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Essentials of Mortgage Loan Origination, Diehl and Associates ©2016

Section II

Copyright 2017 Diehl Mortgage Training & Compliance

Section II

The Contemporary Mortgage Loan Origination Process

Textbook Page

29

Section II

The Contemporary

Mortgage Loan Origination Process


Section II


Section II Goals

• Define key terms like:• Mortgage, Mortgage Lending, Mortgage Banking,

Mortgage Brokering

• Order the steps in the process and determine which roles and activities require a license

• Origination• Processing• Underwriting• Closing


Section II


Section II Goals

• Explain the Mortgage Loan Origination Process and the rules that apply throughout the process

• What’s required• Licensed or exempt• PE and later CE• What’ s the Unique Identifier

• Kickbacks

• Affiliation business arrangements


Section II


Section II Goals

• Advertising requirements• Key ratios• Conventional guidelines: 28/36 (lower or

higher?)• Pre-qualification vs. Pre-approval• Safe Harbor number of options• Conventional (definition, conforming/non)• Non-Conventional (government)• Conforming (Fannie/Freddie)

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Section II Goals

• Describe key products including what they require and how they work and benefits and drawbacks to the borrower

• Fully Amortizing• 15 Year• LTV / Down Payment• FHA

• 2 types of MI• Insured• No Income requirements• Eligibility: Property• Min required investment


Section II


Section II Goals

• VA• Military eligibility• 100%• Guaranteed

• USDA• Direct• Guaranteed• Eligibility: Property and Income Limit

• Non-conforming: Jumbo, A-, Alt-A, Subprime, other

• Fixed-Rate


Section II


Section II Goals

• ARM- Caps & Index + Margin Subject to Caps

• Balloon

• Reverse

• Home equity loan / Home equity line of credit

• Construction

• Interest-Only

• Bridge loan


Section II


Section II Goals

• Apply the rules about application and disclosures

• Application• Prohibited acts

• What is an application?

• Explain key title terms

• Co-borrower responsibility and liability (joint and several)

• Review the application itself (1003, 65)

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Section II Goals

• Joint Tenants- Joint ownership and automatically passes

• Not required to be married• If not married then removal must divide property or

court order sale

• Tenants in Common- Two or more people with equal

• One owner can give up a security interest in their part of the property

• All liens must be cleared to allow property transfers


Section II


Section II Goals

• Tenants by Entirety- Husband and wife are considered one so title automatically passes upon passing

• Must be married but no legal action required upon passing and no will or probate needed

• Property cannot be subdivided• In divorce, this converts to tenacy in common


Section II


Section II Goals

• Fee simple rights• Review the application: FNMA 1003, Freddie Mac

Form 65• Disclosures: LE, Intent to proceed, Home Loan

Toolkit, “When your home is on the line (HELOC), servicing disclosure statement

• Discount points, rates-fees tradeoff• Origination points• Yield Spread Premium (YSP)- Lender credit to

borrower.


Section II


Section II Goals

• QM- Must document Ability to Repay• 1. Income/assets 2. Employment 3.Monthly

payment• 4. Monthly payment on simultaneous loans • 5. Mortgage related payments • 6. debt (alimony or child support if paid)• 7. DTI 8. Credit

• QM- Must document Ability to Repay• Maximum 43% DTI unless exempt from DTI limits

only• Fannie, Freddie, FHA, VA, USDA

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Section II Goals

• QM- Must be below APR limits• 1st Mortgage: APR < APOR + 1.5%• 2nd Mortgage: APR < APOR + 2.5%• 3rd Mortgage: APR < APOR + 3.5%

• If over these, then > High Priced Loan

• Other key considerations

• Compensating factors


Section II


Section II Goals

• Appraiser / Appraisal (USPAP)

• Opinion of value• Sales comparison approach, cost approach,

income approach

• Fair market value

• Appraisal rules• Influencing value

• Insurance- Hazard, Flood


Section II


Section II Goals

• Loan decisions- Approve, Deny, Counter, Withdraw

• Required notification• Reasons

• Per diem interest

• Prorated expenses and credits between buyer and seller can accommodate these

• Everything is subject to negotiation


Section II


Contemporary Mortgage Loan Origination Process• A mortgage is an agreement between a

borrower and a lender in which the borrower conveys an interest in a property to the lender as security for a loan.

• Mortgage bankers are not bankers. They are "financial intermediaries" that serve parties on opposite ends of the mortgage lending transaction by moving capital or money.

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Mortgage Lending vs. Mortgage BankingThe terms “mortgage lending” and “mortgage banking” are often used interchangeably; however, there is a difference between the two.

Mortgage lending:

• Broader industry of making funds available to borrowers

• Through loans • Furnished by institutions and business entities • Including banks, credit unions, thrifts, etc.

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Mortgage Lending vs. Mortgage BankingThe terms “mortgage lending” and “mortgage banking” are often used interchangeably; however, there is a difference between the two. Mortgage banking:• Specific component of mortgage lending • Banks and similar institutions fund loans with

money from secondary market• Has evolved into primary means of perpetuating

mortgage lending industry

• Cyclical process

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Mortgage Lending vs. Mortgage Banking / Mortgage Brokering

Mortgage Lending

Mortgage Banking Mortgage Brokering

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Process and Participants

Originating is:• Developing marketing plan and solicit clients• Educating client about loan programs• Taking application and gather complete and

accurate information• Providing disclosures, estimates, obtain fees

and get signature on dated application• Preparing loan file and submitting to loan

processor

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Knowledge Check

Name three Origination activities

Review


Section II



Processing is:

• Reviewing loan files and requesting needed documents

• Sending deposit, employment and verification forms

• Ordering credit report and appraisal per loan type

• Reviewing all documents, preparing and forwarding loan file to underwriting

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Knowledge Check

What does a Processor do?

