Lender Financing - Part 1 - Chapters 55-57 Flashcards
Understand the components of the Uniform Residential Loan Application
The Uniform Residential Loan Application prepared by the buyer with the Transaction Agent (TA) supplies the lender with necessary information about the buyer and the property securing the mortgage. It also give the lender authorization to start the mortgage packaging process.
The Uniform Residential Loan Application calls for the buyer with the assistance of the mortgage representative and the TA to enter information such as:
- the type of mortgage sought, such as a conventional, VA or FHA-insured, and total $ amount, interest rate, fixed or adjustable, payment schedule, amortization period
- the identity of the property used to secure the mortgage and source of down payment
- the buyer’s name and any co-borrower information
- employment information, including current employment, job title, and years spent at job
- the buyers monthly income and housing expenses
- the buyers assets and liabilities, which disclose the buyers net worth (note a buyer does not need to disclose all their assets to maintain privacy) just need enough to get approved and show creditworthiness
- details about the transaction, including cost of repairs, alterations and improvements made to the property
- relevant miscellaneous credit worthiness issues to be disclosed to the lender, including debt enforcement and debt avoidance the buyer has experienced.
Guide your buyer on how to prepare the mortgage application
The uniform residential loan application prepared by the buyer with the transaction agent supplies the lender with necessary information about the buyer and the property securing the mortgage. It also gives the lender authorization to start the mortgage packaging process.
Once a lender receives a mortgage application and any processing fee, a lender evaluates the mortgage package and considers a buyer’s ‘willingness and capacity’ to pay. A lender evaluates a buyers ‘ability-to-repay’ (ATR).
Then the property is appraised to determine if it qualifies as security for the mortgage. If a lender approves the property based on an appraisal, a mortgage package is assembled and sent to an underwriter for review.
Once mortgage conditions are met and verified, the mortgage is classified as approved. Escrow calls for mortgage documents and funds. On funding, the sales transaction is closed.
Advise on the lender disclosures required under the Real Estate Settlement Procedures Act (RESPA)
The Real Estate Settlement Procedures Act (RESPA) is legislation prohibiting brokers from giving or accepting referral fees if the broker or their agent is already acting as a transaction agent in the sale of a 124 unit residential property which is being funded by a purchase-assist federally-related consumer mortgage.
The Real Estate Settlement Procedures Act (RESPA) mandates lenders active in the secondary mortgage market to disclose all mortgage-related charges on mortgages used to purchase, refinance or improve 1 to 4 unit Residential Properties.
Mortgage related charges include:
- Origination fees
- credit report fees
- insurance costs
- prepaid interest
RESPA is now administered and enforced by the Consumer Financial Protection Bureau (CFPB) – not the US Department of Housing and Urban Development (HUD).
A Real Estate Settlement Procedures Act (RESPA) controlled lender needs to provide the buyer with a:
- a Loan Estimate of all mortgage-related charges,
- a special information booklet, published by the CFPB
- a Closing Disclosure which summarizes all ‘final’ mortgage terms and details by the lender,
- a list of homeownership counseling organizations.
What is a federally related mortgage loan?
“Federally related mortgage loans” are also defined to include installment sales contracts, land contracts, or contracts for deeds on otherwise qualifying residential property if the contract is funded in whole or in part by proceeds of a loan made by a lender, specified federal agency, dealer or creditor subject to …
What loans does respa not apply to?
Commercial or Business Loans
Normally, loans secured by real estate for a business or agricultural purpose are not covered by RESPA. However, if the loan is made to an individual entity to purchase or improve a rental property of 1 to 4 residential units, then it is regulated by RESPA.
balance sheet
A balance sheet is an itemized, dollar value representation for setting an individual’s net worth by subtracting debt obligations (liabilities) from asset values. the buyer and co-borrower need to prepare a balance sheet if their assets and liabilities are sufficiently joined to make one combined statement viable. If not each co-borrower is to prepare a separate asset and liability statement for individual consideration by the lender.
buyer mortgage capacity
A buyer mortgage capacity is a buyer’s ability to make mortgage payments based on their debt-to-income ratios.
creditworthiness
A buyer’s willingness to make mortgage payments is evidence by the credit report. The credit history demonstrate to the lender whether or not the buyer has a propensity to pay, called creditworthiness. Creditworthiness is an individual’s ability to borrow money, determined by their present income, wealth and previous debt payment history.
