification. Identify the steps in the loan process. Discuss the information necessary to complete a standard loan application. Identify criteria for evaluating borrowers. Calculate income and debt ratios. Explain credit scoring. Discuss the settlement process, including reconciliation. 2 Mortgage Functions Origination: Making or initiating a new loan Initial contact with borrower Ordering credit report, other required documentation Loan Processing: Verifying information contained in the loan file Employment and other verification Coordination of loan process Underwriting: Evaluating and deciding whether to make a new loan, and if so, on what terms Done by the funding source Evaluates credit scores/history, appraisals, job history, collateral, etc. Servicing: Continued maintenance of loan after closing Lender, servicing company, other Mortgage and escrow statements, collecting payments, pursuing late payments 3 1

Pre-Qualification or Pre-Approval Pre-Qualification: Pre-determining what a potential borrower may be able to borrow Does not guarantee approval; not binding Done by any MLO (Broker or Lender) Does not always require disclosure 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 (Broker passes along approval) Triggers mandated disclosures, unless specific property not identified 4 Traditional Steps in Loan Process 1. Consulting with the mortgage loan originator 2. Completing a loan application 3. Processing a loan application 4. Analyzing the borrower and property 5 Interest Rates Amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the loan amount (the principal) Basis point: 1/100th of a percentage point Par rate: Rate without points/discounts lenders offer only to mortgage brokers Rate lock: Lender commitment to specific interest rate for specific period of time Float: Borrower bets on interest rate; does not lock before close 7 2

Generic Mortgage Lender We pay for things we like, and charge for things we don t Rate 30 Day Price 60 Day Price 90 Day Price 4.00 1.00 (1.50) (2.00) 4.50 0 (.5) (1.00) 5.00 1.00.50 0 Credit Score < 720 (.50) LTV < 80% 1.00 Non Owner Occupied Property (2.00) 8 Common Fees Common fees Credit bureau report Property appraisal report Inspections Title insurance Recording fees Lender s return: Total amount lender can make from a loan in relation to amount invested No compensation that varies based on loan terms Origination fee: Covers administrative costs of making and processing loan Must be disclosed on Good Faith Estimate (GFE) Points: One percent of the loan amount Only credit report fee may be collected prior to delivering Truth in Lending Statement/GFE 9 Discount Points Points paid upfront to reduce interest rate Prepay some interest as upfront out-of-pocket May qualify for a larger loan Must reflect bona fide reduction May be paid by seller to make property more marketable Discount pricing based on lender assumptions and calculations Shifts timing of fees to upfront from later in loan term (through lower interest) Shown as a charge to borrower on GFE 10 3

Yield Spread Premium Tool that MLOs can use to lower the upfront out-of-pocket expense for borrower Borrower pays higher interest rate in exchange for eliminating some closing costs/fees Shifts timing of fees from upfront to later in loan term (through higher interest) Shown as a credit to borrower on GFE 11 Qualifying Standards Analysis of the current or allowable monthly housing expense based on the borrower s income and debt Housing expense ratio Total debt-to-income ratio PITI: Monthly mortgage payment Principal Interest Taxes (property and perhaps special assessment) Insurance (homeowners, mortgage, flood if applicable) Required homeowners association fees must be counted 12 Housing Expense Ratio Relationship of the borrower s total monthly housing expense (PITI) to income, expressed as a percentage Total Housing Expense Gross Income = Ratio% Also called the front end ratio Should not exceed 28% for conventional loans 13 4

Case in Point Mark has a stable monthly gross income of $2,900 and the house he wants to buy would have a monthly mortgage payment of $700: $700 $2,900 = 0.24 or 24% Housing expense ratio is acceptable for a conventional loan since it s below 28%. 14 Total Debt-to-Income Ratio Relationship of the borrower s total monthly debt obligations (PITI + long-term debts) to income, expressed as a percentage Total Debt Gross Income = Ratio % Long-term debt: Any installment debt with 10 or more payments left or other debt that will not be cancelled Also called: Back end ratio DTI Total debt service ratio Should not exceed 36% for conventional loans 15 Case in Point $2,900 Stable Monthly Gross Income $700 Proposed Mortgage Payment $225 Auto Payment (18 payments left) + $100 Child Support $1,025 Total $1,025 $2,900 = 0.35 or 35% Total DTI ratio is acceptable for a conventional loan Borrower must generally qualify under both ratios 16 5

