©2011 Cengage Learning Chapter 6: Processing: Pre-Qualification & Loan Application Part...

©2011 Cengage Learning

Chapter 6: Processing:

Pre-Qualification & Loan Application

Part III PROCESSING

By Dr. D. Grogan

M.C. “Buzz” Chambers


PREVIEW The purpose of this chapter is to show the learner how

the mortgage loan broker bridges the gap between the borrower’s infrequent borrowing of real estate loan funds and the lender’s frequent daily business transaction practices.

The mortgage loan broker aids in the paperwork and forms required to close a real estate loan.

The purpose of this chapter is also to familiarize the learner with the Uniform Residential Loan Application (URLA, FNMA 1003).

Different types of loans have differing, specific qualifications for each particular loan.


STUDENT LEARNING OUTCOME

1. Complete buyer qualification data to determine qualifying ratios.

2. Differentiate between acceptable ratios for Federal Housing Administration (FHA), Department of Veterans Administration (DVA), and conventional financing.

3. Outline basic DVA eligibility criteria for veterans. 4. Explain the sections of the URLA 1003, loan

application.


Mortgage Loan Broker Role:

Your title: Loan agent, loan representative Your job: A liaison between lender & borrower Your role: Accept & process the loan application

Provide required disclosureVerify informationObtain additional information from borrower

Reject applicationProvide borrower with written credit

disclosure and reporting agencyReject or Accept the loan based on the information


6.1 Lender/Purchase Statement The lender should obtain a copy of the accepted

purchase agreement after the mortgage loan broker has received a completed loan application and has a credit report.

The loan broker should provide a letter showing: Borrower loan qualification Purchase price maximum for borrower Creditworthiness of the borrower


Property Profile When a purchase agreement is finalized,

the loan broker needs to obtain a property profile to determine: Current title holders Legal description Status on property tax payments Liens Trust deeds Comparables Assessor parcel number (APN)


6.2 Disclosure of Home Ownership Counseling

Purpose: The more the borrower knows about home ownership, the better the borrow can make realistic and wise purchase & loan decisions.

Required by some loan programs before purchaser approved for a specific loan.

How much money will be needed to consummate the transaction, including the down payment, closing costs, and the reserves?

What does the credit history indicate about the future ability to make the loan payments?

What questions should the borrower ask when shopping for a loan to obtain attractive terms?

Can the borrower budget for the cost of home ownership to obtain the tax advantages of home ownership?


6.3 Residential Loan Application

FNMA form 1003 Pronounced: 10 – 0 – 3 New version Jan 2010 Appendix A shows the English/Spanish form

An explanation for each circled number corresponds with the form and directions.

The circled numbers on the form require detailed and accurate information for each item.


Uniform Residential Loan Application

1003 – Page 1

Part 1 – Type of loan applied for. Loan terms Part 2 – Property information. Loan purpose:

purchase, refinance, construction) Part 3 – Borrower info (social security number) Part 4 – Employment info (number of years) Note: Want to see at least 2 years employment

history & 2 years residential history.



1003 – Page 2 Part 5: Monthly Income & Expense data

Income, commissions, dividends, rental income Monthly housing expense for Loans, taxes, insurance,

association dues

Part 6: Assets and liabilities data Liquid assets (cash, checking accounts) Other assets (real estate, retirement, vehicles)

Liabilities includes unpaid loan balances

Total assets - Total liabilities = Net Worth



1003 – Page 3 Part 6 (continued): Real Estate owned

Rental income and creditor name Part 7: Transaction details

Purchase price + costs + discount points List of subordinate financing and credits Mortgage insurance and funding fee financed Add loan amount + insurance + funding fee Subtract cash from borrower



