-evaluates; loan applicant's overall financial situation and value of property; make sure applicants can afford payments; make sure that the property is worth enough so that the proceeds of a foreclosure sale would cover the loan amount
-loan underwriter or credit underwriter; person who performs the evaluation
The underwriting process involves what basic tasks?
-reviewing the loan application
-obtaining additional information about the applicant from other sources
-applying the lender's qualifying standards
-verifying information provided by the applicant
-evaluating the property appraisal
-making a recommendation in favor of or against loan approval
How are underwriting standards made?
-most lenders use Fannie Mae/Freddie Mac
-FHA and VA standards must be used for FHA and VA loans
What two types of underwriting are used in conjunction with one another?
-automated underwriting (AU) and manual underwriting.
What is an automated underwriting system?
a computer program designed to analyze loan applications and recommend approval or rejection
Some large lenders have their own automated underwriting systems, but the main systems are...
-developed by Fannie Mae (Desktop Underwriter) and Freddie Mac (Loan Prospector)
The programming of the secondary market entities's AU systems is based on millions of _______________, which is statistics on whether loan payments are made as agreed.
When the lenders put the applicants info in the AU system, the automated underwriting report falls into three main categories, what are they?
-a risk classification
-a recommended level of documentation
-a recommendation concerning the property appraisal or inspection
Risk Classification of underwriting can come back as what three ways?
-approved/ineligible; approved but may need to change something
-refer/caution; needs manual check
When underwriting of risk classification comes back refer/caution, the application for loan has been denied.
-false; although some lenders may deny if the risk classification comes back refer/caution, some lenders look through the underwriting manually and find out what is wrong; the AU system highlights the problem areas
If the buyer's overall financial situation indicates that she can reasonably be expected to make the propose monthly loan payments on time, she is considered...
To decide if a buyer is creditworthy, the underwriter figures three main things, what are they?
-net worth (assets)
What are the three credit reporting agencies?
-Equifax, Experian, TransUnion
If a lender receives a credit report from an applicant, and the credit report comes back with a low letter and high listed debt, what should the lender do?
-obtain reports from all three agencies (tri-merge) because the credit report might not be accurate.
What is the credit information that is important to an underwriter?
-the length of the credit history
-the payment record
-derogatory credit incidents
A personal credit report presents information about an individual's loans, credit purchases, and debt repayments for the previous ___ years.
Credit reports typically cover revolving credit accounts (credit cards and charge accounts), installment debts (car loans, student loans), and mortgages. Other bills such as ___________ and __________ usually aren't listed unless they were turned over to a collection agency.
-utility bills and medical bills
Credit history basically describes an applicant's _________ with credit.
As a general rule, a mortgage loan applicant should have at least a ____ year history of credit use with _____ or more active accounts (loans or credit cards).
With the encouragement of __________ and __________, lenders have become more willing to work with loan applicants who don't have an established credit history.
Fannie Mae and Freddie Mac
For each account that appears on a credit report, there's a payment record showing whether payments have been made on time. Late payments are shown as __ days, __ days, or 90 days or more overdue. Late payments that occurred more than __ years ago won't usually affect the underwriter's decision.
30, 60, 2
What are the Major Negative incidents on a credit report?
-Charge-offs; loss for income tax purposes; no payments for six months
**These incidents remain on the credit report for no more than 7 years; bankrupticies 10 years
**An underwriter won't necessarily be concerned about an incident that occurred more than 2 years before the loan application, unless it was a foreclosure or a bankruptcy
What is the most widely used type of credit score in residential lending?
Credit scores most likely range around _____ to ____.
Credit activity within the previous __ years has the greatest impact.
Maxing out a credit card, even with making payments on time, can lower a credit score.
Applying for too much credit can have a negative effect on a credit score.
true; credit inquiry; too many in the past year; indicates that the applicant is in danger of becoming overextended.
Mortgage and car loan credit inquires in the previous 30 days are ignored when shopping for a loan.
It is a good idea for prospective buyers to obtain their credit reports and find out their credit scores well before they apply for a mortgage.
true; A credit report may contain incorrect info, and the Fair Credit Reporting Act requires credit reporting agencies to investigate complaints and make corrects which can take a month or more.