Review


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Underwriting is:• Analyzing creditworthiness and willingness to pay• Reviewing property value to ensure that sufficient

value exists (LTV)• Matching client and property data to investor

requirements• Reviewing compensating factors, making final

decision to approve / deny loan• If denied, may submit for review by others for a second

look and send to closing

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Section II


Knowledge Check

What is a task that an Underwriter performs?

Review


Section II


Knowledge Check

Do Processors and Underwriters need a license?

“Yes”, “No”, or what would it depend on?

Review

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Section II



Closing is:• Preparing, assembling and reviewing closing

documents• Funding mortgage loan• Verifying that all closing conditions are met• Verifying that all fees, costs and premiums are

collected• Recording deed, other required documents,

releasing any prior liens on the property

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Section II


Mortgage Loan Originator Licensing

Why must MLOs be licensed or registered?• Origination is the key to the entire mortgage

process• Originators have most contact with customer,

thus should meet certain standardsPLUS• It’s the law• SAFE Act of 2008: unlicensed origination is

illegal

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Section II


Mortgage Loan Originator LicensingThe licensing requirements under the SAFE Act also include provisions for general character and financial fitness:

• License provisions for screening originators / applicants

• Adequate responsibility

• Personal credit

• Character (no criminal activity)

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Mortgage Loan Originator LicensingThe mortgage loan originator must not merely have a license application pending approval, renewal or transfer; the license status must be active before a mortgage loan originator can originate loans:

• Pre-licensing requirements must be met

OR

• If federally supervised and exempt from licensure, person must register through NMLS

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Pre-licensing Requirements

Pre-licensing requirements include:

• 20 hours of pre-licensing education fulfilled by this course

• NMLS Registration and unique identifier

• Passing character and financial fitness exam

• Background checks and fingerprints (FBI)

• Passing both the State and Federal exams

• Paying all licensing fees

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Use of Unique Identifier

• Must have unique identifier to do business

• Permanently identifies loan originator

• Helps to track employment history

• Tracks disciplinary / enforcement actions

• On all materials- Flyers, Business Cards, Ads, Radio

• Cannot use another person’s or let them use yours

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Knowledge Check

Where is the Unique Identifier and where must it be?

Review

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Customers and Kickbacks

Kickback: A receipt of anything of value in exchange for referring business. Things of value include services, gifts (other than nominal gifts, such as a thank you note), business referrals (such as cross referral schemes), and promise of continued use of services in exchange for referrals, as well as the obvious gifts of monetary value.

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Section II



If a lender requires a borrower to use a specific settlement service provider, unless there is an exception, it would be considered a kickbackbecause it is an inappropriate cross-referral scheme.

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Affiliated business arrangements are, perhaps surprisingly, not kickback schemes so long as the affiliation is disclosed. To qualify, an affiliated business must be controlled by and fall under the “parent” business.

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Knowledge Check

How do you determine whether something is a kickback or not (What value would be considered a kickback)?

What Regulation covers this topic?

Review

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Advertising

• TILA requirements bring clarity

• Simply put, advertisements must be clear and accurate

• Terms advertised must be the terms available

• Company must be identified

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Initial Interview

Pre qualification is not the same as Pre approval

• How much a person might be able to borrow

• “Dry run” without verification

• NOT credit determination

Pre approval:

• Determination of actual amount of financing

• Actual credit determination

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Knowledge Check

Which is a stronger commitment….Pre approval or Pre qualification?


Section II


Three Lending Ratios

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Qualifying Ratios• Housing Expense Ratio (Housing-to-Income):

what portion of the borrower’s income can be allocated to housing

• Total Debt-to-Income Ratio: what portion of the borrower’s income is already allocated to debt repayment

• Loan-to-Value: Loan amount (s) / Value


Section II


Understanding Ratios

Housing Expense Ratio = Monthly Housing Expense / Gross Monthly Income• Total of housing payment (PITI) / Gross Monthly

Income• Principal • Interest• Taxes• Insurance

• Total housing payment should not exceed a certain percentage of gross monthly income. (Usually 28%, varies by program)

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Debt-to-Income Ratio = Total Monthly Expenses / Gross Monthly Income• Total of ALL debts (including PITI) / Gross Monthly

Income• All non cancellable debt obligations (loans, leases, credit

cards)• Generally, installment debt with less than 10 payments

not counted• Life insurance premiums, utilities, cell phones not

counted• Total monthly debt obligations should not exceed a

certain percentage of gross monthly income. • (Usually 36%, varies by program)

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Debt-to-Income Ratio = Total Monthly Expenses / Gross Monthly Income• Total of ALL debts (including PITI) / Gross Monthly

Income• All non cancellable debt obligations (loans, leases, credit

cards)• Generally, installment debt with less than 10 payments

not counted• Life insurance premiums, utilities, cell phones not



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Housing Expense

Ratio

A borrower earns $4,500 per month in gross income.

If their housing ratio is 28%, what is the maximum housing payment for which they can quality?

$4,500 x .28 = $1,260


Section II


Housing and

Debt To Income

Ratio

A borrower earns $4,500 per month in gross income. If my housing ratio is 28%, what is the maximum housing payment they can quality for?$4,500 x .28 = $1,260What is the maximum total debt this borrower can have if DTI is 36%?$4,500 x .36 = $1,620


Section II


Housing and

Debt To Income

Ratio

If my housing ratio is 28%, what is the maximum housing payment for which they can quality?

$4,500 x .28 = $1,260

What is the maximum total debt this borrower can have if DTI is 36%?

