LESSON 9: LENDER LOAN PROCESSES Flashcards
What is the role of federal and state agencies in the residential mortgage credit process?
The largest providers of residential mortgage credit are highly regulated by federal and state agencies, ensuring the loan qualification process follows organized steps.
What is pre-qualification in the mortgage process?
Pre-qualification is when lenders determine how much home buyers can afford before applying, typically at no charge, hoping buyers will eventually finance with them.
What factors do lenders consider when determining whether to underwrite a loan?
Lenders look at the applicant’s income, credit, source of funds, debts, and net worth, as well as the property’s value as collateral.
How do layers of risk affect homeownership?
Layers of interrelated high-risk characteristics increase the likelihood of default and foreclosure if not sufficiently offset, threatening long-term homeownership.
What is the ultimate goal of researching an applicant’s income?
To determine whether the applicant’s income is sufficient and reliable enough to repay the mortgage and other debts.
What does an underwriter look for in a source of income?
An underwriter looks for a two-year employment history, consistent work patterns, and verification of income through forms such as W-2s, tax returns, and employer verifications.
How is net operating income (NOI) related to mortgage underwriting?
NOI from investment properties is considered as income for loan purposes, calculated from gross income minus vacancies, credit losses, and operating expenses.
What is included in a credit report?
A credit report includes personal profile, credit summary, public records, account history, and the number of inquiries initiated.
What is the Residential Mortgage Credit Report (RMCR)?
The RMCR is a specialized credit report used by mortgage lenders that includes detailed account history and necessary verifications for underwriting.
How does a credit report affect mortgage underwriting?
A credit report helps assess the applicant’s willingness to repay by showing payment history, bankruptcies, judgments, and credit management.
What is the importance of credit scoring in mortgage applications?
Credit scoring is used to evaluate the borrower’s likelihood of repaying a loan, with higher scores generally indicating lower risk.
What is the range of FICO scores, and how do they influence mortgage rates?
FICO scores range from 350 to 850, with higher scores indicating lower risk. A higher score can result in a lower mortgage interest rate.
What can a borrower do to improve their credit score?
Correct inaccuracies, close unused accounts, reduce credit balances, and avoid late payments to improve credit scores over time.
What is the Fair Credit Reporting Act (FCRA)?
The FCRA ensures consumers’ rights to accurate and unbiased credit reporting, allowing free access to credit reports annually and providing dispute options for inaccuracies.
What are the conditions under which a consumer can receive a free credit report under the FCRA?
Consumers can receive a free report if unemployed and seeking work, on welfare, if fraud is involved, or if credit was denied based on the report.
How long can negative information remain on a credit report?
Negative information generally remains for 7 years, except for bankruptcies (10 years) and certain legal actions, which can last until the statute of limitations runs out.
What is the Equal Credit Opportunity Act (ECOA)?
The ECOA, passed in 1968, protects borrowers from discriminatory practices by lenders and applies to both lenders and real estate brokers who arrange financing.
What may a lender not do according to ECOA?
A lender may not discourage an applicant based on race, nationality, age, marital status, sex, or welfare status, nor may they require disclosure of race, nationality, sex, or religion, except voluntarily.
Can a lender ask about the applicant’s marital status?
A lender may ask whether the applicant is married or unmarried, and if married, whether they are separated, but cannot ask about being widowed or divorced.
Can a lender inquire about the applicant’s desire to have children?
No, a lender may not ask about the applicant’s desire to have or raise children.
What are the restrictions when a lender evaluates an applicant’s income?
Lenders may not refuse to consider public assistance, discount income based on sex or marital status, or refuse alimony, child support, or retirement income if there is a history of payment.
What must a lender do when evaluating a loan application?
A lender must accept or deny an application within 30 days and explain the reasons for denial or less favorable terms if applicable.
Who enforces the Equal Credit Opportunity Act?
The Federal Trade Commission (FTC) and the U.S. Department of Justice enforce the ECOA.
What is a liquidated asset in the context of underwriting?
A liquidated asset is a cash asset like stocks or bonds that may not need to be liquidated at closing, unlike non-liquid assets such as real estate or automobiles.