PROPERTIES On passing, 'Finish' button: On failing, 'Finish' button: Allow user to leave quiz: User may view slides after quiz: User may attempt quiz: Goes to Next Slide Goes to Next Slide After user has completed quiz At any time Unlimited times Determining Maximum Mortgage Housing expense (for conventional) Stable monthly gross income x.28 = Maximum PITI Debt-to-income (for conventional) Stable monthly gross income x.36 Total amount of long term debts - Monthly long-term obligations Maximum PITI DTI more realistic measure Smaller of the two is the maximum mortgage payment allowable 18 Qualifying with Ratios Housing Payment (PITI) Other Debts Doesn t fit! Total Debt to Income (PITI + Other Debts)/Income Housing Expense Ratio PITI / Income 19 6

Case in Point $3,200 Monthly Gross Income x 0.28 Income Ratio $ 896 Maximum Mortgage PITI Payment $3,200 Monthly Gross Income x 0.36 Income Ratio $1,152 Maximum Debt - $220 Car Payment - $ 75 Personal Loan Payment - $ 50 Revolving Charge Card Payment $ 807 Maximum Mortgage PITI Payment 20 Completing the Loan Application Detail borrower s History Trends Attitude Attempt to predict future loan repayment behavior Uniform residential loan application Fannie Mae Form 1003 Freddie Mac Form 65 May be in writing or electronic 21 When is an Application an Application? Submission of a borrower s financial information in anticipation of a credit decision Borrower's name, monthly income, and Social Security number to obtain a credit report Property address and an estimate of the value of the property Mortgage loan amount sought Any other information deemed necessary by the loan originator Triggers federal disclosure requirements 22 7

Memory Tool 6 Key Items trigger disclosure. PENCIL in the application Property Address Estimated Value Name Credit (and info needed to get it) Income Loan Amount 23 Co-Borrowers Someone who signs the note along with primary borrower Accepts joint obligation to repay Joint ownership interest in security property Co-signor does not have joint ownership interest Must have acceptable credit/assets If no joint assets/liabilities, two applications should be used 24 Sections I: Type and Terms Type of loan Loan amount Rates Term 25 8

Section II: Property and Purpose Do not assume or advise on how title should be held Occupancy determines interest rate, available programs, and overall risk FHA loans require bona fide occupancy as principal residence within 60 days then for at least 12 months 26 Section III: Borrower Information Marital status: Married, unmarried, separated May ask about number of dependents borrower must support Previous address needed if at current address for 2 years or less 27 Section IV: Employment Information Current and previous employment over two-year period Self-employed: Owning 25% or more of the business 28 9

Section V: Income and Expense Employment income, overtime, bonuses, commissions, dividends, interest, net rental income, and income from any other sources Borrower chooses whether to disclose alimony/child support Current monthly housing expenses allows comparison to proposed to gauge payment shock 29 Section VI: Assets and Liabilities 30 Section VI: Assets and Liabilities Assets: Items of value Liabilities: Financial obligations Debts: Any recurring monetary obligation that will not be cancelled Installment loan with > 10 monthly payments left usually disregarded Pledged assets up to amount owed Alimony or child support required to be paid Net worth: Subtract liabilities from total assets 31 10

Section VII: Transaction Details Estimate of funds required at closing Required borrower disclosure: Secondary financing Seller-paid closing costs Other credits: Equity Deposits being held 32 Section VIII: Declarations Outstanding judgments, bankruptcies, foreclosures, lawsuits, etc. Delinquency, defaults on any federal debt, other loan Alimony/child support obligations Borrowed funds used for any part of down payment Co-signers on other debts Citizen/permanent resident Occupy property as a primary residence Ownership interest in other properties in the past three years 33 Section IX: Acknowledgment Borrower and any co-borrower must date and sign Acknowledge: Understand and agree to be bound by loan terms 11 disclosures 34 11

