Creating a Mortgage Flashcards
When a borrower meets with a lender to apply for a mortgage loan, the underwriting form used will likely be Fannie Mae’s Uniform Residential Loan Application (URLA). It’s the standard form most lenders use to collect the information necessary to evaluate the loan risk their applicants represent.
The benefit of using this form is that it allows lenders to approach the task of underwriting without bias and with consistency. And it establishes a set of criteria or expectations that lenders, borrowers, and real estate brokers can prepare for.
The URLA, with its 9 different sections, can appear to be a daunting document. Not to worry, Anthony, the lender will be the one to walk your client through the document, and they will assist your client in filling out the form.
Even so, you’ll want to be familiar with its contents — which is why I’ve provided an overview of the primary underwriting information being gathered:
Borrower/Co-Borrower information
Employment information
Assets and liabilities
Property owned by the borrower
Purpose of the loan and property information
Borrower/Co-Borrower declarations about the property, funding, and past financial history
Acknowledgment of legal obligations
Military service
Demographic information
I’ve included a pdf of the application here so you can take a quick look.
A blank “Uniform Residential Loan Application” form.
The Uniform Residential Loan Application
After the borrower completes the Uniform Residential Loan Application, the lender undertakes the automated and manual underwriting necessary to make a decision. The lender then informs the applicant as to whether or not the loan has been approved.
If so, the borrower is provided with a document known as the Loan Estimate form.
A few days prior to closing, the lender will follow up with the borrower by providing a Closing Disclosure form reflecting the final numbers to be used in the settlement of the loan.
Before I go more into detail about the forms themselves, I want to give you a little background, including some of the government intervention that led to the creation and use of these forms.
Government Influence in Loan Origination
There are a number of ways that the government has shaped the development of the loan origination process, which has led to the two forms used today.
Truth in Lending Act
Title I of the Consumer Credit Protection Act of 1968 is better known as the Truth in Lending Act (TILA). It was created to ensure that credit terms are disclosed in a clear and meaningful way. This was done so that consumers could compare credit terms from different lenders more readily and knowledgeably.
Mortgage loans are covered by this Act.
RESPA
The Real Estate Settlement Procedures Act (RESPA) was created in 1974 as a response to a number of abusive practices related to the real estate settlement process. The Act took effect the following year as a way to regulate the lending process around federally related loans.
It is one of the earliest and most influential legislative efforts addressing this topic.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act led to the creation of the Consumer Finance Protection Bureau (CFPB), a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace.
Before the passing of this Act, that responsibility was divided among several agencies.
Integrated Disclosure Forms
One of the CFPB’s most noteworthy contributions is the simplification and transparency it brought to the mortgage lending process.
The bulk of that effort came in 2015 with the creation of the Loan Estimate form and its companion document, the Closing Disclosure form. (I told you we’d get back to talking about these forms!)
These forms integrate the multiple disclosure requirements (and forms) that previously existed separately in TILA and RESPA. If you hear of the term TRID in relation to the Loan Estimate and Closing Disclosure forms, it’s in reference to the bureau’s TILA-RESPA Integrated Disclosure initiative that brought these two forms to life.
Loan Estimate & Closing Disclosure: The History
CFPB’s Take on the Integrated Forms
With a tip of the cap to the Consumer Financial Protection Bureau (CFPB), I’ll summarize what they have to say about these integrated disclosure forms on their site:
The Loan Estimate
The Loan Estimate combines and replaces the Good Faith Estimate and the initial Truth-in-Lending (TIL) statement. The form highlights the most important elements of the transaction and allows for easy comparisons among competing lenders. It informs the borrower about the important details regarding the requested loan, including the estimated interest rate, monthly payment, and total closing costs for the loan.
The Closing Disclosure
The Closing Disclosure combines and replaces the HUD-1 Settlement Statement and the final Truth-in-Lending (TIL) statement. It provides the final details about the mortgage loan. The form mirrors the format and presentation of the information found on the Loan Estimate, making the two documents easy to compare, thus allowing the borrower to spot any changes that have taken place.
How the Documents Work Together
The new documents put the most relevant information where it’s easy to see, right on page 1.
The first page of the consumer finance mortgage estimate site.
- Projected Payments
A breakdown of the estimated total monthly payment appears on both the Loan Estimate and the Closing Disclosure.
You can help your clients understand the impact of fees not included in the estimated total monthly payment, such as homeowner’s association, maintenance, and any other property-related fees your client will be expected to pay.