$4,500 x .36 = $1,620

_____________________________________

This borrower has $360 in non-housing debt.

$4,500 x .28 = $1,260

$4,500 x .36 = $1,620 – (non-housing debt) $360 = $1,260

Maximum housing payment is the lesser of maximum housing debt or maximum DTI housing debt obligations


Section II


Housing and

Debt To Income Ratio 2

A borrower earns $5,000 per month in gross income and has $650 in non-housing debts.

What is the mortgage payment this borrower will qualify for, assuming ratios of 28% for housing ratio and 36% for DTI?

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Section II


Housing and

Debt To Income Ratio 2

A borrower earns $5,000 per month in gross income and has $650 in non-housing debts. What is the mortgage payment this borrower will qualify for, assuming ratios of 28% for housing ratio and 36% for DTI?Housing ratio = $5,000 x .28 = $1,400Maximum DTI = $5,000 x .36 = $1,800 -$650 = $1,150


Section II


Housing Expense

Ratio 3

Borrower earns $6,300 per month in gross income and has $500 in non-housing debts.

What is the mortgage payment this borrower will qualify for, assuming ratios of 28% for housing ratio and 36% for DTI?


Section II


Housing Expense

Ratio 3

Borrower earns $6,300 per month in gross income and has $500 in non-housing debts. What is the mortgage payment this borrower will qualify for, assuming ratios of 28% for housing ratio and 36% for DTI?Housing ratio = $6,300 x .28 = $1,764Maximum DTI = $6,300 x .36 = $2,268 -$500 = $1,768


Section II



Debt-to-Income Ratio• Total of ALL debts (including PITI) / Gross Monthly

Income• All non cancellable debt obligations (loans, leases,

credit cards)• Generally, installment debt with less than 10

payments not counted• Life insurance premiums, utilities, cell phones not



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Knowledge Check

What are the standard conventional ratios for the housing expense ratio and DTI?

If the numbers are not the same which would you use…..higher or lower ?

Review


Section II


Initial Interview

Enough information must be gathered to determine which type of loan (generally) and which specific loan program best suits the borrower’s interests, objectives, and qualifying ability.


Section II


What Must Happen in Interview

The loan type and program selected must be selected to suit the borrower:

• Borrower must have final say in loan program type and loan product type

• At least 3 options is the golden rule, creates safe harbor

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Section II


Choosing a Mortgage Program Type

There are conventional and non-conventional loan programs available to borrowers:• Conventional:

• Not guaranteed or insured by the Federal Government

• Conforming (FNMA, FHLMC) and Non-Conforming (Private Investors)

• Non-conventional:• Government loan, not private: FHA, VA, USDA• Generally lower loan maximums but less stringent

credit qualifying- Flexible Credit

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Conventional loans are not guaranteed / insured by federal government:

• Financed solely by a bank / institutional lender

• May require Private Mortgage Insurance (PMI)• IF amount exceeds 80% of property value

• PMI remains until the loan is paid down to 78%, then it automatically ends, or at 80% upon request

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The characteristics of these loans are:

• Traditional conventional loans are usually fixed rate, long-term and fully amortizing

• Loans with terms other than a fixed rate 30 year term are considered nontraditional

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Conforming loans meet the requirements set by Freddie Mac or Fannie Mae to be sold on the secondary market.

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Knowledge Check

Is an FHA loan a conforming loan?

What does conventional loan mean?

Can you have a conventional conforming?

Review

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• Fully amortizing loans (or self-liquidating) include payments which fully pay down the entire loan balance (principal and interest) over the life of the loan

• Fixed rate loans have set interest rates that remain the same for the duration of the term

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15 year mortgage loan characteristics are:

• Better interest rates • Shorter terms and reduced risk to lender

• Payments are higher • Borrower’s tax deduction declines more rapidly• Less interest is paid each year as principal is

reduced more quickly

• Bi-weekly payment plans may be used

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Loan-to-Value Ratio is used to classify:

• 80% LTV Conventional Loan (20% down payment)



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Government Loan Products

FHA loans are insured by the Federal Housing Administration against loss by foreclosure:

• Mortgage insurance • Up-Front MIP• Annual Paid Monthly MI

• Included in maximum mortgage amount

• Public-sector mortgage insurance is required • Due to high loan-to-value ratio

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The FHA insures loans for single and multi family homes made by approved lenders:

• Good protection against losses when borrowers default

• FHA loans are not dependent on income level

• Overseen by HUD• Sets regulations for approval

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The standards for evaluation of an application for an FHA loan include the following (The 4 C’s of FHA underwriting):

• Credit history of the borrower

• Capacity to repay the loan

• Cash assets

• Collateral

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Eligibility of the property is important. The following help determine whether the property, in addition to the borrower, will be eligible for an FHA loan:

• The condition of the property

• The maximum mortgage amount allowed for the property based upon its location

• Occupancy of the property

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The following property types may be eligible for FHA loans and include 1 to 4 family dwellings of the following types: • Detached or semi detached dwellings• Row houses• Multiplex dwellings• Individual condominium units• Some manufactured housing• Utilities and condition of property

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Loan regulations: FHA loans also require a borrower to have a minimum investment in the property and place some restrictions on the loan, such as restricting the assumption of the loan and secondary financing in relation to the loan.

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Knowledge Check

What’s are three things you know about an FHA Loan?