Section X: Government Monitoring Monitors compliance with equal credit/housing laws MLO must note ethnicity, race, sex Applicant declines, MLO must note as possible MLO must sign application, NMLS unique ID 35 Processing the Loan Application Gather pertinent information for validation All aspects of financial situation considered Borrower with marginal income may qualify with substantial assets Substantial assets may not offset poor credit paying habits Co-borrower can help or hurt Must have acceptable assets and credit Must be able to support self and at least proportionate share of housing expense Large down payment can offset marginal credit or income 36 Income Stable monthly income: Monthly income that can reasonably be expected to continue in the future Generally gross base income from primary jobs Secondary sources include: Bonuses Commissions above base salary Part-time earnings Overtime Disability payments Social Security Pensions Retirement payments Interest-yielding investments Rental income Alimony Child support Maintenance Unemployment and welfare (if verifiable, continuous, and ongoing) 37 12

Secondary Income Bonuses, commissions, and part-time Consistent for two years; average may be used Verify with W-2s, pay stubs, income tax returns Overtime Consistent for two years; average may be used Disability payments Count if permanent If expiring, must continue for 3 years Social Security Permanent if retirement age If disability, must verify 3-year continuance Pensions and retirement benefits Must be stable and solvent Interest-yielding investments Durable if sound and consistent 38 Secondary Income Rental income Stable pattern of positive cash flow Use 75% of gross to account for vacancy loss Alimony, child support, and maintenance Consistent (written agreement or court decree) Should continue for minimum of three years Unemployment and welfare Verifiable, continuous, ongoing MLOs may not discriminate for receipt of public assistance Self-employment income Must own 25% of business Provide personal and entity tax returns 2 years May require financial statements 39 Evaluating Income May add 25% to non-taxable income to develop adjusted gross income Each type to be evaluated separately Stable employment history Continuous for 2 years unless explainable Advancement Education and training Computing monthly income Multiply the hourly wage by the number of hours worked in a week Multiply by 52 (weeks in a year) Divide by 12 (months in a year) 40 13

Case in Point Borrower makes $19.50 per hour, 40 hours / week Hourly Wage: $19.50 Weekly Income: $19.50 x 40 hours = $780 Annual Income: $780 x 52 weeks = $40,560 Monthly Income: $40,560 12 months = $3,380 41 Verifying Income W-2 forms for previous two years May be able to get copies from employer Payroll stubs for previous 30-day period Show borrower and employer Include gross earnings for current and YTD Verification of Employment (VOE) IRS Form 4506-T Gives lender permission to request transcript of tax returns 42 Reasonable Ability to Repay Required by Mortgage Reform and Predatory Lending Act (Title XIV of Dodd-Frank) Applies to most closed-end consumer credit secured by dwelling (owner occupied or not) Requires verified and documented information of borrower s ability to repay Current or reasonably expected income or assets, Current employment status, Monthly payment on the mortgage (with the calculation based on the fully indexed rate), Monthly payment on simultaneous loan, Monthly payment for mortgage-related obligations Current debt obligations, Monthly DTI or residual, Credit history. 43 14

Qualified Mortgage Defines a safe harbor for compliance Loan may not contain Negative amortization Interest-only payments Balloon payments Term longer than 30 years Points and fees may not exceed 3% of loan Income and assets must be verified/documented Underwriting considers maximum interest rate for 1 st 5 years, uses fully amortizing payment, considers mortgage-related obligations 44 Other Provisions of Proposed Rule Limit prepayment penalties to prime qualified mortgages with fixed rate Requires maintenance of ability to pay evidence for three years Prohibits evasion of the rule by structuring closedend credit as an open-end plan Rule will eventually be finalized by Consumer Financial Protection Bureau 45 Mortgage Exercise 3-1 Two months ago, Lisa Zorn was honorably discharged from the Air Force, where she spent four years training as an airplane mechanic. After discharge, she moved to take a 40 hour/week apprentice mechanic job with a major airline company where she earns $18/hour. Last month, her husband Dave, who has worked the past two years as registered nurse, found a nursing job with a local hospital making $625 per week. They just bought a new car and pay $400 each month on that loan. 46 15