What is the role of gifts in purchasing real estate?
Gifts can be used to cover closing costs and can come from relatives, fiancées, or charitable organizations, but not from interested parties like the seller (unless they are a relative).
What is required from the donor when a borrower uses a gift for real estate purchase?
The donor must provide a gift form stating the gift amount, the relationship to the borrower, and confirming that the funds do not need to be repaid.
What are seller contributions?
Seller contributions are funds from the seller, often used to cover certain closing costs or discount points for the buyer, but may be limited by the lender.
How can retirement vehicles be used to purchase real estate?
Retirement funds like a 401(k) or IRA can be used to purchase property under specific conditions, such as using up to $10,000 from an IRA for first-time homebuyers penalty-free.
What is the Taxpayer Relief Act of 1997 regarding IRAs?
The Taxpayer Relief Act allows first-time homebuyers to withdraw up to $10,000 from an IRA without penalty for purchasing a principal residence.
What must underwriters evaluate when assessing an applicant’s financial qualifications?
Underwriters evaluate qualifying ratios, such as the housing-expense-to-income ratio and total debt service ratio, to determine whether the applicant can afford the loan.
What are Fannie Mae and Freddie Mac’s housing-expense ratios?
Fannie Mae and Freddie Mac do not have a housing ratio but require the total debt service ratio to not exceed 36%.
What are FHA’s qualifying ratios for housing-expense and total debt?
The FHA requires a housing-expense ratio of 29% and a total debt ratio of 41%.
What is the VA’s qualifying debt ratio?
The VA requires the total debt ratio to be under 41%, but does not have a specific housing-expense ratio.
What are installment debts?
Installment debts are loans with determined beginning and ending dates, such as mortgages, car loans, and student loans, typically considered long-term debts if more than six months remain.
What are revolving debts?
Revolving debts include credit cards, store charge cards, and gas cards, where lenders may consider the minimum monthly payment or the full credit line balance.
What are other recurring liabilities?
Other recurring liabilities may include alimony, child support, and legal judgments, which may or may not be included in long-term debt calculations by Fannie Mae and Freddie Mac.
What is the housing-expense-to-income ratio?
The housing-expense-to-income ratio is the annual PITI (Principal, Interest, Taxes, and Insurance) divided by the borrower’s annual income, often referred to as the front-end ratio.
What limits are set for the housing-expense ratio?
The housing-expense ratio must be below the maximum limits set by the lender, Fannie Mae, or FHA for the loan to qualify.
What is the Total Debt Service Ratio (Back-End Ratio)?
The total debt service ratio is equal to: (PITI + all long-term debts) ÷ gross income. Fannie Mae requires it not to exceed 36%, meaning the total house payment and long-term debts cannot exceed 36% of gross monthly income.
What is the purpose of using only the debt service ratio in recent lending trends?
There is evidence suggesting there is no correlation between high housing expense ratios and default, as long as the debt service ratio is controlled.
What is net worth?
Net worth is the total assets minus total liabilities. Assets include bank accounts, stocks, bonds, retirement funds, insurance policies, real estate, automobiles, and business possessions.
What is the qualifying total-liabilities-to-net-worth ratio for business loans?
Lenders may require a qualifying total-liabilities-to-net-worth ratio of about 400%, meaning a business cannot owe more than four-fifths of the value of its assets.
How is property value assessed for loan qualification?
The lender must consider the value of the property that will act as security for the loan, especially if foreclosure occurs. The value is assessed through an appraisal, using comparable property sales for non-income properties and cash flow analysis for income properties.
What does an appraiser do to determine the market value of a property?
An appraiser considers recent sales of comparable properties, adjusting for differences in size, location, and condition to determine the market value. The process becomes more subjective if sales are old or farther from the subject property.
What are the eight steps in completing an appraisal?
- Stating the objective 2. Listing necessary data 3. Gathering, recording, and verifying data 4. Determining the highest and best use 5. Estimating the land value 6. Estimating value using applicable approaches 7. Reconciling the final value estimate 8. Writing and presenting the value report.
