Module 2: Mortgage Lending Process Flashcards
Define Origination
Process of making or initiating a new loan.
Define Loan Processor
Responsible for verification of the information contained in the file.
Define Underwriting
Process of evaluating risk and deciding whether to make a new loan, and if so on what terms.
- Performed by funding source, never by a mortgage broker.
Define Servicing
The continued maintenance of loan after loan transaction has closed.
Define pre-qualified
If a borrow is not ready to make an offer on the house but wants to know how much money they qualify for they may be pre-qualified. If a credit decision is rendered then the pre-qualification becomes an application and required disclosures need to be delivered.
What is a loan inquiry?
A borrower may make a loan inquiry by phone/internet to inquire about types of loans and corresponding interest rates available. the MLO must provide a corresponding annual percentage rate to the consumer at the same time a rate quote is delivered.
What is pre-approval?
Process by which a lender determines if a potential borrower can receive financing through the lender and for what amount. The lender is rendering a credit decision. Only the lender who is going to fund the mortgage loan can provide a pre-approval.
Define Basis point
basis point is 1/100th of a percentage point
- 325 basis points = 3.25%
- 515 basis points = 5.15%
Define Par Rate
Describes the rate without discounts or points that lenders offer only to mortgage brokers, aka “wholesale rate”.
Define Rate Lock (Lock-in Agreement)
guaranteed commitment by lender that an interest rate will not change on a specific loan for a specific period of time.
Define Float
A borrower may choose to bet on interest rates decreasing by electing to float. Floating is essentially choosing not to lock the interest rate.
What are POC loan fees?
Paid outside of closing (POC) costs are early expenses incurred that must be paid even if the loan doesn’t close.
Define Lender’s return (lender’s yield)
Total amount of money the lender can make from a loan in relation to the amount invested.
What is the origination fee?
Administrative costs of making and processing the loan.
- Can be expressed as a fraction, whole, or multiple origination points.
What is a point?
Point is simply one percent of the loan amount.
What is a discount point?
Represents a pre-payment of interest at the beginning of a loan.
- Borrower pays more out of pocket up front to reduce payments later.
What is Yield Spread Premium?
(Lender Credits); tool to lower the upfront cash out-of-pocket expenses at closing for a borrower in exchange for higher monthly out-of-pocket payments
What does PITI stand for?
Mortgage payment that is the sum of :
- Principal (monthly)
- Interest
- Taxes
- Insurance
Define Housing Expense Ratio
(Front-end ratio) <28%
Total housing expense /gross monthly income = housing expense ratio %
Define Total Debt-to-income ratio
(DTI) aka Back-end ratio <36%
PITI +Total debt / gross monthly income = DTI%
How do you determine the maximum mortgage payment a borrower can qualify for?
Stable monthly income X 28% = max mortgage using housing expense ratio
(Monthly income X 36%) - Monthly Debt = max mortgage using DTI
How do Compensating Factors weigh into mortgages?
Usually automated but factors such as significant cash reserves or a low LTV.
What is the URLA
Uniform Residential Loan Application (URLA) is a form that a lender requires a potential borrower to complete
What are the 4 C’s of Underwriting
- Credit History
- Capacity to repay the loan
- Cash assets
- Collateral
What is a quality source of income
A reasonably reliable source such as income from an established employer, interest-yielding accounts, or government agency.
What is a durable source of income
Income expected to continue for a sustained period of time such as permanent disability, retirement savings, etc.
How many years for Bonuses, commisions, and part-time earnings to be considered durable?
2 years. Less than 2 years is considered unstable.
How do you calculate inconsistent income?
- If recent year’s income is higher than previous year:
recent higher income / 12 - If recent year’s income is lower than previous year:
(former higher + recent lower) /24 **And an explanation of the declining income may be required by underwriter.
How are Pensions and Retirement benefits considered
Usually considered stable income, but source may be investigated to determine solvency.
What is Auto Allowance, and what is it considered in regards to income?
Allowance given by employer for the business use of their car. After expenses are deducted the remainder is considered taxable income and when averaged for the previous 2 years is considered income for loan qualification.
Are Interest-Yielding Investments a form of income?
lenders will consider this a durable income if investments are sound and interest payments are consistent.
How is unemployment and welfare counted as stable income?
Is it:
- verifiable (proven receipt of income?)
- Continuous (regular for 2 years?)
- Ongoing (likely to continue for 3 years?)
Define Homeowner’s Hazard Insurance
Policy that covers loss or damage to the home/property in the event of fire or other disasters:
- Sufficient policy amount to cover mortgage amount with lender on policy.
- Require borrowers to pay first year’s insurance premium in full prior to closing.
What is the NFIP?
National Flood Insurance Program provides flood insurance for the life of a loan.
Define PMI
Private Mortgage Insurance is offered by private companies to insure a lender against default on a loan by borrower where there is a loss of collateral value. Typically 20-25% of the loan amount.