Mortgage Exercise 3-1 1. What is the maximum mortgage payment (PITI) a lender would allow for a conventional loan based on the housing expense ratio? $18 hourly wage x 40 hours in a week x 52 weeks = $37,440 annual income $37,440 annual income 12 months = $3,120 Mrs. Zorn s monthly income $625 weekly income x 52 weeks = $32,500 annual income $32,500 annual income 12 months = $2,708.33 Mr. Zorn s monthly income $3,120 + $2,708.33 = $5,828.33 total stable monthly income $5,828.33 x 0.28 = $1,631.93 maximum housing expense 47 Mortgage Exercise 3-1 2. What is their total debt-to-income? What is the maximum mortgage amount (PITI) a lender would likely approve? $5,828.33 x 0.36 = $2,098.20 maximum debtto-income allowed $2,098.20 - $400 (car loan) = $1,698.20 maximum housing expense Remember to use the lower monthly payment allowable, which is $1,631.93. 48 Mortgage Exercise 3-1 3. Can the Zorns get approved for a loan even though they ve only been at their jobs a short time? Explain. Yes, although Lisa and Dave have only been at their jobs a short time, Lisa had special training in the Air Force, and Dave is a vocational nurse, which also implies special training. 49 16

Credit History Record of debt repayment How credit accounts were paid in the past Likelihood of paying accounts on time and as agreed in the future Borrower must inform lender of all debts Credit report from national reporting company Experian, Equifax, TransUnion Derogatory ratings must be explained ECOA prohibits discrimination in lending based on age, sex, race, marital status, color, religion, national origin, receipt of public assistance 50 Credit Scoring Objective means of determining creditworthiness of potential borrowers based on a number system Correlation between mortgage performance and credit scores Credit scoring system calculations consider: Number of open accounts Total credit limit Types of credit (e.g., credit cards, installment loans) Length of credit history (e.g., when opened, latest activity) Total amount of debt outstanding Number of late payments in the past 30-60-90 days Presence of adverse public records Number of recent credit inquiries Re-establishment of positive credit history after past problems Scores range from 300 to 850 Fannie Mae/Freddie Mac consider above 720 acceptable; 620-660 marginal; below 620 generally unacceptable FHA requires 10% down on scores between 500-579 51 Derogatory Credit Credit Score Information Disclosure (FACTA) Score credit that reporting agency distributed to the lender Key factors affecting the credit scores Credit agency contact information Bankruptcy (Title 11 of U.S. Code) Chapter 7 Liquidation proceeding All debts discharged Generally appear on credit report for 10 years Chapter 13 Individual Debts paid off over period of 3-5 years Generally appear on credit report for 7 years Other negative information stays on credit report 7 years Frequent bill consolidation and refinancing could be marginal risk Encourage borrowers to get annual free copy of credit report 52 17

Assets Above average assets offset marginal debt-to-income Liquid assets quickly converted to cash Checking, savings Secured borrowed funds Gift funds Bridge loans Certificates of deposit Retirement accounts Money market funds Trust funds Mutual funds Expected cash from properties Stocks and bonds pending sale Non-liquid assets include: Cash deposits on the sales contract Cash value of life insurance policies Net worth of businesses owned Automobiles 53 Down Payment Sufficient liquid assets needed for Down payment Closing costs Other incidental expenses Most programs require 5% down from own funds Verify source of down payment Borrowed funds must be included in total DTI ratio Gifts may be acceptable for down payment Donor gift letter showing funds don t need to be repaid Usually from immediate family member Fannie Mae/Freddie Mac require at least 5% from own funds unless gift is 20% or more of purchase price 54 Reserves and Other Assets Reserves: Cash on deposit or other highly liquid assets a borrower will have available after the loan funds Prefer at least 2 months PITI Non-owner occupied require 6 months Property converted to investment with less than 30% equity, 6 months for both (conventional) Other assets Shows ability to manage money Resources for emergencies Real estate equity: Difference between the market value of the property and the sum of the mortgages and other liens against the property 55 18

