Functions of Loan Processing Flashcards
To be able to explain the different reasons and rules around processing loans
Processing a new loan involves several key functions to ensure a smooth and efficient loan origination process. Here are the typical functions involved in processing a new loan. Steps
For New Loans
· Application Review
· Documentation Verification
· Credit Assessment
· Property Valuation
· Underwriting
· Loan Approval and Conditions
· Closing Preparation
· Compliance and Regulatory Checks
· Loan Funding and Disbursement
· Post-Closing Review and Follow-Up
**For a 2nd Mortgage **
· Application Review
· Documentation Verification
· Credit Assessment
· Property Valuation
· Risk Analysis
· Compliance and Regulatory Requirements
· Communication and Coordination
· Loan Settlement
For a Reverse Mortgage
· Application Review
· Documentation Verification
· Eligibility Assessment
· Property Valuation
**· Financial Assessment
· Loan Calculation
· Compliance and Regulatory Requirements
· Communication and Coordination
· Loan Settlement
What are the 5 reasons to take out a loan?
- **Purchase: **The purchase of a property, such as a home or an investment property.
- Refinance: Refinancing involves replacing an existing mortgage with a new one, often with better terms or interest rates
- Home Equity Loan/Home Equity Line of Credit (HELOC)/ Top up ( Upstamps): Leverage the equity they have built up in their property. These types of mortgages allow borrowers to access a portion of the home’s value to fund expenses such as home improvements, debt consolidation, education, or other major purchases. Typically set up with the existing lender.
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Debt Consolidation: Some individuals choose to consolidate high-interest debts, such as credit cards or personal loans, by taking out a mortgage. By using the equity in their property, they can pay off the higher-interest debts and potentially benefit from lower interest rates associated with a mortgage.
5.Construction/Renovation: Finance the construction progress when building a new home or undertaking significant renovations, individuals may apply for a construction loan to finance the construction process. - Bridging Finance: Borrowers who are in the process of selling their existing property and purchasing a new one may need short-term bridging finance. This type of loan provides temporary funding to bridge the gap between the sale and purchase transactions.
Construction Loan: A construction loan is designed for borrowers who plan to build a new home or undertake significant renovations. The loan amount is disbursed in stages, known as progress payments, as the construction progresses. What are the money rules of this type of loan?
○ Money Rules:
§ Interest-Only Repayments: During the construction phase, most construction loans require borrowers to make interest-only repayments. This means you only need to pay the interest charged on the amount disbursed for construction, rather than the principal amount borrowed. The interest-only period usually lasts for the duration of the construction process, which can range from several months to a year or more. Length can vary but averages between 6months to 2 years.
§ Progressive Drawdowns: Construction loans are disbursed in stages, known as progressive drawdowns, based on the construction progress. The lender will typically inspect the construction site and assess the completion of specific stages before releasing funds. Interest is charged only on the amount drawn down at each stage.
§ **Repayment Conversion: **Once the construction is complete, the loan will transition from the interest-only phase to the principal and interest repayment phase. At this point, your repayments will include both the principal amount borrowed and the interest charges. The loan will typically have a predetermined loan term, such as 25 or 30 years, within which you must fully repay the loan.
**Loan-to-Value Ratio (LVR) Adjustments: **Construction loans often have different loan-to-value ratio (LVR) requirements compared to traditional mortgage loans. The LVR is the percentage of the property’s value that the lender is willing to lend. During the construction phase, the LVR is typically calculated based on the land value and the estimated value of the completed property. Once construction is complete, the LVR is recalculated based on the final value of the property.
○ Extras:
§ Construction Offset Account: Similar to an offset account, a construction offset account is specifically designed for borrowers constructing a new home. It allows them to offset the interest charged on the construction loan with funds held in the offset account during the construction phase.
§ Construction-to-Permanent Loan: A construction-to-permanent loan combines the financing for land purchase and construction into a single loan. It transitions from the construction phase, where the borrower makes interest-only payments, to the permanent phase, where regular principal and interest repayments begin.
