Third Party Services - Chapter 14 Flashcards
Third Party Services
While the lender provides the financing, there’s a whole host of others needed to make the transaction work. These other participants are referred to as third party services, or settlement services.
Each one of these services comes with a fee that is charged by the service provider. In most instances this fee is passed on to the borrower. How the fee is handled is governed by the rules of RESPA.
Credit Reporting
The credit pull is one of the first steps that an MLO will typically take when beginning the application process with the borrower.
The beginning of the loan origination process is not the only time that the MLO will look at the borrower’s credit report. Most underwriters will also review the borrower’s credit just prior to closing to ensure nothing has changed.
A consumer’s credit profile may change daily; the credit report is typically valid 90-120 days, depending on the loan program. Each reporting agency calculates credit scores differently, but the following factors are commonly involved:
The Three Major Consumer Reporting Agencies (CRAs
- Equifax
- TransUnion
- Experian
How CRAs Commonly Calculate Credit Scores
- Payment History (≈35% of the credit score): Paying bills on time is one of the best ways for a consumer to maintain a good credit rating.
- Credit Use (≈30% of the credit score): The ratio of current revolving debt (credit card balances) to the total available revolving credit (credit limits).
- Credit History (≈15% of the credit score): The length of the consumer’s credit history.
- Credit Type (≈10% of the credit score): Whether credit is made up of installment, revolving, or other consumer finances.
- Inquiries (≈10% of the credit score): If there have been recent searches for credit and/or the amount of credit obtained recently. While a consumer’s attempts to obtain new credit can have an adverse effect on their credit score, it is generally understood by the credit reporting agencies that multiple credit reviews (pulls) by a specific segment of lenders for large ticket items, such as a mortgage or car, during a fixed shopping period of approximately 14-28 days should not negatively impact a consumer’s credit score.
Property Inspection
In most circumstances, a property inspection is not the appraisal. We’ll go into depth on the appraisal later, but for the moment consider the moment consider that the property appraisal determines the property’s value while the inspection determines if something may impact the home’s structure in a negative way.
Depending on the loan program, sewer, pest or other inspections may be required. State and local law may also require specific types of property inspection. As an example, VA requires termite and pest inspections in some states.
Appraisal
While it is necessary for the borrower to qualify for the mortgage loan, just as important to the final approval by the underwriter is the value of the subject property. For a mortgage application to be approved, the value of the home must meet minimum value thresholds. The determination of that value is the appraisal.
Appraisal Basics
Once the borrower receives an initial approval and the underwriter has confirmed the accuracy of the application with necessary documentation, an appraisal is ordered. Given the importance for the appraiser to operate independently, many MLOs will use a third party appraisal selection company to assist in finding and assigning an appraiser to perform the appraisal. This additional step ensures that no undue influence can be put on the appraiser.
The appraiser is required to provide a written report of their property valuation. The appraisal may include a visual inspection inside and outside of the property, and it may also include the exterior of the home and rooms inside.
The appraiser does not include outlying buildings (such as detached garages) in their determination of value. Nor do they include certain basement or below grade rooms in the home unless they meet a finished standard (no exposed cinder block, rafters, etc.).
The appraiser takes photographs of the home, and of comparable properties to provide illustration for their report. They also include a map showing the property’s location.
Rules and Regulations: Valuation Independence
Section 42 of TILA (the Valuation Independence Rule) requires that the appraiser operate independently of outside influences in the conduct of their job. TILA prohibits coercion of the appraiser and any improper characterization of value.
TILA establishes boundaries for conduct between interested parties (MLOs, borrowers) and the appraiser, but that does not mean that all interactions are illegal. For instance, the appraiser can be informed of recent renovations to the home. The appraiser may even request receipts from the homeowner if available to determine costs. The underwriter can request additional information and explanation from the appraiser after receiving and reviewing the report. Underwriters may also request multiple appraisals to be performed on the property if necessary.
Rules and Regulations: USPAP
The Uniform Standards of Professional Appraisal Practice (USPAP) is administered by the Appraisal Foundation and provides the guiding principles of the appraisal industry (it’s their SAFE manual).
