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Chapter 13
Loan Origination, Processing, and Closing
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Chapter 13 Learning Objectives
Understand the steps involved in processing of a loan application and closing a mortgage
Understand the operation of mortgage bankers
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Loan Processing
Involves several steps including property appraisal, analysis of application, submission for credit approval, and closing the loan
Appraisal – Three stages Ordering the appraisal; since 1995 Uniform Residential Appraisal Report used for nearly all
loans
Monitoring the appraisal
Evaluating the appraisal
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Loan Processing Appraisal valuation section – generally accepted
appraisal standards require the use of three approaches for determination of value: Market Approach Cost Approach Income Approach
Appraisal reconciliation phase – arriving at final estimate for value
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Loan Processing - Analysis of Application
Complete analysis of the financial position of the borrower and the disclosure of information required by the Real Estate Settlement Procedure, Regulation Z and the ECOA
RESPA requires lenders to: Provide, in advance, general information on the settlement costs Provide within 3 days after receiving the application estimated
closing costs and monthly payments Provide within 3 days after receiving the application good-faith
estimate of the cost of the loan over its term, including APR
The lender verifies the credit standing of the applicant
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Loan Processing – Submission of Insurance
Applying for Mortgage Insurance FHA, VA, or PMI
Common form for submission for FHA and VA Mortgage insurance is in addition to homeowners
insurance Paid along with homeowners insurance
May be paid by the borrower or through escrow
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Loan Processing – Submission of Insurance
Many lenders participate in FHA’s direct endorsement program The lender performs the underwriting process A lender that is a direct endorser is essentially an agent of
the FHASaves processing time
If the application for insurance is accepted FHA issues mortgage insurance certificate
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Loan Processing – Submission of Insurance
For FHA approval, lender submits a package containing:1. Mortgage Credit Analysis Worksheet
2. Application for commitment of insurance
3. Copy of sales contract
4. All verifications of deposits
5. All verifications of employment
6. Credit reports
7. Verification of indebtedness
8. Other documents
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Loan Closing
Two distinct transactions: Transferring title
Signing documents (e.g. promissory note)
Standard mortgage or deed-of-trust form for FNMA and FHLMC; similar form for FHA and VA
Mortgage or deed-of-trust includes same information as the note and also provide description of the property
Settlement statement – record of what went on at the closing
Truth-in-lending disclosure must be given to the borrower and must include major financial terms
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Loan Closing Disbursement
Lender may give separate checks to the closing agent payable to each party (title company, mortgage insurer, real estate agent, etc.)
Lender gives one check to the closing agent for the full amount of the loan
Recording Gives public notice that the buyer is the new owner of the property
and the mortgage has a lien on the property Serves as a protection of the owner/lender against others that may
claim to have a valid deed
Mortgage insurance payment
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Mortgage Banking
The origination, servicing, and the sale of mortgage loans by a firm or a individual
Mortgage bankers: Non-depository institutions
Do not hold loans in portfolio
Retain servicing rights
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Mortgage Brokers Alternative to mortgage bankers Licensed companies that offer mortgages from variety
of lenders Can provide borrowers with their best loan options
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Mortgage Banking – Sources of Funds Two principal sources of funds:
Commercial paper – short term (180 to 720 days) obligation with rate approx. equal to the prime rate
Warehousing loans – short term loans from commercial banks; structured as line of credit; mortgage loans used as collateral
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Mortgage Banking - Revenues Four main sources for revenues
Origination fee – 1% of the amount of mortgage Servicing fee – 0.25 – 0.5% of the outstanding mortgage
balance Warehousing rate difference – Income from the differential
between the rate on the mortgage loan and the rate on credit line
Marketing rate difference – The difference between the amount originated and the amount received from the sale
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