In some cases, negative credit reports and poor credit scores may not prevent a home buyer from obtaining a loan. Credit problems can often be explained, applicants can write a letter. What are some good reasons for bad credit?
-state reason for problem
-problem occurred during a specific period
-problem no longer exists
-good credit before and since
-provide documentations from third party
-don't blame creditors
-EX: loss of job, divorce, hospitalization, illness, or a death of family member
From an underwriter's point of view, income analysis has three dimensions, what are they?
-Quantity; if applicants monthly income is enough
-Quality; sources from which the income is derived; dependability; ex; established employer (not a newly established employer, could lower quality), government agency, or an interest-yielding investment account.
-Durability; probability of continuance; preferably for the next 3 years; wages from permanent employer, permanent disability benefits, interest on established investments
Stable monthly income is made up of
the quality and durability of the applicants income.
What types of income generally meet the tests for quality and durability?
-permanent employment; for at least two years or stable consistent income
-job changes have been for advancement
If an applicant hasn't had permanent employment for at least ___ years, the underwriter may do what?
-2, check into the applicant's two previous jobs
-job-hopping can be a problem, unless it states career advancement
-lender will make sure the applicant has been bringing in a consist level of income, regardless if it is from the same line of work or not.
-if the applicant has recently graduated from college or training.
Even though an applicant just graduated from college and hasn't had a permanent work history, a lender still may consider them.
true; strengthens the loan application
Commissions, overtime, and bonuses may only be counted towards the applicants stable montly income if...
they have been shown to be consistent for at least 2 years.
-lenders average the amount; if decreasing, it is counted less
Employment history of an applicant can have many types of income sources. The main thing to be treated at stable income is if there is an...
established earnings pattern
To lenders, self-employment adds an extra element of risk to a loan, because the borrower's income is often unpredictable and small businesses often fail.
Self-employment income can be considered from owing a business, freelancing, or consulting work. The main thing the lender looks at is if the applicant has been in this kind of work for at least two years and what the trend is of the applicant's _________, __________ and _________, and ___________.
-training and experience
-the nature of the business
In addition to regular wages from a job, stable monthly income may include:
-W-2 forms for 2 years plus pay stubs for 30 days, with phone call to employer
-Self-employed applicant needs financial records and income tax returns for 2 years
What federal association prohibits age discrimination in lending?
The federal Equal Credit Opportunity Act
Income that usually doesn't count as stable monthly income is...
-wages from temporary job
-contributions from unobligated family members
Alimony and child support can count towards the stable monthly income if...
-there is a copy of court decree
-proof of receipt
-payments must be reliable
-child is under mid-teens
Rules for calculating stable monthly income:
-acceptable sources of income are transformed into monthly income, regardless if they are weekly, quarterly or annually.
-hourly wage to monthly earnings; multiply the hourly wage by the number of hours the loan applicant works per week, then multiply by ___ (weeks in a year) and divide by 12 (mo).
-Or multiply the hourly wage by ______, as long as the buyer is being paid for a 40 hr week.
-52; ex; hourly wage 14.50, hours per week 40;; weekly income 14.50 x 40 = 580;; annual income 580 x 52 = 30,160;; Monthly income 30,160 x 12 = $2,513
-173.33; ex; hourly wage 14.50, hours per week 40;; monthly income 14.50 x 173.33 = $2,513
Rules for calculating stable monthly income:
-being paid every two weeks (26 payments per year) is not the same as being paid twice a month (24 payments per year).
-If the buyer is paid every two weeks, multiply the payment amount by ___ to get the annual total, then divide by 12 to get the monthly figure.
Rules for calculating stable monthly income;
-Nontaxable income; take the nontaxable income amount and multiply is by ___, than add it back to the nontaxable income, than add it to the monthly income.
To measure adequacy of stable monthly income, underwriter uses income ratios:
-Debt to income ratio
-Housing expense to income ratio
-Housing expense to income ratio; measures the monthly mortgage payment alone against the monthly income
-EX: The Cochrane's monthly salary is $6,000. The mortgage they're applying for would require monthly PITI (principal, interest, taxes, insurance) payments of $1,800. To calculate their housing expense to income ratio, divide the PITI payment by their monthly income:
1800/6000 = .30, or 30%
Their proposed housing expense represents 30% of their stable monthly income, so their housing expense to income ratio is 30%.