Reverse Mortgage/ Equity Release Mortgage : A reverse mortgage is available to older homeowners and allows them to access the equity in their property. The loan does not require regular repayments, and interest is added to the loan balance over time. The loan is typically repaid when the borrower sells the property or upon their passing. What are the money rules?
○ Money Rules:
§ **No Repayments Required: **With a reverse mortgage, borrowers are not required to make regular repayments towards the loan balance. This means you don’t need to make monthly payments like you would with a traditional mortgage.
§ Accumulated Interest: Instead of making repayments, the interest charged on the loan is added to the loan balance over time. This means that the loan balance increases over the life of the loan.
§ Growing Debt: As interest accumulates and is added to the loan balance, the overall debt gradually grows. The longer the loan is in place, the more the debt increases.
§ Repayment Events: Repayment of the loan typically occurs when one of the following events takes place:
a. Sale of the Property: If the borrower decides to sell the property, the loan balance, including the accumulated interest, is repaid from the proceeds of the sale. Any remaining equity belongs to the borrower or their estate.
b. Permanent Move from the Home: If the borrower permanently moves out of the home, such as moving into a nursing home or aged care facility, the loan becomes due. The loan balance, including the accumulated interest, must be repaid at that time.
c. Passing Away: Upon the borrower’s passing, the loan becomes due. The loan balance, including the accumulated interest, is typically repaid from the proceeds of the sale of the property.
§ Loan Protection: Australian regulations provide consumer protections for reverse mortgage borrowers. These include a “no negative equity guarantee” that ensures borrowers (or their estate) will not owe more than the value of the property when the loan is repaid.
o Second Mortgage: A second mortgage is a loan taken out in addition to an existing mortgage on the same property. It allows borrowers to access additional funds by leveraging the equity they have in their property. Also knowns as a home equity loan or a home equity line of credit). Funds can be used for renovations, business or personal use. what are the money rules?
§ Loan Amount: Determined by the available equity in your property.Often a percentage of the property’s appraised value minus any outstanding mortgage balances.
§ Interest Rates: Eeither fixed or variable.
§ **Fixed repayment schedule **
§ Collateral: A second mortgage is secured by your property, meaning it uses your home as collateral. This gives the lender the right to sell the property in the event of default to recover the outstanding loan balance. It’s important to be aware of the potential risks involved in securing a loan with your property.
**Valuations: **When applying for a second mortgage, the lender may request a valuation to determine the current market value of the property. This valuation helps them assess the property’s worth and calculate the loan-to-value ratio (LVR) to ensure it meets their lending criteria. When the second mortgage is fully repaid, and the loan is discharged, some lenders may require a valuation to confirm the property’s value at that time. This valuation serves as a final assessment of the property’s worth and provides an updated figure for their records.
9 different names for a second mortgage
§ Home Equity Loan
§ Home Equity Line of Credit (HELOC):
§ Second Charge Mortgage
§ Second Lien Mortgage
§ Second Registered Mortgage
§ Subsequent Mortgage
§ Junio Mortgage
§ Subordinate Mortgage
§ Piggyback Mortgage
Difference between a first and second mortgage?
* Purpose
* Loan to value ratio
* Documentation
* Underwriting
* Settlement
* Priority
§ The second mortgage is less of a priority over the primary loan.
§ Purpose: Purchase Mortgage is used to finance the acquisition of a new property, while a Second Mortgage is taken out on an existing property where the borrower already has an existing mortgage.
§ Loan-to-Value Ratio (LVR): In a purchase mortgage, the LVR is typically based on the purchase price or the appraised value of the property, whichever is lower. In a second mortgage, the LVR is calculated based on the current market value of the property minus the outstanding balance of the first mortgage.
§ Documentation: For a purchase mortgage, the borrower typically needs to provide documents related to the property purchase, such as the contract of sale, proof of deposit, and other property-specific documents. For a second mortgage, the borrower may need to provide documents related to the existing mortgage, such as the current mortgage statements and details of the outstanding balance.