Verification of Deposits One to two months of bank statements Verification of Deposit (VOD) current and average balance Does the verified information conform to statements in the loan application? Is there enough money in the bank to pay costs of buying the property? Has the bank account been opened recently (within the last few months)? Is the present balance notably higher than the average balance? 56 Verification of Deposits Seasoned funds preferred In account for entire period covered by bank statements Red flags that funds may be borrowed: Recently opened accounts Higher-than-normal balances Document source of any large and unusual deposit 57 Insurance and Escrow Covers loss or damage to property in the event of fire or other disaster Sufficient to replace home or reimburse mortgage amount Lenders may place insurance to cover loan value 1 year of premiums required before closing Usually put in escrow (as with property tax) Lender/servicer forwards payments to insurer 58 19

Flood Insurance Covers the peril of flood for property in federally designated special flood hazard area (SFHA) Required by lender for life of loan Purchased from: National Flood Insurance Program (NFIP) Write Your Own program 59 Mortgage Exercise 3-2 Sam Able wants to buy a home, and it s estimated that an 80% conventional loan will have a mortgage payment of $878. He has an automobile payment of $212 a month with 14 installments remaining. He earns $700 per week. His down payment and closing costs are estimated at $18,400. Sam is selling a home with equity of $14,000. He has a checking and savings account with a local bank, and plans to draw on that account to close the transaction. The Verification of Deposit came back showing that Sam s savings account has an average monthly balance of $1,000 and a current balance of $3,600. 60 Mortgage Exercise 3-2 1. What is Sam s housing expense ratio? $700 weekly income x 52 weeks = $36,400 annual income $36,400 annual income 12 months = $3,033.33 monthly income $878 mortgage payment $3,033.33 monthly income = 0.29 (29% housing expense ratio) 61 20

Mortgage Exercise 3-2 2. What is Sam s total debt-to-income ratio? $878 mortgage payment + $212 auto payment = $1,090 total debt service $1,090 total debt service $3,033.33 monthly income = 0.36 (36% total debt-toincome ratio) 62 Mortgage Exercise 3-2 3. Will Sam have any problems closing this transaction? Explain. Yes, Mr. Able will have a few problems closing this transaction. The equity in his home ($14,000) plus money in the bank ($3,600) equals only $17,600, but his down payment plus estimated closing costs = $18,400. He needs to show two additional months of cash reserves, and his housing expense ratio of 29% exceeds guidelines. 63 Mortgage Exercise 3-2 4. Do you see any problems with Sam s Verification of Deposit? Explain. Yes, Mr. Able s Verification of Deposit is a problem because his current balance of $3,600 is significantly higher than his average balance of $1,000. He will need to have a good explanation of where the funds came from so the lender knows that he did not borrow the down payment. 64 21

Underwriting: Art, Not Science Underwriter evaluates: Documentation Borrower information Various risk factors Decision resulting from underwriting process: Reject loan as applied for (bad risk or incomplete file) Make loan on terms applied for Make loan on different terms 65 Underwriting: Loan File MLO should: Take ownership of loan file Review application carefully Ensure all documentation is included Ensure all information is accurate Identify issues that may be problematic Underwriter will evaluate: Sufficient value in collateral property? Is borrower likely to be able to make proposed monthly payments? 66 Automated Underwriting Systems Reduce cost/time of examining loan package Provide consistent underwriting decisions Uses statistical computer models based on traditional underwriting factors Does not consider race, ethnicity, age, other prohibited characteristics Recommends approval or refer for manual underwrite Fannie Mae s Desktop Underwriter and Freddie Mac s Loan Prospector 67 22

