Part III
PROCESSING
Chapter 6: Processing:
Pre-Qualification & Loan Application
By Dr. D. Grogan
M.C. “Buzz” Chambers
©2011 Cengage Learning
PREVIEW
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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.
©2011 Cengage Learning
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.
©2011 Cengage Learning
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 disclosure
Verify information
Obtain additional information from borrower
Reject application
Provide borrower with written credit disclosure
and reporting agency
Reject or Accept the loan based on the information
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©2011 Cengage Learning
6.1 Lender/Purchase Statement
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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:
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Borrower loan qualification
Purchase price maximum for borrower
Creditworthiness of the borrower
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Property Profile
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When a purchase agreement is finalized,
the loan broker needs to obtain a property
profile to determine:
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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
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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?
©2011 Cengage Learning
6.3 Residential Loan Application
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FNMA form 1003
Pronounced: 10 – 0 – 3
New version Jan 2010
Appendix A shows the English/Spanish form
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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.
©2011 Cengage Learning
Uniform Residential Loan Application
1003 – Page 1
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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.
©2011 Cengage Learning
Uniform Residential Loan Application
1003 – Page 2
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Part 5: Monthly Income & Expense data
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Income, commissions, dividends, rental income
Monthly housing expense for Loans, taxes, insurance,
association dues
Part 6: Assets and liabilities data
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Liquid assets (cash, checking accounts)
Other assets (real estate, retirement, vehicles)
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Liabilities includes unpaid loan balances
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Total assets - Total liabilities = Net Worth
©2011 Cengage Learning
Uniform Residential Loan Application
1003 – Page 3
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Part 6 (continued): Real Estate owned
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Rental income and creditor name
Part 7: Transaction details
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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
©2011 Cengage Learning
Uniform Residential Loan Application
1003 – Page 3
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Part 8: Borrower & Co-borrower Declarations
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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
©2011 Cengage Learning
Uniform Residential Loan Application
1003 – Page 3
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Part 9: Acknowledgements and Agreements
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Acknowledge purpose of the loan & intent
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Agreement to amend items during loan period
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Transfer or assignment
No representations nor warranties by lender
Certification
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The loan is senior
No illegal uses
Information provided is true and correct
Civil liability & criminal prosecution for misrepresentation
Signed and dated by each borrower
©2011 Cengage Learning
Uniform Residential Loan Application
1003 – Page 3
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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
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Borrower gives any additional useful information
 All
parties sign and date this page
©2011 Cengage Learning
SECTION 2: Pre-Qualifications
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Income:
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Establish income
Verify pay stub, tax returns, W-2’s.
Document bonuses, rental & interest income
©2011 Cengage Learning
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%
©2011 Cengage Learning
Ratio Calculation
PITI + HOA + MI
FRONT END RATIO = GROSS INCOME (GI)
MONTHLY
BACK END RATIO = PITI + HOA + MI + DEBTS
GROSS INCOME (GI)
MONTHLY
©2011 Cengage Learning
ARM Income-Expense Ratios
Housing
Expense
Total monthly
Debt service
FNMA (LTV 90% or more)
26%
33%
FNMA (LTV 90% or less)
28%
36%
FHLMC (exceeds cap and
discount guidelines)
25%
33%
©2011 Cengage Learning
6.5 Dept of Veterans Administration
(DVA) Qualification
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DD form 214, Report of Release or
Discharge From Active Duty
Original Certificate of Eligibility
Eligibility requirements for various conflict
periods
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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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Service Period Criteria
E RA
World War II
Peacetime
DATES
09/16/40-07/25/47
07/26/47-06/26/50
Korean Conflict 06/27/50-01/31/55
Post-Korean
02/01/55-08/04/64
Vietnam
08/05/64-05/07/75
©2011 Cengage Learning
LENGTH OF SERVICE
90 days active duty
181 days continuous
active duty
90 days active duty
181 days continuous
active duty
90 days active duty
Service Period Criteria (cont)
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Post-Vietnam
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Enlisted
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Officers
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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05/08/75-09/07/80 181 days continuous
active duty
09/08/80-08/01/90 2 years (24 months)
active duty
10/17/81-08/01/90 2 years (24 months)
©2011 Cengage Learning
Maximum DVA loans: Calculating the sales
price/loan amount gross income
Gross Income
X
41%
Total debt service, including housing expense
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Multiply by
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Subtract
monthly installment/revolving debts
Total debt allowed for PITI
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Subtract
figure for monthly taxes and insurance/Homeowners
association dues (HOA)
Total debt for principal and interest
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Divide by
P & I factor for current allowable interest rate
Maximum loan amount borrower may receive
©2011 Cengage Learning
Table of residual income by region
For loan amounts below $79,999:
Family Size
Northeast
Midwest
1
$390
$382
2
$654
$641
3
$788
$772
4
$888
$868
5
$921
$902
Over 5 Add
$75
for
each additional
For loan amounts above $80,000:
Family Size
Northeast
Midwest
1
$450
$441
2
$755
$738
3
$909
$889
4
$1,025
$1,003
5
$1,062
$1,039
Over 5 Add
$80
for
each additional
©2011 Cengage Learning
South
$382
$641
$772
$868
$902
member up to a
West
$425
$713
$859
$967
$1,004
family of 7
South
$441
$738
$889
$1,003
$1,039
member up to a
West
$491
$823
$990
$1,117
$1,158
family of 7
6.6 Federal Housing Administration (FHA) Qualifications
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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.
©2011 Cengage Learning
Maximum FHA loan amount
$ _________ Gross income
×
43% Back-end ratio
Total debt service including housing expense
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Multiply by
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Subtract
monthly installment/revolving debts
Total income allowed for PITI
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Subtract
figure for monthly taxes and insurance/HOA
Total income for principal and interest
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Divide by
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ADD
Total Price
P & I factor for interest rate (varies with point
structure—buydown)
Maximum loan amount borrower may obtain
CASH DOWN PAYMENT
Total Sales Price
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MONTHLY GROSS INCOME
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Borrower’s Base Income
Other
Co-borrower’s Income
Other
TOTAL MONTHLY INCOME (Gross)
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$
$_____________
$
$_____________
$_____________(A)
DEBTS AND OBLIGATIONS
Installment Debt
(10 mo. or longer-Car, Student Loans, Etc.)
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$ ______
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Revolving Debt (Credit Cards)
$______
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TOTAL MONTHLY OBLIGATIONS
$ _________(B)
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MONTHLY PAYMENTS
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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 $ ________
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TOTAL HOUSING EXPENSES
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$
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________________ (C)
FHA Qualifying worksheet
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TOTAL HOUSING EXPENSE
(C) $______ ÷ Total Gross Income (A)
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$______ = ______%
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.
©2011 Cengage Learning
6.7 Conventional Qualifications
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Reserve requirements:
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$417,000
$417-$729,750
> $1 million
> 2-3 months PITI held as cash
6 months reserves
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.
©2011 Cengage Learning
Calculating the Sales Price/Loan from Gross Income
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Multiply by
LTV)
Gross Income
× 36% (33, 36, 38% back-end ratios based on the
Total debt service including housing expense
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Subtract
monthly installment/revolving debts
Total allowed for PITI
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Subtract
figure for monthly taxes and insurance/HOA
Total allowed for PI
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Divide by
P & I factor for interest rate (varies with points charged)
Maximum loan amount borrower may obtain
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Divide by
loan to value percentage (0.95, 0.90, 0.80)
Sales price borrower may purchase
©2011 Cengage Learning
6.8 Other Qualifications
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When a borrower or property falls into the following
categories, additional qualifications are often
required:
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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
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