The lender cannot ask your clients to pay for an application, appraisal, or similar fee until after they have had the opportunity to review the Loan Estimate and have indicated that they would like to move forward with their application.
If the estimated total monthly payment is different on the initial Loan Estimate than it is on a revised Loan Estimate or on the Closing Disclosure, your clients can easily spot the difference and make sure they understand and agree.
- Costs at Closing
The estimated closing costs and estimated cash to close also appear on the first page of the Loan Estimate and Closing Disclosure.
Your clients see how much money they are expected to pay in closing costs and how much they are expected to bring to the closing table as soon as they receive a Loan Estimate. The estimated cash to close includes both the closing costs and the down payment.
If the amounts change on any revised Loan Estimates or Closing Disclosures, your clients have the time to ask why, make decisions, and respond.
The Whole Form and Nothing but the Form
For you inquisitive types, here’s a link to the Loan Estimate form in full. (The Closing Disclosure looks so much like it, they could be twins!)
Loan Estimate & Closing Disclosure: The Forms
As you now know, the Loan Estimate and Closing Disclosure forms have been purposely formatted to make it easy for the borrower to notice any changes to the rates, terms, or costs from one form to another.
But here’s what you might not realize: As soon as a lender is aware that something of consequence is going to change, they need to make the borrower aware of the fact.
If the change happens well before the Closing Disclosure is due, the lender will issue a revised Loan Estimate reflecting those changes.
When this occurs, they are still obligated to send out a Closing Disclosure form shortly before the day of closing (at least three business days prior).
Ch-ch-ch-changes
Since David Bowie released his song years before revised Loan Estimates were a thing, we can rule the CFPB’s integrated forms as inspiration. Nevertheless, I will always sing praises to the CFPB for their work to protect consumers of mortgage loans.
In fact, I will now turn the mic over to the CFPB and let them explain how revised Loan Estimates work and what they mean for the consumer:
I received a revised Loan Estimate from my lender showing a higher interest rate and increased closing costs. What does this mean?
When important information changes, your lender is required to give you a revised Loan Estimate showing how this new information affects your loan terms and closing costs.
The Loan Estimate is a form that went into effect on Oct. 3, 2015.
It is illegal for a lender to intentionally underestimate charges for services on the Loan Estimate, and then surprise you with higher charges on a revised Loan Estimate or Closing Disclosure. However, a lender may increase the fees it quoted you on the Loan Estimate if certain circumstances change.
Here are some common reasons why the estimated charges in your Loan Estimate might increase:
You decide to change the kind of loan, for example moving from an adjustable-rate to a fixed-rate loan
You decide to reduce the amount of your down payment
The appraisal on the home you want to buy came in lower than expected
You took out a new loan or missed a payment on another loan, and your credit score has changed
Your lender could not verify your overtime, bonus, or other income
The interest rate on your loan was not locked, and locking the rate caused the points or lender credits to change
If your lender gives you a revised Loan Estimate, you should look it over to see what has changed. Ask your lender:
“Can you explain why I received a new Loan Estimate?”
“How is my loan transaction different from what I was originally expecting?”
“How does this change my loan amount, interest rate, monthly payment, cash to close, and other loan features?”
The CFPB Speaks: Changes to the Loan Estimate
Not only did TRID integrate and clarify the disclosure forms used in loan origination, but it also established delivery deadlines for those forms. The purpose of the deadlines is to give the consumer sufficient time to react to the information contained in these disclosures.
These deadlines sound simple enough, but like a lot of things in life, they’re a little more complicated than they appear at first glance.
Loan Estimate Deadlines
A lender is obligated to deliver or mail the Loan Estimate form by the third business day after the lender receives the loan application from the borrower.
Notice the words in bold in the above sentence. There’s a reason for that.
If the Loan Estimate is hand-delivered, it should be received by the borrower within three business days after having submitted the application.
If the Loan Estimate is placed in the mail by the lender within three days after receiving the application, it could take an additional number of days for it to actually get to the borrower. Regardless of when it actually arrives, the Loan Estimate is considered received by the borrower three business days after having been mailed by the lender.
For the Loan Estimate, a business day is defined as one in which the lender is fully operational and open to the public. For some lenders, this might mean Monday through Friday. For other lenders, business days might also include Saturdays.
Here are a couple of examples of how the Loan Estimate timeline might work out:
An infographic showing an example of the loan estimate timeline.