Real Success No standard order for assembling loan package for lender approval Consider including Dear Underwriter letter to acknowledge special circumstances Keep borrowers informed throughout process Lender has 30 days to communicate credit decision Approval Counteroffer Adverse action 68 Closing (Settlement or Loan Consummation) Lender issues clear to close when conditions met Managed by escrow / title agent or attorney Follows sales contract / escrow instructions Gathers required documents Calculates adjustments / prorations Compares Good Faith Estimate with HUD-1 Loan documentation signed and recorded Funds disbursed according to settlement statement If sale, also involves transfer of ownership Procedures may differ by state/region 69 Settlement Statement Reconciliation RESPA procedures for closing (HUD-1) Reflects total costs Debits (like debts): Sums of money owed Credits: Sums of money received Borrower/buyer side: Debits owed by borrower added to loan amount/ purchase price Mortgage amount is credit to borrower Credits total debits = amount needed to pay at closing Acquisition cost: Total amount necessary to purchase property Sales price Charges necessary to close Seller side: Credits due seller added to purchase price Total credits total debits = seller s net 70 23

Proration Division of expenses between buyer and seller in proportion to the actual usage of the item as of day loan is funded Accrued expenses Items for which the cost has been incurred, but the expense has not yet been paid Show as a debit to the seller and a credit to the buyer Prepaid expenses Items the seller has already paid Show as a credit to the seller and a debit to the buyer Proration calendars (may be determined by local custom) A 360-day year, 12 months of 30 days each. A 365-day year, counting the exact number of days in each month (taking leap years into account) 71 Proration Steps 1.Determine if the expense is accrued or prepaid 2.Divide the expense by the appropriate period to find a monthly (daily) rate 3.Determine how many months (days) are affected by the expense 4.Multiply the monthly (daily) rate by the number of affected months (days) 5.Determine which party is credited and which is debited 72 Key Term Review Assets Bankruptcy Credit History Credit Scoring Debts Debt-to-Income Ratio Discount Points FICO Score Float Housing Expense Ratio Liabilities Loan Processor Mortgage Loan Originator PITI Point Pre-Approval Pre-Qualification Rate Lock Reserves Servicer Stable Income Underwriter Yield Spread Premium 73 24

Summary 1. Common areas of work: Mortgage loan originator takes applications, pulls credit reports, orders appraisals, and assembles documents for mortgage loans Loan processor works on the file assembled by the originator, verifies information in the file, coordinates other aspects of the loan and closing Underwriter reviews file and arrives at a credit decision including any conditions for the lender or investor, based on the credit risk associated with a particular loan Servicer oversees the collection of mortgage payments and pursues late payments on behalf of the mortgagee 74 Summary 2. Lender s return is total amount a lender or broker makes on a loan. Loan fees, discount points Points are 1% of loan amount, increase lender s yield, paid for many reasons Discount points used to buy down the interest rate Yield spread premium is a tool MLOs can use to reduce a borrower s settlement costs 75 Summary 3. Borrowers can get pre-qualified or preapproved. Pre-qualification. MLO reviews borrower history to determine if they re likely to get approved for a loan, and the approximate amount; Not binding on the lender. Pre-approval. Lender uses application to determine that potential borrowers can be financed for a certain amount for a specific property; done only by lender 76 25

Summary 4. The loan process consists of four steps: 1. Consulting with a MLO 2. Completing the application 3. Processing the application 4. Analyzing the borrower and the property Common fees include credit report, appraisal, title work, inspections, etc. The loan application asks a number of personal and financial questions, along with information about the property the borrower wishes to purchase. 77 Summary 5. Borrower data: Address and employment information-2-3 years Income should be stable and verifiable Income from alimony/child support may be excluded if borrower chooses Self-employed (at least 25% ownership) may need personal, company tax returns and financial statements Disclose assets, liabilities (alimony, child support obligations) Liquid assets can be quickly converted to cash Net worth is assets minus liabilities Borrowers must answer all declarations truthfully 78 Summary 6. Bankruptcy is a court process that cancels debt and provides some relief for creditors. Chapter 7 bankruptcy is a liquidation proceeding where the debtor receives a discharge of all dischargeable debts. Chapter 13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. Chapter 13 bankruptcy usually appears on a credit report for 7 years. 79 26