§ Underwriting: The underwriting process for a purchase mortgage focuses on assessing the borrower’s ability to repay the loan based on their income, creditworthiness, and other financial factors. For a second mortgage, the underwriting process may also consider the borrower’s existing mortgage obligations, including their payment history and the overall debt-to-income ratio.
§ Settlement: In a purchase mortgage, the settlement typically occurs on the date specified in the purchase contract when the property ownership is transferred to the borrower. In a second mortgage, the settlement process involves the establishment of the additional loan or line of credit, and the borrower may receive the funds either as a lump sum or as a line of credit.
§ Priority: The purchase mortgage generally has the first priority lien on the property, meaning it takes precedence over any subsequent mortgages or liens. The second mortgage has a lower priority and is subordinate to the first mortgage.
Portable Mortgage : A portable mortgage allows borrowers to transfer their existing loan to a new property when they sell their current property and purchase a new one. This feature eliminates the need to refinance the loan and can save on costs and paperwork. Require valuations on both properties. Waht are 7 names for a portable mortgage?
○ Other names for a portable Mortgage
Transferable Mortgage
Mortgage Portability
Moveable Mortgage
Portable Home Loan
Porting a Mortgage
Mortgage Transfer Option
Portable Loan Facility
What is a land loan?
o Land Loan: A land loan is designed for borrowers who want to purchase vacant land for future development or investment purposes. This loan type specifically finances the purchase of the land only, without including construction costs.
Split Rate Mortgage: A split rate mortgage allows borrowers to divide their loan into multiple portions, with some portion having a fixed interest rate and the remaining portion having a variable interest rate. This option provides a balance between stability and potential interest rate changes. What are some interesting variations to this?
o Split Loan with Different Terms: Borrowers can opt for a split loan where each portion has a different loan term. For example, one portion of the loan can have a fixed term of five years, while the other portion has a variable term. This provides flexibility and mitigates the risks associated with interest rate fluctuations.
Split Loan to Different Repayment Types: In addition to splitting a loan into different interest rate portions, borrowers can also split their loan into different repayment types. For example, they can allocate a portion of the loan to be repaid on a principal and interest basis and another portion to be repaid on an interest-only basis.
o Family Pledge Loan/Family Guarantee Mortgage: A family pledge loan allows borrowers to use a family member’s property as additional security for their loan, reducing the deposit required or eliminating the need for lenders mortgage insurance. This type of loan can assist borrowers who have limited savings for a deposit.
o Family Pledge Loan/Family Guarantee Mortgage: A family pledge loan allows borrowers to use a family member’s property as additional security for their loan, reducing the deposit required or eliminating the need for lenders mortgage insurance. This type of loan can assist borrowers who have limited savings for a deposit.
What are the 5 most common types of loans
○ Variable Rate Mortgage: A variable rate mortgage has an interest rate that can fluctuate over time based on changes in the lending market and the Reserve Bank of Australia’s cash rate. The monthly repayments can increase or decrease, depending on the interest rate movement.
○ Fixed Rate Mortgage: With a fixed rate mortgage, the interest rate is set for a specific period, typically ranging from one to five years. During this period, the interest rate and monthly repayments remain constant, providing stability and predictability for borrowers.
○ Split Rate Mortgage: A split rate mortgage allows borrowers to divide their loan into multiple portions, with some portion having a fixed interest rate and the remaining portion having a variable interest rate. This option provides a balance between stability and potential interest rate changes.
○ Split Loan to Different Repayment Types: In addition to splitting a loan into different interest rate portions, borrowers can also split their loan into different repayment types. For example, they can allocate a portion of the loan to be repaid on a principal and interest basis and another portion to be repaid on an interest-only basis.
○** Interest-Only Mortgage:** An interest-only mortgage allows borrowers to make repayments only towards the interest component of the loan for a specified period, typically between one to five years. Principal repayments are deferred until the interest-only period ends.
Principal and Interest Mortgage: A principal and interest mortgage requires borrowers to make regular repayments towards both the principal amount borrowed and the interest. This type of mortgage allows borrowers to gradually reduce the loan balance over time.