What happens in Step 1 of an appraisal?
The appraiser states the objective of the appraisal, including the purpose, date, property location, type of value to be determined, and any limitations, while identifying the property’s legal description and ownership rights.
What is involved in Step 2 of the appraisal process?
The appraiser lists necessary data and sources, deciding which appraisal approaches to use and what information is needed.
What happens during Step 3: Gathering, Recording, and Verifying Data?
The appraiser collects and verifies data related to the property’s geographic and economic characteristics and creates a physical description of the property, including photographs.
What is the purpose of Step 4: Determining the Highest and Best Use?
The appraiser identifies the most profitable, legal, and plausible use for the property, based on gathered data, such as governmental controls, economic status, and the property’s physical characteristics.
What is the goal of Step 5 in the appraisal process?
The appraiser estimates the land value by locating and comparing similar parcels, typically following the sales comparison approach.
How does the appraiser estimate value in Step 6?
The appraiser uses applicable approaches to valuation (such as sales comparison, cost, and income approaches) to estimate the property’s value.
What happens in Step 7: Reconciliation of the Final Value Estimate?
The appraiser combines the results from various valuation methods, placing more weight on the data and approach most relevant to the subject property.
What is involved in Step 8 of the appraisal process?
The appraiser writes and presents the value report in accordance with Uniform Standards of Professional Appraisal Practice (USPAP), which ensures ethical and professional standards.
What role does an appraiser play in the real estate industry?
An appraiser evaluates a property’s worth and submits their evaluation in the form of a report. They perform a thorough study of the property and may take on roles such as broker, surveyor, economist, and possibly accountant. Appraisers must not engage in activities they are not qualified for.
What are the two value principles used in the sales comparison approach to appraisal?
The two value principles are the principle of substitution (pay only as much for a property as for a comparable property) and the principle of contribution (an improvement’s value is based on how much it adds to the property’s market value, not its actual cost).
How does the appraiser use the sales comparison approach?
The appraiser collects data from comparable property sales, analyzes differences, and adjusts the sale price to estimate the subject property’s value.
What is the formula used in the sales comparison approach?
Comparable Property Sale Price ± Adjustments = Subject Property Value.
What physical characteristics are considered in the sales comparison approach?
Dwelling units, number of bedrooms, square footage, utilities, construction materials, amenities (e.g., pool, hot tub), and location near environmental hazards.
What factors related to the age of a property are considered in the sales comparison approach?
The appraiser considers both the actual age of the property and its remaining useful life.
How does the usage of the property affect the appraisal?
Properties used as primary residences may have different financing terms than second homes or investment properties, impacting interest rates and down payments.
What is the cost approach in property appraisal?
The cost approach estimates the value of a property by adding the cost of reproducing the improvements to the land value and subtracting depreciation.
What is the cost approach formula?
Cost of Reproduction - Depreciation + Land Value = Property Value.
What are the steps involved in the cost approach?
Establish reproduction cost, estimate depreciation, determine land value, adjust for comparisons, and apply the formula to state the property value.
What is the income approach to appraisal?
The income approach estimates a property’s value based on its income by converting income into value, commonly used for commercial properties.
What is the basic formula for the income capitalization approach?
Net operating income (I) + Capitalization rate (R) = Value (V).
What are the steps to applying the income approach?
- Estimate the potential gross income. 2. Subtract vacancy and collection loss to find effective gross income. 3. Estimate building expenses and subtract them from effective gross income.
How do you estimate the potential gross income?
The potential gross income is the total income at 100% occupancy at market or lease rent, plus additional income like laundry or parking.
What is effective gross income?
It is the potential gross income minus the estimated vacancy and collection loss, plus any additional income (e.g., from antenna rentals).
How are building expenses categorized in the income approach?
Building expenses are categorized into fixed expenses (e.g., taxes, insurance), variable expenses (e.g., snow removal, utilities), and reserves (e.g., replacement items like stoves).
What is the capitalization rate?
The capitalization rate is the percentage of return an investor expects from the property and is calculated by dividing the net operating income by the sale price.