Summary 7. The underwriting process may evaluate: Capacity (ability to pay) Collateral (down payment, home value) Credit (good payment history) Character (job stability, reserves) Some elements may be automated to reduce time and costs for lenders. Automated underwriting systems (AUSs) offer computerized analysis to recommend accepting the loan or refer it to a human underwriter for further consideration. Fannie Mae Desktop Underwriter (DU ) Freddie Mac Loan Prospector (LP ) 80 Summary 8. Credit and income: Monthly income stability, quality, and durability Bonuses, commission, part-time earnings, and overtime count if consistent; temporary income not usually counted Credit history is a record of debt repayment; credit scoring is an objective means of evaluating credit Lenders verify assets and may require financial statements The three main credit bureaus produce similar credit scores, which range from about 300 to 850 Gift letter can show part of the down payment/closing costs are a non-repayable gift 81 Summary 10. Conforming loans sold on the secondary market (e.g., Fannie Mae and Freddie Mac) require income ratios of 28% for housing expense and 36% for debt-to-income (DTI) Housing expense ratio relationship of borrower s total monthly housing expense (Principal, Interest, Taxes, Insurance or PITI) to gross stable monthly income, as % PITI also includes required homeowners association fees Total debt-to-income ratio relationship of total monthly debt (housing and un-cancelled debts with 10 or more payments left) to gross stable monthly income, as % Borrower must qualify under both ratios 82 27

Summary 11. Closing Also called settlement, culmination of the loan process Papers are signed and funds disbursed In sales transaction, also the transfer of ownership from seller to buyer, per terms of the sales contract (seller receives value for property cash, mortgage, etc. and buyer gets title) Proration division of expenses between buyer and seller in proportion to the actual usage as of day loan is funded 83 Chapter 3 Quiz 1. Bob is buying a house. It was appraised at $236,000, the sales price is $228,000, and the loan amount is $216,000. In order to buy down his interest rate, Bob is willing to pay 2 points in addition to the 1 point in loan origination fees. What is the price of Bob s discount points? A. $4,320 B. $4,720 C. $6,840 D. $7,080 84 Chapter 3 Quiz 2. Non-taxable child support income A. cannot be considered as stable income. B. may be counted at 75%. C. may be counted at 100%. D. may be counted at 125%. 85 28

Chapter 3 Quiz 3. If the borrower is self-employed, he or she should provide A. average monthly income amount earned over the previous two years. B. employment verification from the last employer. C. profit and loss statements for the previous six years. D. tax returns for the previous two or three years. 86 Chapter 3 Quiz 4. A gift letter A. can come from a borrower s parent or guardian only. B. cannot be used for part of the down payment. C. must be signed by the donor. D. must state when the gift is to be repaid. 87 Chapter 3 Quiz 5. To be classified as self-employment income, the borrower must own at least what percent of the business used for qualifying? A. 5% B. 10% C. 25% D. 50% 88 29

Chapter 3 Quiz 6. Conforming loans follow guidelines of A.ECOA. B.Fannie Mae and Freddie Mac. C.the FHA. D.RESPA. 89 Chapter 3 Quiz 7. When qualifying for a conventional loan, stable gross monthly income can include A. alimony received (that a borrower chooses to reveal). B. bonus received for the first time last year. C. erratic unemployment earnings. D. income from other family members. 90 Chapter 3 Quiz 8. If the lender wants the borrower's permission to get copies of his income tax returns, the borrower must sign what form? A. 1003 B. 4506-T C. 95-IRS D. URAR 91 30

Chapter 3 Quiz 9. Joe wants to get a loan to buy a house. When evaluating his credit obligations, which would LEAST LIKELY be considered as debt? A.car loan payment B.cell phone service payment C.child support payments D.credit card payments 92 Chapter 3 Quiz 10. A borrower has a stable gross monthly income of $3,200 and recurring monthly debts of $370. What is the maximum amount of money available to him for a monthly housing expense in order to qualify for a conforming loan? A. $782 B. $896 C. $928 D. $1,152 93 31