1003 – Page 3 Part 8: Borrower & Co-borrower Declarations

Any judgments, bankruptcy, foreclosure or lawsuit Any SBA or student loans or government agency Any alimony, child support or maintenance pay No part of down payment is borrower If borrower is a co-maker or endorser on a note Resident status (citizen or permanent resident

alien) Ownership interest in property in past few years



1003 – Page 3 Part 9: Acknowledgements and Agreements

Acknowledge purpose of the loan & intent The loan is senior No illegal uses

Agreement to amend items during loan period Transfer or assignment No representations nor warranties by lender

Certification Information provided is true and correct Civil liability & criminal prosecution for misrepresentation

Signed and dated by each borrower


Uniform Residential Loan Application1003 – Page 3

Part 10: Government monitoring Borrower states they will not furnish data, or Borrower completes the requested information:

Race National origin Sex

Interviewer required to complete data How application taken Interviewer information

Part 10: Government monitoring

Borrower gives any additional useful information

All parties sign and date this page


SECTION 2: Pre-Qualifications

Income: Establish income Verify pay stub, tax returns, W-2’s. Document bonuses, rental & interest income


6.4 Qualifying Ratios:Front End Ratio = Total Housing expense/Gross Income

Conventional – 95% LTV Max. Ratio is 26%

Conventional – 90% LTV Max. Ratio is 28%

Conventional – 80% LTV Max. Ratio is 32%FHA – Max Ratio is 29%

Back End Ratio = Proposed Housing exp + All debt / Gross Income

Conventional loans – maximum 33%

36%

38%

FHA and DVA maximum ratio is 41%

Community Home Buyers Program may be as high as 45%


Ratio CalculationPITI + HOA + MI

FRONT END RATIO = GROSS INCOME (GI) MONTHLY

BACK END RATIO = PITI + HOA + MI + DEBTS

GROSS INCOME (GI) MONTHLY


ARM Income-Expense Ratios

Housing Total monthly

Expense Debt service

FNMA (LTV 90% or more) 26% 33%

FNMA (LTV 90% or less) 28% 36%

FHLMC (exceeds cap and 25% 33%discount guidelines)


6.5 Dept of Veterans Administration (DVA)

Qualification DD form 214, Report of Release or

Discharge From Active Duty Original Certificate of Eligibility Eligibility requirements for various conflict

periods Beginning and ending dates of the conflict Specific number of active days of service Minimum 24 full months for post-Vietnam


E RA DATES LENGTH OF SERVICEWorld War II 09/16/40-07/25/47 90 days active dutyPeacetime 07/26/47-06/26/50 181 days continuous

active dutyKorean Conflict 06/27/50-01/31/55 90 days active dutyPost-Korean 02/01/55-08/04/64 181 days continuous

active dutyVietnam 08/05/64-05/07/75 90 days active duty

Service Period Criteria


Service Period Criteria (cont) Post-Vietnam 05/08/75-09/07/80 181 days continuous

active duty Enlisted 09/08/80-08/01/90 2 years (24 months)

active duty Officers 10/17/81-08/01/90 2 years (24 months)

active duty Persian Gulf 08/02/90-undetermined 24 months or

period called to active duty, not less

than 90 days Veteran is still on 181 days of Continuous Service active duty


Maximum DVA loans: Calculating the sales price/loan amount gross income

Gross Income Multiply by X 41%

Total debt service, including housing expense

Subtract monthly installment/revolving debts

Total debt allowed for PITI

Subtract figure for monthly taxes and insurance/Homeowners association dues (HOA)

Total debt for principal and interest

Divide by P & I factor for current allowable interest rate

Maximum loan amount borrower may receive


Table of residual income by regionFor loan amounts below $79,999:

Family SizeNortheast Midwest South West

1 $390 $382 $382 $425

2 $654 $641 $641 $713

3 $788 $772 $772 $859

4 $888 $868 $868 $967

5 $921 $902 $902 $1,004

Over 5 Add $75 for each additional member up to a family of 7

For loan amounts above $80,000:

Family SizeNortheast Midwest South West

1 $450 $441 $441 $491

2 $755 $738 $738 $823

3 $909 $889 $889 $990

4 $1,025 $1,003 $1,003 $1,117

5 $1,062 $1,039 $1,039 $1,158

Over 5 Add $80 for each additional member up to a family of 7


6.6 Federal Housing Administration (FHA) Qualifications

Calculate the maximum loan amount from the gross income.