Review


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• VA-guaranteed loans are government-guaranteed loans

• Veterans Benefits Administration of the VA

• To help eligible veterans who have served or who are currently on active duty

• US Armed Forces, Coast Guard, Reserves, National Guard

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• The VA rarely lends money directly to borrowers:

• Except in isolated areas with scarce financing

• Must borrow funds from VA approved lender

• Lenders may become automatic endorsers• Allows authority to close VA loans without prior

approval

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The most important requirement to be approved for a VA loan is the borrower's military eligibility:• Military eligibility:

• Length of continuous active service• When enlisted• If served during wartime

PLUS• Credit history, income, etc.• Spouses can be eligible

• Cannot count income of non married co-borrower unless co-borrower is also an eligible veteran.

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The VA doesn't limit the price a veteran can pay for house, but it does limit the amount it will guarantee in case of default to 25% of the purchase price or of the established reasonable value whichever is less.

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• The total debt-to-income ratio is used in VA loans

• An important difference from conventional loans is that VA loans do not typically employ housing expense ratio

• Instead, Underwriters look at total debt-to-income ratio when evaluating a borrower

• Most lenders look at “gross income” while VA looks at “Net Effective” or “Residual Income”

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Section II


Knowledge Check

What LTV is a VA loan?

What must you have to pursue a VA loan?

What amount is guaranteed?

Are VA loans insured or guaranteed?

Review

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Section II



Housing and Community Facilities Programs (HCFP) under USDA Rural Development has programs:

• For low-income buyers in rural areas

• Referred to as “Section 502” loans

• For single-family homes

• Guaranteed loans from private lenders, OR

• Direct loans to borrowers

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These Section 502 loans (USDA Rural Development Programs) can be used to:

• Purchase an existing home

• Renovate or repair an existing home

• Relocate an existing home

• Construct a new home

• Purchase and prepare a site (including water and sewage) for a home

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Section II



Homes must meet certain requirements in order to be eligible:

• Modest in design and cost

• Not possessing market value over loan limit

• Applicants must also meet income requirements based on the area median income (AMI) for the region

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Knowledge Check

What is required to originate a USDA loan?

Review

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USDAIncome and Property Eligibility Web Site


Section II


Nonconforming Loan Programs

• A nonconforming loan is simply a loan that Fannie or Freddie will not purchase

• They can be large loans that exceed the maximum conforming loan limits of Fannie Mae and Freddie Mac OR loans that accommodate slightly higher-risk borrowers than what GSE standards would allow

• They include:• Jumbo loans• Alt-A• A-loan• Sub-prime loans• Seller-financed and other creatively-financed loan programs

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These are not inherently bad loans, but loans which carry more risk for the borrower and will carry more regulation and more documentation when determining if one of these loan types is in the borrower’s best interests.

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• Private Jumbo Conduits have grown much larger and more important since mid‐80s

• Provide source of funds for jumbo loans (over lending limits of Fannie and Freddie)

• Most use GSE guidelines

• Also have their own special rules

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A-minus conventional and Alt-A loans allow slightly higher risk to borrowers, but:

• Give opportunity for loans considered “salable” on secondary market

• Even with slightly at-risk borrowers

• “Float between” average risk and high risk loans

• Special markets for these

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Subprime Loans are suited to borrowers with less-than-perfect credit scores or other elements of risk to lenders:

• Rarely seen in today’s markets

• Higher-than-typical interest rates

• Loan originator must conduct and document thorough risk-benefit analysis

• Added disclosure requirements

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Section II


Choosing a Mortgage Loan Product

Once loan type is chosen, specific loan product must be chosen, considering:

• Borrower’s purpose and needs• Income to debt ratio• How much borrower can afford to pay each • Month• Length of loan • Variable payment amount

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Section II


Fixed-Rate Mortgage (FRM)

A fixed-rate loan is a mortgage loan in which the interest rate and payments remain the same for the life of the loan:• Usually fully amortize• The most conservative• Monthly payments will fluctuate the least• Rates usually higher than variable rate loan• Lender carries this risk• Because the interest rate is fixed, it also cannot go

down

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Fixed-Rate Mortgage (FRM)

Other considerations of fixed rate loan products are:

• Some APR loan rates may decrease when market drops

• Can get a slightly more expensive loan with a variable rate APR since initial payments will be lower

• If income will increase in a few years, a fixed-rate may not be in borrower’s best interest

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Adjustable-Rate Mortgage (ARM)An Adjustable-Rate Mortgage (ARM) is a mortgage with an interest rate that increases or decreases:

• Over life of loan

• Based on market conditions• Determined by easily definable financial index, such

as prime rate posted by Federal Reserve Bank, Treasury Bills, etc.

• Also called Variable Rate Mortgage (VRM)

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Adjustable-Rate Mortgage (ARM)Typically the initial rate is fixed for a certain amount of time:

• During a rate adjustment period, the rate may be adjusted up or down, can then lock again

• Typically have slightly lower initial rates than fixed rate loans

• Payment amounts can change over life of loan

• Can be an excellent choice for borrowers looking to sell or repay loan before initial period expires

• BUT a fixed-rate loan is probably better for those who plan to hold the loan for full term

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Balloon Features

Balloon features may be included in variable or fixed- rate loan products:

• Series of equal monthly payments, and

• A large final payment due at specified date

• Good for those expecting to sell or refinance at certain time

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Reverse Mortgage

Reverse mortgages are for Seniors 62 years and older:• Take advantage of equity they have built up in

their homes• Proceeds available are dependent on age,

interest rate and value / maximum loan amount in the area

• Option to those wishing to remain in homes with cash flow issue / need for lump sum / medical / annuity purposes

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Reverse Mortgage

There is a possibility of abuse:

• Easy to qualify

• Proceeds have no restrictions

• Counseling session required

• Seniors are made aware in advance of the costs, alternatives, and uses for the funds

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Reverse Mortgage

• Loan does not have to be repaid until borrower dies, sells home, or moves away

• Borrowers still responsible for payments, taxes and insurance

• Can pay off or refinance any time

• When no longer primary residence for 1 year, loan is due and needs to be repaid

• Must be 62 or older, have substantial equity in the property, and get HUD counseling

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Knowledge Check

What must the minimum age of reverse mortgage borrowers be?

