Lesson 9: Loan Qualifying Flashcards
Durability of income
Durability refers to likelihood income will continue
Quality of income
Quality refers to reliability
co-borrowers
When two people apply for a loan together, they may be called co-borrowers, or borrower and co-borrower.
The underwriter takes into account the income and assets of both applicants, along with their debts and credit reputations. If the loan is approved, both borrowers become fully liable for the loan.
cosigner
A co-borrower who won’t have an ownership interest in the property is called a cosigner.
A cosigner (such as a parent) signs the promissory note but not the mortgage since she doesn’t have an ownership interest in the property.
A cosigner with a good income and credit score can help a marginal borrower obtain a loan.
Debt to income ratio
All monthly debt payments as a percentage of monthly income
Housing expense to income ratio
Monthly PITI payment as a percentage of monthly income
swing loan (or bridge loan)
If the property will not sell in time for closing, the lender may be willing to arrange a swing loan (or bridge loan), which provides the cash necessary to close the purchase of the new home.
When the old home sells, the borrower pays off the swing loan from the sale proceeds.
Truth in Lending Act (TILA)
Comparing loan costs is made easier by the Truth in Lending Act (TILA).
This federal law requires lenders to disclose the cost of their loans in a uniform manner, enabling borrowers to tell just how expensive the loans are.
The Consumer Financial Protection Bureau enforces TILA.
seller financing disclosure statement
Now let’s turn to disclosures required in transactions with seller financing.
In seller financing, a seller helps finance the sale of her home by extending credit to the buyer.
When seller financing is used for a one- to four-unit residential property, certain disclosures must be made to both the buyer and the seller using a seller financing disclosure statement.
Predatory steering
Directing a buyer toward a more expensive loan (one with a higher interest rate or greater fees) than the buyer could otherwise obtain.
Fee packing
Charging interest rates, points, or other fees that far exceed market rates and aren’t justified by the level of service provided.
Loan flipping
Encouraging repeated refinancing even though there is no benefit to the borrower. (The predatory lender benefits from the loan fees.)
Disregarding buyer’s capacity to pay
Making a loan based only on the property’s value, without considering whether the buyer will be able to afford the loan payments.
Balloon payment abuses
Making a low monthly payment loan that is either partially amortized or interest-only, without disclosing to a borrower that a large balloon payment is due later.
When the balloon payment is due, borrowers will be left with the choice of foreclosure or having to make an expensive refinance.
Fraud
Misrepresenting or concealing unfavorable loan terms or excessive fees, or using other fraudulent means (such as falsifying documents) to get a borrower to agree to a loan.
