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©2011 Cengage Learning
Chapter 6: Processing:
Pre-Qualification & Loan Application
Part III PROCESSING
By Dr. D. Grogan
M.C. “Buzz” Chambers
©2011 Cengage Learning
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.
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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.
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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
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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
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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)
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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?
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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.
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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.
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Uniform Residential Loan Application
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
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Uniform Residential Loan Application
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
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Uniform Residential Loan Application
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
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Uniform Residential Loan Application
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
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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
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SECTION 2: Pre-Qualifications
Income: Establish income Verify pay stub, tax returns, W-2’s. Document bonuses, rental & interest income
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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%
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Ratio CalculationPITI + HOA + MI
FRONT END RATIO = GROSS INCOME (GI) MONTHLY
BACK END RATIO = PITI + HOA + MI + DEBTS
GROSS INCOME (GI) MONTHLY
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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)
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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
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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
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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
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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
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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
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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.
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Maximum FHA loan amount
$ _________ Gross income Multiply by × 43% Back-end ratio
Total debt service including housing expense
Subtract monthly installment/revolving debts
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
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MONTHLY GROSS INCOME
Borrower’s Base Income $ Other $_____________ Co-borrower’s Income $ Other $_____________ TOTAL MONTHLY INCOME (Gross)
$_____________(A)
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DEBTS AND OBLIGATIONS Installment Debt $ ______
(10 mo. or longer-Car, Student Loans, Etc.)
Revolving Debt (Credit Cards) $______
TOTAL MONTHLY OBLIGATIONS $ _________(B)
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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)
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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.
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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.
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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
Subtract monthly installment/revolving debts
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
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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.
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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