Image description
Closing Disclosure Deadlines
Regardless of how it’s delivered, the borrower must receive the Closing Disclosure three business days before closing day.
With respect to the Closing Disclosure deadline, a business day is considered to be any day other than Sunday or a federal holiday.
Here are two examples that demonstrate the timeline difference between hand-delivered and mailed-out Closing Disclosure forms:
An infographic showing an example of the closing disclosure timeline.
Image description
Finish Strong
It’s critical that these deadlines get met, Anthony.
The implications of a missed Closing Disclosure deadline generally means that closing itself gets moved. And that can have all sorts of unpleasant implications for everyone involved in the transaction.
So while you’re not directly responsible for the creation and delivery of these disclosure forms, you can support your clients by helping them stay on top of things and reaching out to the appropriate parties, if necessary, when it looks like a deadline might be in danger of being missed.
Loan Origination Disclosure Deadlines
I realize that you’ve already had a couple of exposures in this course to the concept of discount points and how to calculate their cost, but I wanted to give you a chance (just a few screens from now!) to see the actual impact that buying down the rate can have on the monthly mortgage payments of a borrower.
Let me first remind you of a couple of things:
1 point = 1% of the loan principal (This is true whether it is an origination point or a discount point.)
In the purchase of discount points (aka buydown), a borrower is basically agreeing to pay some interest upfront as a trade-off for a lower interest rate over the life of the mortgage.
A Good or Bad Strategy
Prepaying interest through points can be a good or bad strategy, depending on what the lender is offering in exchange for those points AND how long the borrower plans on staying in the loan.
Most lenders, as a rule of thumb, will reduce the mortgage rate by 25 basis points (0.25%) in exchange for the payment of the first discount point. After that, things become less predictable. The payment of two discount points will not necessarily lower your rate by 50 basis points (0.50%), as you would expect.
Oftentimes, a lender will offer less of a rate drop for the payment of subsequent discount points, if more than one is being purchased. This really varies from one bank to the next, so a borrower needs to look at the fine print of the discount point incentives being offered. Each lender has their own pricing structure, and some lenders may be more or less expensive overall than other lenders – whether or not you’re paying points. That’s why it pays to shop around.
More About Discount Points
Our friends over at the CFPB also do a good job of explaining and illustrating how discount points and lender credits work and the impact they can have, so what follows here is taken from their website with much gratitude and all credit due.
What are (discount) points and lender credits and how do they work? Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs. Points, also known as discount points, lower your interest rate in exchange paying for an upfront fee. Lender credits lower your closing costs in exchange for accepting a higher interest rate.
Points
Points let you make a tradeoff between your upfront costs and your monthly payment. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time.
Paying points lowers your interest rate relative to the interest rate you could get with a zero-point loan at the same lender. A loan with one point should have a lower interest rate than a loan with zero points, assuming both loans are offered by the same lender and are the same kind of loan. The same kind of loan with the same lender with two points should have an even lower interest rate than a loan with one point.
The exact amount that your interest rate is reduced depends on the specific lender, the kind of loan, and the overall mortgage market. Sometimes you may receive a relatively large reduction in your interest rate for each point paid. Other times, the reduction in interest rate for each point paid may be smaller. It depends on the specific lender, the kind of loan, and market conditions.
Lender Credits
Lender credits work the same way as points, but in reverse. You pay a higher interest rate and the lender gives you money to offset your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate.
Lender credits are calculated the same way as points, and may appear on lenders’ worksheets as negative points. For example, a lender credit of $1,000 on a $100,000 loan might be described as negative one point (because $1,000 is one percent of $100,000).
That $1,000 will appear as a negative number as part of the Lender Credits line item on page 2, Section J of your Loan Estimate or Closing Disclosure. The lender credit offsets your closing costs and lowers the amount you have to pay at closing.
In exchange for the lender credit, you will pay a higher interest rate than what you would have received with the same lender, for the same kind of loan, without lender credits. The more lender credits you receive, the higher your rate will be.
The exact increase in your interest rate depends on the specific lender, the kind of loan, and the overall mortgage market. Sometimes, you may receive a relatively large lender credit for each 0.125% increase in your interest rate paid. Other times, the lender credit you receive per 0.125% increase in your interest rate may be smaller.
A loan with a one-percent lender credit at one lender may or may not have a higher interest rate than the same kind of loan with no lender credits at a different lender. Each lender has their own pricing structure, and some lenders may be more or less expensive overall than other lenders – regardless of whether or not you’re receiving lender credits.