-Debt to income ratio; measures the proposed monthly mortgage payment plus any other regular debt payments against the monthly income
-EX: The Cochrances other debt payments (credit cards, car loan, etc.) amount to $480 per month. To calculate their debt to income ratio, add the proposed housing expense and the other debt payments together, then divide by their monthly income:
1800 + 480 = 2280/6000 = .38, or 38%
Their total monthly debt payment represents 38% of their stable monthly income, so their debt to income ratio is 38%
assets minus liabilities
-indicates ability to manage financial affairs
-applicant must have enough liquid assets to close transaction
Liquid assets and reserves
-Liquid assets; cash or other assets that can be easily converted into cash
-reserves; money left over or collected incase of emergency; when reserves are required, most common is 2-3 months worth of mortgage payments; afforable housing programs often require only a month's payment in reserve.
Verification of funds in bank accounts are done by sending the bank a ___________________ document or bank statements for __ or __ months.
-request for verification of deposit
Recently opened bank accounts or higher-than-normal balances must be explained, why?
-to see if the applicant has resorted to borrowing the funds for the downpayment and closing costs; lenders don't like that.
As a general rule, a home buyer is not allowed to borrow from relatives, friends, or other sources to come up with either the funds needed for closing or the reserves, why?
What are exceptions to this rule?
-borrowing money would defeat the purpose of the lender's requirements; buyer would have additional debt instead of an investment in property.
-using funds from car sale, stock, life insurance policy, etc.;; affortable housing programs can allow a buyer to borrow part of the funds from a relative or other source;; buyer may obtain money needed for closing from a relative or another source if the buyer won't be required to repay it, money is a gift. ***If is is a gift, there must be a gift letter; clearly states that the money is a gift and doesn't need to be paid back; lender documents and verifies, along with the identity of the donor.
Net equity of old property can be used towards downpayment and closing costs of new home. What is net equity?
What can buyers of the new property do if their old property did not sell before the purchase of their new home to cover downpayment and closing costs?
-market value - (liens + selling expenses) = net equity; the amount of money received from the sale of property.
-buyer can apply for a swing loan; will be secured by the buyer's equity in the old home, and it will be paid off out of the proceeds from the eventual sale of the old home.
In addition to the creditworthiness, what are other aspects of a proposed loan that will affect whether or not it will be approved?
-loan type; fixed or arm
-the repayment period; 15 or 30yrs
-owner-occupancy; primary residents?
-the property type;manufactured homes, condo, etc.
What is the difference between prime and subprime lending?
How was subprime lending a major factor of the 2007-2008 crisis?
-subprime lending is making loans to borrowers who pose a greater risk (b, c, and d credit), prime is people with A credit
-subprime advertisements are aimed for people who have trouble getting a standard loan and have such words as "acceptance" or "consumer"
-refinancing and home equity loans for the purpose of debt consolidation make up a large part of the subprime market.
-subprime has higher interest rates for higher risk.
2) increasing number of Wall Street investors who bought subprime loans and used them as the basis for issuing private label mortgage-backed securities;; Prime and subprime lending blurred with A minus credit.
charging risky borrowers more for their loans; depending on credit letter
The loan applicant receives child support from her ex-husband. Their child is now 16 years old. Will the child support payments be counted as part of the applicant's stable monthly income?
After determining the quantity of the loan applicant's stable monthly income, the underwriter measures the adequacy of the income using:
One reason an underwriter looks at a loan applicant's net worth is to see how well the applicant manages her financial affairs. Another reason is to:
determine if the applicant has enough liquid assets to cover the costs of purchase and the required reserves.
The Stanleys are selling their old home, and they plan to use the sale proceeds as a downpayment in buying a new home. In adding up the Stanleys' liquid assets, an underwriter would be willing to include:
the net equity of the old home
Bronowski doesn't have enough money for closing, so his parents are going to give him $2,500. The underwriter will:
require the parents to sign a gift letter
The Olsens have a proposed monthly housing expense of $1,800, a monthly student loan payment of $180, and a monthly credit card payment of $100. Their stable monthly income is $6,500. What is their debt to income ratio?