How is the capitalization rate calculated?
Formula: Capitalization Rate (R) = Net Operating Income (I) ÷ Sale Price (V).
What is an example of calculating the capitalization rate?
If a property sells for $200,000 and has a net operating income of $20,000, the capitalization rate is 10% (20,000 ÷ 200,000).
What is the effect of hard inquiries on your credit score?
Hard inquiries can drop a credit score by 5-20 points for several months.
What is the difference between hard and soft inquiries?
Hard inquiries (e.g., when applying for credit) can affect your score, while soft inquiries (e.g., account review by companies) do not affect your score.
What is the role of public record information in a credit report?
Public records like bankruptcies, civil judgments, or tax liens are viewed negatively by lenders.
What are satisfactory accounts in a credit report?
These are accounts that are current or have been paid as agreed, such as installment or revolving accounts.
How is the Credit Utilization Ratio (CUR) calculated?
The CUR is calculated by dividing the balance of revolving accounts by the credit limit. A CUR under 25% is ideal for a higher credit score.
What are the two types of credit inquiries?
Regular inquiries (hard inquiries) and account review inquiries (soft inquiries).
What should you do when shopping for credit to minimize score drops?
Get quotes for a car loan within 14 days or a mortgage within 30 days to ensure multiple inquiries count as one.
What is the first step in the loan process?
The first step is to complete the loan application, which is often the Uniform Residential Loan Application (Fannie Mae Form 1003).
What happens after the loan application is submitted?
After submission, the borrower’s information is checked, including salary and employment, which is verified with the employer using a Verification of Employment Form. The loan officer orders an appraisal and sends the verified application and appraisal to the underwriter.
What is the underwriter’s role in the loan process?
The underwriter evaluates the applicant’s creditworthiness and the property’s value to decide whether to approve the loan.
What happens after loan approval?
After approval, the loan is sent to the closing department, where the title is inspected and insured, a survey is ordered, and the deed is prepared.
What is prequalification in the loan process?
Prequalification is when a lender determines how much a borrower can borrow before the borrower has a sales contract. It can be informal or formal with a credit check.
How are online applications used in the mortgage process?
Many lenders now offer online applications for loans, making financing more accessible.
What are floating rates?
Floating rates are interest rates that are not fixed and change with the market. Borrowers may pay a lock-in fee to secure a lower rate at the time of approval.
What is the Uniform Residential Loan Application (URLA)?
The URLA, also known as Fannie Mae Form 1003, is used by lenders to determine a borrower’s creditworthiness for a home loan by gathering personal financial information.
What information is gathered in Section 1: Borrower Information of the URLA?
Personal details such as name, social security number, date of birth, marital status, dependents, contact info, current and prior addresses, and employment details.
What is included in Section 2: Financial Information — Assets and Liabilities of the URLA?
This section details the borrower’s bank account balances, assets, debts, monthly payments, and income, helping lenders assess financial stability.
What does Section 3: Financial Information — Real Estate include in the URLA?
Information about real estate owned by the borrower, including rent received, mortgage payments, and the balance of any current mortgages.
What does Section 4: Loan and Property Information ask for in the URLA?
The loan amount requested, the purpose of the loan, the address of the home, and whether the borrower intends to live in, rent, or use the home as a second property.
What is covered in Section 5: Declarations of the URLA?
The borrower’s history with past homes, any loans, and questions about bankruptcy, judgments, foreclosures, lawsuits, and federal debt.
What is the purpose of Section 6: Acknowledgments and Agreements in the URLA?
To affirm that the borrower understands the penalties for providing inaccurate information and agrees to the terms and conditions of the loan.
What information is gathered in Section 7: Military Service of the URLA?
Information about the borrower’s or their spouse’s military service for loans backed by the U.S. Department of Veterans Affairs (VA).
Why is Section 8: Demographic Information included in the URLA?
It gathers the borrower’s ethnicity, sex, and race to comply with the Home Mortgage Disclosure Act (HMDA), which helps regulators identify lending discrimination.
