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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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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.
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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.
31-32
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
32
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Mortgage Lending vs. Mortgage Banking / Mortgage Brokering
Mortgage Lending
Mortgage Banking Mortgage Brokering
32
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
32
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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
33-34
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
33-34
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Knowledge Check
Name three Origination activities
Review
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Process and Participants
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Knowledge Check
What does a Processor do?
Review
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Process and Participants
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
33-34
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Knowledge Check
What is a task that an Underwriter performs?
Review
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Knowledge Check
Do Processors and Underwriters need a license?
“Yes”, “No”, or what would it depend on?
Review
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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Process and Participants
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
33-35
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
35
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
35
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
35
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
35
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Knowledge Check
Where is the Unique Identifier and where must it be?
Review
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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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.
36
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Customers and Kickbacks
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.
36
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Customers and Kickbacks
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.
36
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Advertising
• TILA requirements bring clarity
• Simply put, advertisements must be clear and accurate
• Terms advertised must be the terms available
• Company must be identified
36-37
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
38
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Knowledge Check
Which is a stronger commitment….Pre approval or Pre
qualification?
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Three Lending Ratios
38-39
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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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)
38-39
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Understanding Ratios
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)
38-39
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Understanding Ratios
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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?
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Understanding Ratios
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
counted• Total monthly debt obligations should not exceed a
certain percentage of gross monthly income. • (Usually 36%,
varies by program)
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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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.
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
39
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
40-41
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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Choosing a Mortgage Program Type
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
40-41
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Choosing a Mortgage Program Type
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
40-41
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Choosing a Mortgage Program Type
Conforming loans meet the requirements set by Freddie Mac or
Fannie Mae to be sold on the secondary market.
40-41
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Choosing a Mortgage Program Type
• 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
40-41
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Choosing a Mortgage Program Type
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
40-41
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Choosing a Mortgage Program Type
Loan-to-Value Ratio is used to classify:
• 80% LTV Conventional Loan (20% down payment)
• 90% LTV Conventional Loan (10% down payment)
• 95% LTV Conventional Loan (5% down payment)
40-41
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Government Loan Products
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
42
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Government Loan Products
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Government Loan Products
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
42
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Government Loan Products
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Government Loan Products
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.
42
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Knowledge Check
What’s are three things you know about an FHA Loan?
Review
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Government Loan Products
• 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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Government Loan Products
• 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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Government Loan Products
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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Government Loan Products
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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Government Loan Products
• 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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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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Government Loan Products
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
43
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Government Loan Products
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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Government Loan Products
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
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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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Nonconforming Loan Programs
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.
44
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Nonconforming Loan Programs
• 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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Nonconforming Loan Programs
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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Nonconforming Loan Programs
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
44
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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
45
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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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Essentials of Mortgage Loan Origination, Diehl and Associates
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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)
45-46
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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
45-46
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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
46-47
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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
46-47
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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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
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Copyright 2017 Diehl Mortgage Training & Compliance
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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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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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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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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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
51
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Asset Verification
NOTE: If business bank statements are provided,
applicant must provide proof of ability to withdraw funds.
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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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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
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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
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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
51-52
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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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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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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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Essentials of Mortgage Loan Origination, Diehl and Associates
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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
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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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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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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
53
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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)
53-54
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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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When has a Borrower “Applied” for a Loan and Must Receive
Disclosure Forms?
53-54
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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
53-54
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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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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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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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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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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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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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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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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
Essentials of Mortgage Loan Origination, Diehl and Associates
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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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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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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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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
56
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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
56
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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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Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Copyright 2017 Diehl Mortgage Training & Compliance
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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Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
57-58
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
57-58
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
57-58
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Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Copyright 2017 Diehl Mortgage Training & Compliance
QM is a Safe Harbor Loan• Loans meeting the 8 requirements• Are
first lien loans having:
• APR
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Essentials of Mortgage Loan Origination, Diehl and Associates
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Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Copyright 2017 Diehl Mortgage Training & Compliance
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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Copyright 2017 Diehl Mortgage Training & Compliance
Credit Reports and Scoring
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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Essentials of Mortgage Loan Origination, Diehl and Associates
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Copyright 2017 Diehl Mortgage Training & Compliance
Credit Reports and Scoring
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
60-61
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
Credit Reports and Scoring
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
60-61
Essentials of Mortgage Loan Origination, Diehl and Associates
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Copyright 2017 Diehl Mortgage Training & Compliance
Credit Reports and Scoring
Problematic items can affect a credit score negatively
• May require letter of explanation (LOX)
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Copyright 2017 Diehl Mortgage Training & Compliance
Credit Reports and Scoring
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
60-61
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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)
60-61
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
60-61
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Copyright 2017 Diehl Mortgage Training & Compliance
Qualifying Ratios
The 3 main ratios used in determining an applicant’s mortgage
payment are:
• Housing-to-income
• Debt-to-income
• Loan-to-value
62-63
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
62-63
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
62-63
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
62-63
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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
62-63
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
62-63
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
63-64
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Copyright 2017 Diehl Mortgage Training & Compliance
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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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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Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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
63-64
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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
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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?
Loan Amount is 90% of $225,000 = $202,500Discount is 1% or
$2,025
Apply
Essentials of Mortgage Loan Origination, Diehl and Associates
©2016
Section II
Copyright 2017 Diehl Mortgage Training & Compliance
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 the borrower need to bring to