debt-to-income ratio (DTI)
The Debt To Income Ratio (DTI) is the percentage of monthly gross income that goes towards paying debt. Generally, the debt to income ratio for conventional mortgages, also called the debt to income standard, limits the buyers:
- monthly payments for the maximum purchase assist mortgage to approx 31% of the buyers monthly gross income
- long-term debt, plus monthly payments, to approx 41% of the buyers gross monthly income
The debt to income ratios can be adjusted depending on one or more compensating factors such as if the buyer has:
- Ample cash reserves
- A low Loan To Value (LTV) Ratio
- Spent more than 5 years at the same place of employment
value ratio (LTV)
The Loan-To-Value ratio (LTV) is a ratio stating the outstanding mortgage balance as a percentage of the mortgage properties fair market value. Basically, the degree of Leverage.
The appraisal determines whether the property is of sufficient value to support the amount of financing the buyer requests. Essentially the lender uses the appraisal to gauge whether the loan-to-value ratio meets the lenders standards. Generally, an acceptable loan-to-value ratio for conventional mortgages is 80% of the property’s value, requiring the buyer to make a minimum 20% down payment. A greater loan-to-value ratio compels the lender to require the buyer to obtain private mortgage insurance (PMI).
mortgage package
The mortgage package is a collection of documents required to process a mortgage application and sent to a mortgage underwriting officer for review after receipt of the appraisal on the property offered as security.
Real Estate Settlement Procedures Act (RESPA)
The Real Estate Settlement Procedures Act (RESPA) is legislation prohibiting Brokers from giving or accepting referral fees if the broker or their agent is already acting as a transaction agent in the sale of a 1-4 unit residential property which is being funded by a purchase assist, federally regulated consumer mortgage.
transaction agent (TA)
A transaction agent (TA) is the term lenders use to identify the buyer’s agent in a sales transaction, it’s closing contingent on the buyer obtaining a mortgage to fund the purchase price.
Uniform Residential Loan Application
A Uniform Residential Loan Application is a standardized mortgage application completed by the buyer with the assistance of the transaction agent (TA) and the mortgage lenders representative. As implied by its title the uniform residential loan application is intended primarily for use on mortgages secured by Residential Properties. However, as a generic mortgage application, it is used by mortgage brokers as an application for a mortgage funding ANY PURPOSE and secured by ANY TYPE of property.
Understand how purchase assist mortgages insured by the Federal Housing Administration (FHA) enable buyers to become owners
First time home buyers with little cash available for a down payment can buy a home by qualifying for a purchased assist mortgage insured by the federal housing Administration (FHA). By ensuring mortgages made with less demanding cash down payment requirements, and with high loan-to-value (LTV) ratios of up to 96.5%, the FHA enables prospective buyers to become home buyers.
The most commonly used FHA insurance program is the owner occupied, 124 family home mortgage insurance program, called section 203b. Buyers obtaining a section 203b mortgage need to occupy the property as their primary residence.
For the privilege of making a small down payment the buyer needs to pay a Mortgage Insurance Premium (MIP) to the FHA. This essentially increases the annual cost of borrowing as the annual rate charged for the MIP is added to interest payments.
***Together, the MIP and INTEREST are the annual cost incurred to borrow FHA-insured funds for the purchase of a home.
Explain the minimum down payment and Loan-To-Value (LTV) ratio for FHA-insured financing
The FHA set limitations on the amount of a mortgage it will insure. The limit is a ceiling set as a percentage of the appraised value of the property called the LOAN-TO-VALUE RATIO (LTV). FHA-insured mortgages provide for a down payment as low as 3.5% and a higher loan-to-value ratio than conventional mortgages. For the privilege of making a small down payment, the buyer pays a mortgage insurance premium (MIP) to the FHA, effectively increasing the annual cost of borrowing as an addition to interest.
The public policy rationale behind the FHA section 203b program is based on the proposition homeowners are less of a financial burden on the government in their later years then lifetime tenants.
FHA guidelines include:
- manual underwriting for home buyers whose debt to income ratio exceeds 43% and whose credit scores are below 620
- 5% minimum down payments on FHA mortgages greater than $625,000
- mortgage insurance premium to continue through the life of the mortgage (previously it was canceled once the homeowner reached a 78% loan-to-value ratio)
Advise buyers on the use of an FHA Energy Efficient Mortgage to finance energy efficient improvements
Homebuyers and homeowners may finance energy efficient improvements under FHA. This is called the Energy Efficient Mortgage (EEM) program. With reduced utility charges, buyers and owners may make higher monthly mortgage payment to fund the cost of the energy efficient property improvements.