What is the purpose of Section 9: Loan Originator Information in the URLA?
To provide details about the mortgage company, licensing, and contact information for the loan originator.
What is a verification of deposit?
A verification of deposit is a document through which a mortgage lender obtains proof from a borrower’s banking institution of their balances. The bank provides current data and two months’ worth of the borrower’s average bank balances.
How does a lender obtain verification of deposit?
Upon a lender’s request, the borrower’s banking institution will provide the necessary verification after the borrower signs an authorization form.
When is an umbrella authorization form used in verification of deposit?
It is used when multiple banking institutions are involved in a potential transaction, allowing the lender to make all necessary requests for information.
Who is responsible for sending the completed verification of deposit form in first and second mortgage applications?
For first mortgages, the lender transmits the request directly to each bank. For second mortgages, the borrower submits the request, but the financial institution must send the completed form to the lender.
How do mortgage lenders typically verify employment?
Lenders contact the employer directly and review recent income documentation. The borrower must sign an authorization form allowing the employer to release the information.
How do lenders verify the information provided on the Uniform Residential Loan Application?
Lenders usually verify the information verbally, but they may use fax, email, or a combination of all methods.
What factors do lenders consider when verifying employment?
Lenders verify the likelihood of continued employment, position, salary, and work history. They may also confirm previous employment details, especially if the borrower has been with their current employer for less than two years.
How do lenders verify income for self-employed borrowers?
Lenders require an IRS Form 4506-T for tax returns and may ask for a CPA’s attestation to confirm income.
What is an appraisal?
An appraisal is an opinion of value that determines the value of a property for loan purposes. The lender or its agent places the appraisal order with a licensed or certified appraiser.
What is the sales comparison approach to appraisal?
It involves using recent sales of comparable properties to determine the value of a property, comparing factors like size, age, quality, and number of rooms.
What is the cost approach in appraisal?
The cost approach is the appraiser’s opinion of the current replacement cost to construct a reproduction of the property, minus depreciation, plus land value.
When is the income approach used in appraisal?
It is used for properties with multiple living units where income is a factor, such as multi-family units.
What are Automated Underwriting Systems (AUS)?
AUS, like those from Freddie Mac and Fannie Mae, use computerized loan analysis to expedite the loan process and reduce costs. These systems can process loans quickly and provide approval in minutes.
What is Freddie Mac’s Loan Prospector (LP)?
Loan Prospector is Freddie Mac’s automated underwriting system, determining loan acceptability by categorizing loans as “accept,” “A-minus caution,” or “manual underwrite loan.”
How do Freddie Mac’s and Fannie Mae’s guidelines differ for self-employed borrowers?
Freddie Mac does not require a minimum income history for self-employed borrowers, while Fannie Mae does.
What does the Homeowners Protection Act of 1998 regulate?
The act regulates the cancellation and termination of private mortgage insurance (PMI) and sets disclosure and notification requirements.
When can a homeowner request PMI termination?
A homeowner can ask for PMI termination when the loan reaches 80% Loan to Value, but PMI must be terminated by the lender at 78% Loan to Value if the borrower is current on payments.
What is the purpose of the Loan Estimate (LE)?
The LE provides the borrower with a detailed breakdown of the loan terms, and it must be delivered within three business days of receiving an application.
What are zero tolerance charges on the Loan Estimate?
Zero tolerance charges are fees that cannot increase at all, such as transfer taxes.
What is the 10% aggregate tolerance for fees on the Loan Estimate?
These charges can increase by no more than 10% in total, such as recording fees.
What is a no tolerance fee on the Loan Estimate?
No tolerance fees can increase by any amount, but must be based on the best information available, like prepaid interest charges.
What are the circumstances under which a lender can revise a Loan Estimate (LE)?
Lenders are generally bound to the LE and may only revise the disclosures under specific circumstances as permitted in the regulation. If a revised LE is required, the lender must follow the timing requirements provided in the regulation.
What is the Closing Disclosure (CD) requirement in relation to timing?