When does the loan mature (require repayment)?

Review

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Reverse Mortgage

Popularity of reverse mortgages is increasing

• Aging population and increased consumer awareness

• Growth in the number of lenders and brokers offering this option

BUT

• Critical to evaluate all options available to assist seniors with their financial needs

• Reverse mortgage has effects on different family members

• Good for seniors to get third-party information to make an informed decision


Section II


Home Equity Loan & Credit Lines

A home equity loan is a loan secured by real property a person owns, such as a primary residence. There are 2 types:

• Fixed-rate home equity loan

• HELOC (Home Equity Line of Credit) • Adjustable rate, often tied to an index such as prime

rate

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Home Equity Loan & Credit LinesA fixed-rate home equity loan is good for a borrower who needs a lump sum:

• To be repaid at a fixed payment and rate over a certain period of time

• Ranging from 5-30 years

• Security of knowing payment and rate will not change

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Home Equity Loan & Credit LinesHELOC’s are mostly variable rate loans:

• Like a credit card secured by equity in home

• Access credit line over and over and also write checks or use ATM card

• Payments are commonly based on interest only amount

• Draw period is 5-10 years then repayment period of up to 20 years (including principal)

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Home Equity Loan & Credit LinesOther characteristics of HELOCs are:

• Lenders offer options such as rate locks on different balances within the line of credit

• They can usually be obtained for low to no cost

• Interest paid on a home equity loan may be tax deductible as is interest on most other types of mortgages

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Construction Loan

A construction loan covers land development / building construction:

• Disbursed in several ways:• Short term (often 12-18 months)• At completion of construction stages• As-needed basis• Mutually-agreed upon schedule• Upon a condition, such as completion of home

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Interest-Only Loan

An interest-only loan is a type of adjustable-rate mortgage:

• Borrower makes no payments on principal for specific amount of time

• Then borrower responsible for making fully amortized payments

• Both principal and interest

• Like a student loan, standard mortgage or car loan

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Interest-Only Loan

The advantages of interest-only mortgages are:

• During interest-only period, monthly payments are very affordable

• Income increase results in more money available for next home

• Payment flexibility• Option to payoff part of principal during interest-only

period without being penalized

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Interest-Only Loan

The major disadvantage of interest-only loans is “payment shock“:

• Once interest only period is over

• Responsible for making fully amortized payments to cover interest and principal

• Planning ahead is required

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Interest-Only Loan

Another disadvantage is:

• During the interest-only period, no progress on paying down principal

• No equity accrued

• Could owe more in principal than house is worth if depreciation

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Section II


Bridge Loan

A “bridge loan” is a short term loan taken out by a borrower against their current property to finance the purchase of a new property:• Swing loan• Typically 6-12 months• May have higher interest rate and closing costs• Purchasing new home and hasn’t sold current

home• “Bridges the gap”

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Section II


Bridge Loan

• Borrowers can have a Purchase Contract Contingency = Contingent offer

• Can remove and do a bridge loan

• Bridge paid off when sells

• Can be refinance

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Section II


Employment Verification

Applicants should provide copies:

• If fixed income (ex: Social Security, Child Support, Pension, Annuity, Dividends, etc.) must provide Proof of receipt of funds and continuation of fixed income for minimum 3 years

NOTE: If there are any rental properties and the Applicant is a wage earner, employed by a company must provide Tax returns with Schedule E for the previous 2 years to calculate net rental income.

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Section II


Asset Verification

Applicant(s) should provide complete two months statements of all information pertaining to liquid assets and the financial institutions the money is deposited:• Checking Accounts• Savings Accounts• Money Market Accounts• Certificate of Deposits• Investment Accounts• 401K/IRA Accounts

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Section II


Asset Verification

NOTE: If business bank statements are provided,

applicant must provide proof of ability to withdraw funds.

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Section II


Asset Verification

If applicant is qualifying for a residential loan, the following documentation is required:• Copy of Gift Letter signed by Donor of funds.

(Note: Gift funds can only be given by a disinterested third party (family, employer, labor union) and funds cannot have any stipulation that the funds are to be returned in any manner)

• Copy of deposit of the gift funds stated on the gift letter

• Donor should provide source of withdrawal of funds donated as Gift

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Section II


Negative / Derogatory Credit ItemsAny Negative / Derogatory Credit Items must be included:• Judgments (Proof of release of lien)• Collection Accounts (Proof paid)• Bankruptcies (Proof of filing date and release)• If bankruptcy is Chapter 13, must provide copy of

proof of pay history to Trustee• Applicant should also provide Letter of Explanation

(LOX) on any late payments on revolving, installment or mortgage accounts

51-52


Section II


Information Required on Application

Other information must be included:

• If no mortgage history on credit report, applicant must provide information for current Mortgage Servicer/Lender

• If applicant has applied for any recent credit, proof of accounts established and inquiries on credit report to be explained on LOX

51-52


Section II


Information Required on Application

An applicant renting an existing primary residence must provide:

• Landlord name, address and telephone number

• 12 months cancelled checks to support pay history o If Landlord is not management company that

will be verifying rental history

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Section II


Ethical Behavior During theDuring Pre-Application Interview

The mortgage loan originator must keep the borrower’s best interests in mind:

• Avoid providing opinion

• Listen to the borrower’s:o Objectiveso Needso Likely qualification abilities

• Determine a number of options which might suit the borrower’s needs (3)

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Section II


Ethical Behavior During theDuring Pre-Application Interview

MLOs should:

Present each option to borrower in response to criteria provided by borrower:

• “Option 1 because you were interested in lowering monthly payment, etc.”