The basic USPAP requirements for appraisals require the appraiser to:
• Identify the client
• Identify the reason for the appraisal (e.g., loan, owner’s information, buyer’s information)
• Describe the real estate
• Identify how the property is held (e.g., fee simple, leased fee)
• Identify the appraisal approach (i.e., market, cost, income)
• Provide relevant dates
• Describe the basis for and scope of the report
• Describe assumptions and hypothetical conditions
• Include a summary
• Describe what the property is currently being used for
• Identify whether the report can also be used by someone other than the client, and if so, how and why
• Sign and certify the report
Program-Specific Appraisal Guidelines
Each mortgage program includes some unique qualities and requirements for the appraisals done for their loans.
• Fannie Mae and Freddie Mac provide many of the industry standards and their requirements serve as the benchmark for the entire industry. Fannie and Freddie include an AIR (Appraisal Independence Requirement) with all their loans that mirrors TILA’s Valuation Independence rule. All Fannie Mae and Freddie Mac appraisals require the inclusion of the 1004-MC (Market Conditions Report) addendum with their full appraisal reports. The 1004-MC provides explanation from the appraiser for the value they provide in the report. Fannie and Freddie allow for repairs to be completed after the valuation. Fannie and Freddie appraisals are good for 120 days.
• FHA follows the standards set by Fannie Mae and Freddie Mac, with one exception. The borrower’s health and safety are FHA’s chief concern as it relates to the appraisal, and therefore they require that any repairs needed to ensure health and safety must be made prior to closing.
• VA requires a Certificate of Reasonable Value (CRV) as its valuation documentation. The CRV does not list items in need of repair and is valid for 180 days. In addition to the CRV, the lender may require a full appraisal.
• USDA loans require that the home must be in livable and stable condition. The USDA does allow for repairs to be made after closing. The appraiser must provide an explanation if seller concessions exceed 6%.
Appraisal Adjustments
Appraisals in many ways are based on comparable property values. To ensure that the homes used for comparison meet an equitable standard, the appraiser uses a system of adjustments to compensate for the resulting difference in value. Each type of adjustment allows for a maximum threshold difference. If the adjustment item exceeds the threshold either a viable explanation is required, or a new comparable property must be found.
The adjustments and corresponding thresholds are as follows:
• Line Adjustments ≤ 10% for each line item - When comparing one specific item in the subject property to the same in a comparable property (such as number of bedrooms) and the value provided, the difference cannot exceed ten percent. As an example if the subject property sales price is $100,000 and the bedroom value in the subject property is $15,000 and the comparable property bedroom value is $18,000, the difference is $3,000. $3,000 ÷ $100,000 = 3%. So in this case the line adjustment is well within the tolerance.
• Net Adjustments ≤ 15% for overall comparison - When comparing all the factors involved between the subject property and the comparable property, the net combination of items cannot exceed fifteen percent. For example, if there are two adjustments, one of +$3,000, and one of -$2,000, the net adjustment is $1,000 ($3,000 - $2,000). Using our previous $100,000 example, this would be a 1% difference and still within the 15% tolerance.
• Gross Adjustments ≤ 25% for overall comparison - When comparing all the factors involved between the subject property and the comparable property, the gross combination of items cannot exceed twenty- five percent. For example, if there are two adjustments, one of +$13,000, and one of -$15,000, the gross adjustment is $28,000 ($13,000 + $18,000). If we use our $100,000 subject property value again, this
$28,000 gross adjustment would exceed the 25% threshold and the appraiser would need to find a different comparable property.
Appraisal Approaches: Sales Comparison Approach
The Sales Comparison Approach is also known as the Market Approach and relies on 3 recent sales in the surrounding area (usually within a 1 mile radius). This is the most common approach and can be used for purchases or refinances.
Appraisal Approaches: Cost Approach
The Cost Approach is used for construction loans, remodeling, repairs, improvements and additions. The value is based on an analysis of the cost of materials, labor, planning and oversight. This approach can also be used to determine replacement value for insurance purposes.
Appraisal Approaches: Income Approach
The Income Approach is used for income producing properties (e.g., rental property). This approach determines the amount of cash flow the property can produce based on market rents and upkeep costs. A calculation using the net operating income of the property divided by the capitalization rate (the investor’s expected return) is used to help determine the property’s value.
Appraisal Forms: The Uniform Residential Appraisal Report (URAR, Form 1004)
The form most commonly used for appraisals. The URAR is considered a full appraisal because it includes an interior and exterior inspection of the evaluated property.
The URAR is not, however, meant to report the appraisal of a manufactured home, condominium, or cooperative.