Regardless of who prepares and delivers the CD, the lender remains liable for the contents and compliance with TRID requirements. The consumer must receive the CD at least three business days before consummation, defined as when the consumer becomes legally obligated to the creditor. The lender must document compliance with the CD timing requirements. For rescindable loans, all consumers must receive proper disclosures.
Who remains liable for the Closing Disclosure (CD)?
The lender remains liable for the contents of the CD and for ensuring compliance with TRID requirements, regardless of who prepares and delivers the CD.
What is the requirement for the consumer in terms of receiving the CD?
The consumer must receive the CD at least three business days prior to consummation.
What is a controlled business arrangement according to the Affiliated Business Arrangement Disclosure?
A controlled business arrangement exists when a bank has an affiliate relationship or a direct/beneficial ownership interest of more than 1% in a settlement service provider to whom the bank refers business. This arrangement must be disclosed, including the nature of the relationship and estimated charges, and the bank cannot require the use of the provider, except in certain circumstances like using an attorney or credit reporting agency selected by the bank.
What information must be disclosed in a controlled business arrangement?
The disclosure must include: the nature of the relationship between the bank and the provider, the ownership/financial interest details, and the estimated charges from the provider.
When must the annual escrow statement be submitted?
The servicer must submit the annual escrow statement within 30 days of the completion of the computation year.
What must the annual escrow statement contain?
The annual escrow statement must include: account history, projections for the next year, current mortgage payment and portion going to escrow, amount paid into and from the account during the past year, balance at the end of the period, explanation of surplus/shortage/deficiency handling, and reasons for not reaching the estimated low monthly balance if applicable.
When must a new servicer provide an initial escrow account statement?
A new servicer must provide an initial escrow account statement within 60 days of servicing transfer.
What is required in a Servicing Transfer Statement?
A Servicing Transfer Statement must include: the effective date of transfer, the transferee servicer’s contact information, the transferor servicer’s contact number for inquiries, dates when payments will be accepted by the transferor and transferee servicers, information on the effect of the transfer on optional insurance, and a statement that the transfer does not affect any other mortgage terms except for servicing.
What is the 60-day rule regarding late fees after servicing transfer?
During the 60-day period after a servicing transfer, no late fee can be imposed on a borrower who makes a payment to the wrong servicer.
What transfers are not considered an assignment or sale of mortgage servicing?
Transfers between affiliates, transfers due to mergers or acquisitions of servicers or sub-servicers, and transfers between master servicers where the sub-servicer remains the same are not considered an assignment, sale, or transfer for servicing purposes, as long as there is no change in payee, payment address, account number, or payment amount.
What is a Title Search?
A title search examines available public records to ensure no clouds on the title exist, confirming that the property owner can legally transfer ownership. It traces ownership back to the original owner, checking for encumbrances, forged documents, or gaps in ownership.
Who performs a Title Search?
Lawyers, qualified title searchers, or insurance companies usually perform title searches for prospective buyers or mortgagees.
What is an Abstract of Title?
An abstract of title is a condensed listing of a property’s history, showing ownership transfers and any liabilities or encumbrances attached to the property. It is prepared by an abstracter after performing a title search.
What is the difference between an Abstract of Title and a Chain of Title?
An abstract of title summarizes the property’s history and current encumbrances, while a chain of title lists only previous owners and their property transactions.
What is a Chain of Title?
A chain of title displays the previous owners of the property, how the property became vested, and where the record is located.
What is a Title Plant?
A title plant is a collection of title records that is privately owned and maintained, usually by a title insurance company.
What is Title Insurance?
Title insurance protects a policyholder from losses due to defects in the title that occurred before the issuance of the policy. It covers issues like forged titles or missed encumbrances.
What are the possible defects covered by Title Insurance?
Defects include forged deeds, conveyance by a spouse without consent, invalid deeds by minors, missing heirs, or unpaid tax liens.
What is the significance of Title Insurance for lenders?
Lenders require title insurance to ensure the title is free of defects before issuing a loan. The insurance company performs a thorough title search and issues a policy to guarantee the title is insurable.
What is Caveat Emptor?