• Explain how loan product will help or make sense

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Section II


Ethical Behavior During theDuring Pre-Application Interview-What Must Not Happen:MLOs must not do:

• Cannot accept any fee or thing of value

• Never mislead a borrower

• A borrower can be misled when a MLO fails to understand his / her needs and recommends an unsuitable loan product

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Section II


Ethical Behavior During theDuring Pre-Application Interview-What Must Not Happen:These are Prohibited Acts:

• Accepting any fee prior to submission of LE after application and borrower’s express intent to proceed with loan application

• Steering borrower to loan benefitting originator

• Misleading borrower, creating false expectations

• Making misrepresentation borrower could rely upon in choosing loan, to his / her detriment

53


Section II


Ethical Behavior During theDuring Pre-Application Interview-What Must Not Happen:These are Prohibited Acts (cont’d):• Suggesting borrower default on existing credit

obligation• Insinuating / suggesting affiliation with

government / with borrower’s current lender unless true

• Stating you can counsel borrower / provide debt relief

• Making improper referral that would result in a kickback

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Section II


Ethical Behavior During theDuring Pre-Application Interview-What Must Not Happen:These are Prohibited Acts (cont’d):

• Asking prohibited question which could be construed as discrimination

• Failure to provide disclosure

• Failing to communicate information accurately

• Failing to identify one’s self / employer

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Section II


Ethical Behavior During theDuring Pre-Application Interview-What Must Not Happen:These are Prohibited Acts (cont’d):

• Failure to get permission to communicate electronically

• Committing / allowing fraud

• Failure to report red flags / identity theft risks

• Failure to ensure personal information kept secure

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Section II


Application Accuracy& Required Information (Form 1003)• The URLA contains information about the

borrower:

• Uniform Residential Loan Application (URLA):

• Information about borrower, property and loan transaction

• 1003 is the most common loan application

• Also form 65 (Freddie Mac form)

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Section II


When an Application Has Been CompletedAn application is completed when the borrower’s information is submitted in anticipation of a credit decision.

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Section II


When has a Borrower “Applied” for a Loan and Must Receive Disclosure Forms?

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Section II


Application Accuracy & Required Information(Form 1003)

Borrower Information and Co-borrower Information includes:

• Name of applicant, current address, Social Security Number

• Employment history, salary and income• Borrower's assets and liabilities• Whether borrower has any public records

such as judgments, foreclosures and bankruptcies

• Borrower's current housing expenses• Rent / mortgage payment information

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Section II


Borrower / Co-Borrower Information

• A co-borrower is someone who accepts joint obligation to pay a debt. The obligation usually creates a joint and several liability between the co-borrowers who are equally responsible for the obligation with neither one having greater or lesser obligation. So, unless it states otherwise in the contract, if there is a co-borrower, all borrowers are co-borrowers.

• Joint and several liability means that if a default occurs, the creditor can come after either one of the borrowers (several) or the borrowers together (jointly) for the entire obligation due.

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Section II


Joint and Several Liability

If one borrower has fewer assets and the creditor only recovers a small percentage from that person, the creditor may seek repayment from the other borrower:

• Creditors may seek repayment from both

• Risk in co-signing

• Must be explained to borrowers

• If not spouses, may need 2 application forms

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Section II


Borrower / Co-Borrower Information

Borrowers will have to provide employment information:

• Verification of past and current employment for last 2 years

• For a self-employed borrower, more information will be required

• Self-employed if they own 25% or more of a corporation

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Section II


Application Accuracy and Required Information (Form 1003)Borrowers will have to provide property information:• Address of property• Legal description of property• Number of units• Age of the property• Whether primary / secondary residence (FHA

requires occupancy as primary residence within 60 days)

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Section II


Application Accuracy and Required Information (Form 1003)How will title be held? (must be decided, or else no submissions):

• Two or more unmarried borrowers are joint tenants

• Married couple are “tenants by the entireties” • Automatically vest 100% in surviving spouse • May be joint tenants instead

• Share of the deceased to pass on by will (devise) / by law (descent)

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Section II


Application Accuracy and Required Information (Form 1003)Borrower interest must be determined:

• Fee simple (all rights)

• Some rights

• Impacts nature of the security interest

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Section II


Application Accuracy and Required Information (Form 1003)Loan and Transaction information must include:

• Loan type and program

• Loan amount and interest rate

• Proposed housing expenses

• Purpose of the loan and amount sought

• Details of the transaction

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Section II


Required Disclosures

Once application prepared and borrower working with processor / through MLO, disclosures are required:

• Disclosure timing considerations come into play

• Upon submission:o Copy of following within 3 dayso Unless exempt


Section II


Required DisclosuresLoan Estimate of settlement charges is required by TRID: • Loan Estimate • Special Information Booklets:

• For purchases federally-related transactions (“The Home Loan Toolkit”).