Points & Credits Example
The chart below shows an example of the tradeoffs you can make with points and credits. In the example, you borrow $180,000 and qualify for a 30-year fixed-rate loan at an interest rate of 5.0% with zero points. In the first column, you choose to pay points to reduce your rate. In the third column, you choose to receive lender credits to reduce your closing costs. In the middle column, you do neither.
Tip: If you don’t know how long you’ll stay in the home or when you’ll want to refinance and you have enough cash for closing and savings, you might not want to pay points to reduce your interest rate or take a higher interest rate to receive credits.
A table comparing three scenarios that affect interest rates.
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Discount Point Strategy Math
If you want to evaluate whether or not it makes sense to pay for discount points, you can by considering the three variables involved:
Cost of discount points
Reduction in monthly payment (savings)
Months in the loan
For example, if you were to pay $3,000 in discount points and it resulted in a monthly mortgage payment reduction of $100, then you would need to stay in the loan for at least 30 months to break even on that upfront discount payment.
Any time spent in the loan after that would result in a savings of $100 per month.
Here’s what the math looks like:
Discount point fee ÷ Monthly payment savings = Months in Loan
With the numbers plugged in:
$3,000 ÷ $100 = 30 months (or two and one-half years)
The CFPB Speaks: Discount Points & Lender Credits
Cash to close is the total amount a buyer needs to bring to closing. This includes such things as fees, taxes, prepaid and escrow, title policy, points, down payment, etc.
If you reviewed the Loan Estimate form I provided earlier, you might have noticed that the bottom of page two contains a section titled Calculating Cash to Close. It provides a line-item list of what would be added and subtracted to get to the total estimated cash to close. (This will also appear with the latest numbers in the Closing Disclosure form.)
Here’s what that section looks like before the numbers are filled out:
A blank calculating cash to close sheet.
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To illustrate how this might end up looking filled out in real life, I’ll walk you through the process and the simple math you’ll use in this type of calculation. (This is your cue to go to the next screen.)
Calculating Cash to Close
Chapter 1 covered lots of good info, Anthony. Let’s do a quick review of some of the important terms, concepts, and principles you’ve learned along the way.
Key Terms
loan estimate
combines and replaces the Good Faith Estimate and the initial Truth-in-Lending (TIL) statement; highlights the most important elements of the transaction
Key Concepts & Principles
Here are the concepts and principles you’ll want to master from this chapter:
Loan Origination Timeline
Here’s a chart that highlights the milestone events in loan origination:
A review of the Loan Origination Timeline.
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The Uniform Residential Loan Application
Fannie Mae’s Uniform Residential Loan Application (URLA) is the standard form most lenders use to collect the information necessary to evaluate the loan risk their applicants represent. The benefit of using this form is that it allows lenders to approach the task of underwriting without bias and with consistency.
Government Influence in Loan Origination
Truth in Lending Act: Ensures that credit terms are disclosed in a clear and meaningful way
RESPA: regulates the lending process related to real estate settlement procedures
Consumer Finance Protection Bureau (CFPB): Created a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace
The Loan Estimate
The Loan Estimate combines and replaces the Good Faith Estimate and the initial Truth-in-Lending (TIL) statement. The form highlights the most important elements of the transaction and allows for easy comparisons among competing lenders.
A lender is obligated to deliver or mail the Loan Estimate form by the third business day after the lender receives the loan application from the borrower.
The Closing Disclosure
The Closing Disclosure combines and replaces the HUD-1 Settlement Statement and the final Truth-in-Lending (TIL) statement. It provides the final details about the mortgage loan.
Regardless of how it’s delivered, the borrower must receive the Closing Disclosure three business days before closing day. The implications of a missed Closing Disclosure deadline generally means that closing itself gets moved.
Two Things to Remember about Discount Points:
1 point = 1% of the loan principal (This is true whether it is an origination point or a discount point.)
In the purchase of discount points (aka buydown), a borrower is basically agreeing to pay some interest upfront as a trade-off for a lower interest rate over the life of the mortgage.
Lender Credits
Lender credits work the same way as points but in reverse. You pay a higher interest rate and the lender gives you money to offset your closing costs.
Calculating Cash to Close
Cash to close is the total amount a buyer needs to bring to closing. This includes such things as fees, taxes, prepaid and escrow, title policy, points, down payment, etc.
You’ll find a Calculating Cash to Close section on both the Loan Estimate and the Closing Disclosure forms.
Chapter Summary