Caveat emptor is the principle of “let the buyer beware,” meaning it is the buyer’s responsibility to investigate the condition of the property.
What is Constructive Notice?
Constructive notice is a legal principle stating that if an interest in property is filed in the public record, it serves as legal notice to everyone. Failing to check these records can affect a buyer’s claims to the property.
What is Actual Notice?
Actual notice is when an individual gains direct knowledge about a property through personal inspection or public records, allowing them to make informed decisions.
What is the significance of Priority in property ownership?
Priority refers to who has legal rights to a property based on time, either by recording a deed or taking possession. Possession generally takes precedence over deed recording.
What is Mortgagees Title Insurance?
A policy that assures lenders they have a first lien on the property and covers costs to defend against lawsuits and losses due to a defective title.
What is Leasehold Title Insurance?
A policy that assures lessees that they have a valid lease on the property.
What is Owner’s Policy of Title Insurance?
A policy that insures the buyer against title defects, not the lender.
What is Certificate of Sale Title Insurance?
A policy issued during court sales that protects the buyer’s interest in property sold by the court.
What does standard title insurance cover?
It protects against fraud, forgery, abstract errors, incompetent grantors, foreclosure, and unmarketable titles.
What is an Attorney’s Opinion of Title?
It is a document prepared by a buyer’s attorney after an abstract is created, stating the ownership condition of the property, but it does not guarantee against defects not found in public records.
What is the role of a Survey in property transactions?
A survey involves researching property records and conducting fieldwork to map out legal boundaries, improvements, right-of-ways, and easements.
What should be checked in a Title Commitment?
Check Schedule A for correct names and legal descriptions, and Schedule B for issues that will not be cleared at closing.
What is an Owner’s Title Policy?
An owner’s title policy is issued after the transaction closes and protects the buyer from title defects, except those listed as exceptions.
What are Title Policy Endorsements?
Endorsements provide additional protection to the lender’s policy, and may cover things like encroachments, environmental liens, or issues with the planned unit development (PUD).
What are Discount Points in mortgage loans?
Discount points are fees charged by lenders to lower the interest rate on a mortgage. One point equals 1% of the loan amount.
What is a Yield Spread Premium (YSP)?
A YSP is a premium paid by an investor for a mortgage loan with a higher-than-market interest rate, often used to cover closing costs or increase broker income.
What are Prepaid Expenses in a loan transaction?
Prepaid expenses include prepaid interest, tax escrows, hazard insurance, and other costs paid in advance or prorated at closing.
What is Mortgage Insurance (PMI or MIP)?
PMI/MIP protects the lender in case of default and is required for FHA loans and most conventional loans with less than 20% down.
What is Flood Insurance?
Flood insurance is required for properties in flood hazard areas, and the cost is typically paid via an escrow account.
What is the Aggregate Adjustment?
The Aggregate Adjustment is the refund of excess funds held in an escrow account for taxes and insurance, ensuring the lender only holds what is necessary for payments.
What are the costs associated with a real estate transaction?
Costs associated with a real estate transaction include: Commission (paid to the realtor), Closing Fee (paid to the title company), and Inspection Fee (for the home inspection).
Who typically pays the commission in a real estate transaction?
The seller generally pays both the listing agent and the selling agent, but the buyer may pay their agent directly if they have a buyer’s agent.
What does the closing fee cover?
The closing fee, collected by the title company, includes paying off existing loans, paying taxes and special assessments, and prorating taxes and homeowner’s dues.
Why is a home inspection recommended?
A home inspection is recommended to find hidden issues that are not evident to the buyer, as the appraisal only determines the property’s value, not its condition.
What are the components of a house payment (PIT)?
The components of a house payment include Principal, Interest, Taxes, Insurance, Flood Insurance, Mortgage Insurance, and potentially Homeowner’s Association (HOA) dues.
What is the principal portion of the house payment?
Principal is the portion of the payment that reduces the loan balance, and it increases over time.
What is the interest portion of the house payment?
Interest is the cost of borrowing money, which is tax-deductible.
What is included in the escrow account of a mortgage payment?