• For open-ended credit: “Your home is on the line” booklet (RESPA)

• Mortgage Servicing Disclosure Statement: whether or not the serving of the loan may be sold after closing

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Section II


Required DisclosuresThe Loan Estimate (LE) required by TRID:

• Offer must remain “good” for ten (10) days assuming borrower qualifies

• No fees except for the credit report until GFE/LE received and borrower indicates intent to pursue loan

• Clearly and conspicuously explains the APR and cost of the loan

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Section II


Required Disclosures

The Loan Estimate (LE) required by TRID:

• Notifies borrower they may not be able to refinance the loan

• Discloses all costs of the loan in a form for the consumer to use when loan shopping for easy comparison

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Section II


Discount Points

Discount points allow a borrower to get a lower interest rate on their loan by paying cash up front to pay less interest each month during the term of the loan:

• 1 point = 1% of principal amount• For $100K loan, 1 point = $1,000

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Section II

Copyright 2017 Diehl Mortgage Training & Compliance Essentials of Mortgage Loan Origination, Diehl and Associates ©2016

Section II


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Section II


Discount Points

Paying discount points is good for those planning to keep mortgages for long time

• Paying points:• Lower monthly payment• Tax incentives

• Extended repayment multiplies the advantage of paying upfront points since the lower interest rate will be enjoyed over a longer period of time

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Section II


Discount Points

Other characteristics of discount points include:

• Seller may pay some points for borrowers, to allow borrower to qualify for better loan

• Helping seller to offload home

• Allow lender to get return-on-investment up front (otherwise lost in lower rate loan)

• MUST be fully disclosed

• MUST actually reduce rate

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Section II


Origination Points

Origination points are different than discount points

• Origination points are part of the fee disclosed on the LE

WHILE

• Discount points are listed as part of the borrower’s charges

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Section II


Lender Paid Compensation(Yield Spread Premiums)The yield spread premium is money or a rebate paid to a mortgage broker for giving a borrower a higher interest rate in exchange for lower up front costs:

• Different than discount points and have the reverse impact

• Increasing (vs. decreasing) monthly payment amount to reduce the up-front costs of getting the loan

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Section II


Lender Paid Compensation(Yield Spread Premiums)There are new rules which affect originator compensation:• Prohibit loan originators from being compensated

in this way, BUT • Allow consumers to get a credit from lender for

paying higher rate in exchange for lower closing costs

• Disclosed on GFE as a credit to the borrower for selecting the higher rate

• Dual compensation prohibited (broker gets paid in the rate or the fees but not both)

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Section II


Analyzing the Borrower’s Financial PictureLenders may use underwriting standards for resale to Fannie / Freddie:

• Because most loans will be sold

• Consideration of borrower’s income, assets, and liabilities & new circumstances which will occur if loan granted, including payment of principal, interest, taxes and insurance (PITI) for new mortgage

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Section II


Analyzing the Borrower’s Financial PictureIncome stability:

• At least 2 years and likely to continue for 3 more years

• IF not stable, may still factor into lender’s decision to extend credit, even though not directly used to compute income of borrower

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Section II


Borrower’s Financial Picture

Income types are subject to stability analysis:

• Secondary income (investment, part time employment, alimony, overtime, disability, social security, child support, rental income, etc.)

• Primary source = stability analysis• Employment history• At least 2 years

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Section II


Borrower’s Financial Picture

Stricter standards are in place per Dodd-Frank

• MLO must verify that borrower has a “reasonable ability to repay the loan according to its terms.”

• Neither MLO nor borrower can hide, alter, exaggerate / otherwise manipulate data during analysis

• Otherwise, it is mortgage fraud

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Section II


Loan Processing, Underwriting & Insuring Income, Assets and Liability

Certain mortgages provide a safe harbor for the lender and originator because they are considered safer

• More consumer friendly

• Qualified mortgages

• Limits or eliminates lender’s / originator’s liability for failing to adequately determine borrower’s ability to repay

• Definition changed in early 2013

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Section II


Qualified MortgagesThese are qualified mortgage

requirements:

• A loan with a maximum Debt-to-income ratio of 43%

• A loan that does not include negative amortization, balloon features, or interest-only payments

• A loan with a term no exceeding 30 years

• A loan with its total points and fees not exceeding 3% of the total loan amount


Section II


Qualified MortgagesThese are qualified mortgage

requirements:• A loan which has verified the borrowers

income and assets, which are also documented and records thereof are kept

• A loan underwritten based upon the maximum interest rate for the first 5 years, using a payment that fully amortizes (reduces the principal to zero) its term

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Section II


Qualified Mortgages (QM)

Rules started January 2014 and the following is required:

• Maximum debt-to-income ratio for qualified mortgage is 43%*

*exemptions to the 43% include fnma, fhlmc, va, fha, usda

• At a minimum, creditors generally must consider eight underwriting factors:

1. Current or reasonably expected income or assets2. Current employment status3. The monthly payment on the covered transaction

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Section II


Qualified Mortgages (QM)

At a minimum, creditors generally must consider eight underwriting factors (cont’d):

4. The monthly payment on any simultaneous loan5. The monthly payment for mortgage-related obligations6. Current debt obligations, alimony, and child support7. The monthly debt-to-income ratio or residual income8. Credit history

Creditors must generally use reasonably reliable third- party records to verify the information they use to evaluate the factors.

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Section II


QM is a Safe Harbor Loan• Loans meeting the 8 requirements• Are first lien loans having:

• APR

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Section II


Net Worth DeterminationIncome, Assets and Liability

Debts are re-occurring payment obligations (bills):

• Installment loans • Credit cards• Mortgages• Collections• Slow pays• Judgments• Student loans, et ceteraPayments for debts with 10 or fewer months left

are not an issue

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Section II


Net Worth DeterminationIncome, Assets and LiabilityThe amount owed on any asset is the liability

• Asset value = asset

SO

• True net worth = asset value minus remaining liability

PLUS

• Borrowers must also reveal alimony or child support as a liability

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Section II


Net Worth Determination

Net worth is a good indicator of credit worthiness

• High net worth shows an ability to manage money

• Liquid assets that can be sold in an emergency to make payments can give a lender and added feeling of security

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Section II


Credit Reports and Scoring

• Credit history is an indicator of willingness to repay debt

• Payment history and extent of obligations in relation to applicant's income and assets