Proof of total verifiable income from all sources. Total monthly expenses that continue for six

months or longer. Determine ratios: 31% front end; 43% back end. Calculate maximum loan amount. Estimate closing costs and down payment for

total cash required to close escrow.


Maximum FHA loan amount

$ _________ Gross income Multiply by × 43% Back-end ratio

Total debt service including housing expense


Total income allowed for PITI

Subtract figure for monthly taxes and insurance/HOA

Total income for principal and interest

Divide by P & I factor for interest rate (varies with point structure—buydown)

Maximum loan amount borrower may obtain ADD CASH DOWN PAYMENT Total Price Total Sales Price


MONTHLY GROSS INCOME

Borrower’s Base Income $ Other $_____________ Co-borrower’s Income $ Other $_____________ TOTAL MONTHLY INCOME (Gross)

$_____________(A)


DEBTS AND OBLIGATIONS Installment Debt $ ______

(10 mo. or longer-Car, Student Loans, Etc.)

Revolving Debt (Credit Cards) $______

TOTAL MONTHLY OBLIGATIONS $ _________(B)


MONTHLY PAYMENTS

Prin. and Int. $___________

Loan Amount $_________ + MIP_________ = $ __________

Homeowners Assoc. (Monthly Dues) $ __________

Not Covered______________ (i.e., fire, flood, etc.) Hazard Insurance (Fire Only) $ __________ Property Taxes @ __________% of the purchase price $ ________

TOTAL HOUSING EXPENSES $ ________________ (C)


FHA Qualifying worksheet TOTAL HOUSING EXPENSE

(C) $______ ÷ Total Gross Income (A) $______ = ______%

TOTAL FIXED PAYMENTS

(B) + (C) $______ ÷ Total Gross Income (A) $______ = ______%

Ratio Guidelines are 31%/43%. These ratios may be exceeded by up to 2% if the property is "Energy Efficient" (built after 1976).

Cash-Out Refinance: No compensating factors allowed, ratios as

stated, 31%/43%, CANNOT BE EXCEEDED.


6.7 Conventional Qualifications

Reserve requirements: $417,000 > 2-3 months PITI held as cash $417-$729,750 6 months reserves > $1 million 12 months reserves

Obtain borrower’s total gross income from all sources.

Determine housing expense (A PITI). Obtain borrower’s assets & liabilities. Calculate ratios: front end & back end.


Calculating the Sales Price/Loan from Gross Income

Gross Income Multiply by × 36% (33, 36, 38% back-end ratios based on the

LTV)

Total debt service including housing expense


Total allowed for PITI

Subtract figure for monthly taxes and insurance/HOA

Total allowed for PI

Divide by P & I factor for interest rate (varies with points charged)

Maximum loan amount borrower may obtain

Divide by loan to value percentage (0.95, 0.90, 0.80)

Sales price borrower may purchase


6.8 Other Qualifications When a borrower or property falls into the following

categories, additional qualifications are often required: the structure does not conform to the zoning of the land (for

example, a single family residence is located on land that is zoned C-1, commercial, I-1, or industrial).

the borrower’s mortgage payment record is slow and there have been three to four late payments in the last twelve months.

the property is been placed into foreclosure. the borrower’s length of time on the job does not meet

FNMA/FHLMC guidelines.


Match Borrower to Loan Program

I. LOAN-TO-VALUE RATIO (LTV)DVA – up to 100%

FHA – down payment of 3%

Conventional – up to 95% (103%) as of 2/1/02 some lenders

Commercial loans – usually only up to 60%

Community Home Buyer – up to 97%

II. Each loan program has unique features

III. Each mortgage loan broker may represent numerous lenders with various program & loans

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