The escrow account covers property taxes, insurance premiums, and flood insurance (if applicable).
What is mortgage insurance, and is it tax-deductible?
Mortgage insurance is included in the monthly payment, but it is not tax-deductible.
How long do buyers typically stay in a home when considering an interest rate buy-down?
The break-even point for an interest rate buy-down is typically five years, so it is more beneficial for buyers who plan to stay in the home long-term.
How should buyers consider cash needs after closing?
Buyers should not use all their cash for the down payment if they will need funds for things like furniture or home improvements after closing.
What is a good practice if income is expected to change?
If income will change, such as a decrease in salary, a buyer may want to consider an interest-only mortgage to keep payments lower.
What should a buyer do if they anticipate employment changes?
If employment is changing (e.g., retirement or starting a new business), buyers should consider a fixed-rate mortgage to avoid refinancing risks.
What should buyers do if they do not save much despite earning a lot?
Buyers who do not save much should consider a 15-year mortgage to build equity quickly through higher principal payments.
What is the role of a realtor when a buyer presents a pre-approval letter?
The realtor should review the closing cost estimate and loan documents to ensure rates, fees, and terms are competitive, and there are no prepayment penalties.
What should a realtor check when working with a pre-approval letter from an unknown lender?
The realtor should verify rates and fees, check for prepayment penalties, and ensure the loan package arrives on time with correct documents.
What are mortgage myths related to no closing cost loans?
No closing cost loans are not truly free; the lender usually raises the interest rate to cover the costs.
What is a “1.00% mortgage”?
A 1.00% mortgage is often a teaser rate that is temporary, and the interest rate will likely rise after a short period.
What are common misconceptions about below-market rates?
Below-market rates often sound appealing, but lenders are in business to make money, and such rates are generally not sustainable for individual borrowers.
What is a closing statement?
A closing statement, or settlement statement, details the buyer’s and seller’s expenses and credits, and shows the final amount due from the buyer at closing.
What is the role of the title company in expense allocation?
The title company uses the sales contract to determine how the expenses, such as commissions and fees, will be allocated between the buyer and seller.
What are tax and insurance reserves?
A buyer may need to open an escrow account for real estate taxes and hazard insurance, and may also pay for the first year’s insurance premium at closing.
What are nonrecurring closing costs?
Nonrecurring closing costs include items like title fees, inspection fees, and loan origination fees.
What is a proration?
Proration is the process of dividing accrued or prepaid expenses, like taxes or insurance, fairly between the buyer and seller at closing.
What are accrued items in a proration?
Accrued items are expenses that are owed by the seller but will be paid by the buyer after closing, like property taxes.
What are prepaid items in a proration?
Prepaid items are expenses paid by the seller ahead of time, such as insurance premiums, which the buyer typically reimburses at closing.
How are accrued items typically handled in a real estate transaction?
Accrued items are generally debited to the seller and credited to the buyer, and prepaid items are credited to the seller and debited to the buyer.
What determines whether certain expenses can be prorated in a real estate transaction?
Federal and state laws, as well as the negotiated terms of a particular purchase agreement, may dictate whether certain expenses can be prorated or how they should be prorated.
How are prorations calculated in Texas?
In Texas, prorations are calculated through the closing date.
What should a real estate licensee do when calculating prorated expenses?
A prudent licensee should familiarize themselves with relevant state laws and check with local lenders to identify the procedures they follow when prorating property taxes, insurance, and interest.
What is the first step in calculating prorated expenses?
The first step is determining an annual charge for the item being prorated.
How do you calculate the monthly charge for a prorated item?
The annual charge for the item is divided by 12 to calculate the monthly charge.
When calculating a daily charge, what are the two common methods?
- A 360-day year, which divides the year into 12 months of 30 days each.
- A 365-day year, which follows the conventional calendar year with 365 days (366 in a leap year).
How do you calculate daily charges using a 360-day year?
You can divide the yearly charge by 360 or divide the monthly charge by 30.
How do you calculate daily charges using a 365-day year?
You divide the yearly charge by 365 (366 in a leap year).