• Special attention to repayment of mortgage loans

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Section II



There are different sources of credit information:

• Formal• On the credit report

• Alternative • Not on the report but monthly obligations that can

be documented

• Credit score based off statistical analysis of items in credit report

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Section II



Credit scores are evaluated by scoring systems:

• Number of open accounts• Types of credit • Total credit limit• Length of credit history • Total amount of outstanding debt

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Section II



Credit scores are evaluated by scoring systems:

• Number of late payments in the past 1-3 months

• Number of recent credit inquiries• Adverse public records • Re-establishment of positive credit history

following past payment problems

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Section II



Problematic items can affect a credit score negatively

• May require letter of explanation (LOX)

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Section II



All information discovered during the credit and legal reviews must be reported subject to the Fair Credit Reporting Act

• Notice to the Home Loan Applicant Credit Score Information Disclosure must be provided to borrowers

• Per Fair and Accurate Credit Transactions Act of 2003

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Section II


Bankruptcy and Other Negative Factors

Bankruptcies are important events in credit history

• Chapter 7- 10 years (Liquidation)

• Chapter 13- 7 years (Repayment over 3-5yrs)

60-61


Section II


Bankruptcy and Other Negative FactorsOther credit events that negatively affect credit rating are:

• Foreclosures

• Late payments

• Collections

• Unpaid tax liens (which remain on the report indefinitely)

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Section II


Bankruptcy and Other Negative FactorsOther credit events that negatively affect credit rating are:

• Bill consolidations and refinancing:• Not equal to bankruptcies / foreclosures• Viewed with some concern• Suggest pattern of living above means• Classified as a marginal risk

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Section II


Qualifying Ratios

The 3 main ratios used in determining an applicant’s mortgage payment are:

• Housing-to-income

• Debt-to-income

• Loan-to-value

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Section II


Qualifying Ratios

Upon first consulting with a potential borrower, a loan originator usually analyzes:

• Monthly housing expense analysis based upon debt and gross income. There are 2 ratios:

• Housing expense (or front-end) ratio • Total debt-to-income (or back-end) ratio

• Gross income and Principle, Interest, Taxes & Insurance (PITI) payment are used to formulate the ratios

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Section II


Housing-to-Income Ratio

Total Housing Expense ÷ Gross Income = Ratio %

• Indicates a prospective borrower's ability to maintain fixed monthly mortgage expenses

• Other costs may be included when applicable, like special assessments, homeowners’ association fees, and mortgage insurance

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Section II


Housing-to-Income Ratio

Total Housing Expense ÷ Gross Income = Ratio %

• 950 + 75 + 60 = 1,085 housing expense

• 65,000 / 12 = 5,417 monthly gross income

• 1,085 / 5, 417 = 20% housing-to-income ratio

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Section II


Debt-to-Income Ratio

Total Debt ÷ Gross Income = Ratio %

• Indicates an applicant's ability to cover the housing AND living expenses adequately during the month

• Total obligations include the monthly housing expenses, plus any debts or loans with remaining terms over six to twelve months, depending on the investor's or insurer's requirements

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Section II


Debt-to-Income Ratio

Total Debt ÷ Gross Income = Ratio %

• 1,085 + 180 + 220 + 135 + 80 = 1,700 total debt

• 5,417 / 1,700 = 31% debt-to-income ratio

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Section II


Loan-to-Value Ratio

Loan Amt ÷ Appraised Value*/Sale Price *= Ratio %* whichever value is less

• Evaluating collateral (value of property being financed) is also used to calculate a mortgage payment schedule and is achieved by using loan-to-value ratio

• This tool is used in conventional loan programs as well as in secondary financing. To calculate LTV, the underwriter divides loan amount by appraised value / sale price, whichever is less

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Section II


Knowledge Check

A loan of $80k with a purchase price of $110k and an appraised value of $100k means a Loan-to-Value of what percent?

Review

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Section II


Knowledge Check

A homebuyer makes an offer for $315,000 on a home and wants to put 10% down. The home appraises for $320,000. What is the loan to value?

Loan amount = $315,000 X 90% = $283,500

Value = Lower of Sales Price or Appraised Value, so

Value = $315,000

$283,500/$315,000 = 90%

Review


Section II


Loan-to-Value Ratio

Loan Amount ÷ Appraised Value */ Sale Price * = Ratio %* whichever value is less• 192,000 / 260,000 or 240,000 = 80% LTV• Lower risk 80% magic number• 200,000 / 245,000 or 250,000 = 82% LTV• Higher risk: 82% = over magic number, so

greater % borrowed = higher costs / fees and mortgage insurance

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Section II


Loan-to-Value Ratio

Lower LTV = Less risk to lender• Larger down payment by borrower, and

therefore higher equity in the property and is more apt to protect investment

• The more equity the applicant has in the property, the less risk the lender/investor has in the event of foreclose on the loan

• Mortgage insurance can offset the lenders risk and provide the borrower lower downpaymentoptions

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Section II


Loan-to-Value Ratio

Generally, higher loan‐to‐value ratio = higher risk of default

• Borrower has less investment in loan with higher LTV ratio

• Mortgage insurance is required for loans with LTV ratios of 80% and above

• Mortgage insurance protects lender in case of such a default

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Section II


A borrower is purchasing a home for $225,000.The property has been appraised for $250,000.Borrower has been approved for a 90% Conventional Loan.They want to pay 1 Discount Point to lower their Interest Rate.

How much will they payto lower their rate?

Apply


Section II



How much will they payto lower their rate?

Loan Amount is 90% of $225,000 = $202,500Discount is 1% or $2,025

Apply


Section II



How much will the borrower need to bring to

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