MLO Boot Camp
Chapter 3
Mortgage Loan
Origination
Activites
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Introduction
• Application information and requirements
• Qualification, processing, and
underwriting
• Specific program guidelines
• Closing
• Financial calculations used in mortgage
lending
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Terms
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2-1 Buydown
3-2-1 Buydown
Assumption
Automated
Underwriting
Basis Point
Closing
Co-Mortgagor
Credit History
• Discount
• Junk Fees
• Loan-to-Value Ratio
(LTV)
• Mortgage Insurance
Premium (MIP)
• Origination
• Origination Fee
• PITI
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Terms
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Points
Pre-Approval
Principal
Private Mortgage
Insurance (PMI)
• Processing
• Qualifying
• Rate Protection
• Reserves
• Secondary
Financing
• Seller-Paid Items
• Servicing
• Teaser Rates
• Underwriter
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Loan Application
• Standard loan application
– Fannie Mae Form 1003
– Freddie Mac Form 65
• Collects information on both borrower
and property
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Mortgage type, terms
Property info, purpose
Personal borrower info
Employment info (2
years)
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Monthly income
Assets, liabilities
Transaction details
Government monitoring
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Accuracy & Truthfulness
• Borrower declaration about accuracy:
– Obligations for alimony or child support
– Outstanding judgments, bankruptcies, foreclosures,
etc.,
– Borrowed down payment funds
– Co-signer on any other debt
– U.S. citizen, permanent resident
– Primary residence
• Sign and date to show understanding
• Update any material changes before closing
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Verification & Documentation
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Net worth: Subtract liabilities from total
assets to confirm:
Sufficient assets for down payment,
closing costs
Adequate reserves to cover two
months PITI
Other assets, if needed, to handle
emergencies and make mortgage
payments
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Down Payment
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Source of funds:
– Conventional generally can’t used
borrowed funds or gifts for first 5%
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May require 2 months bank statements
or Verification of Deposit (VOD)
Gift letter must be signed by donor
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Employment Documentation
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Self-employed needs personal and corporate
tax returns for a minimum of 2 years
Should have continuous employment for at
least 2 years in the same field:
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Appropriate W-2 forms
Original pay stub for the previous 30-day period
May require Verification of Employment (VOE)
forms
Changes for advancement or special
education and training can mitigate
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Disclosure Review: RESPA
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Within 3 days of loan application:
– Special Information Booklet
– Good Faith Estimate (GFE) of Settlement
Costs
– Mortgage Servicing Disclosure Statement
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Disclosure Review: TILA
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Within 3 days of loan application:
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Truth in Lending Statement (TIL) to disclose
annual percentage rate
Guide on reading the TIL
Consumer Handbook on Adjustable Rate
Mortgages or CHARM booklet (if applicable)
ARM Disclosure (if applicable)
Balloon Disclosure (if applicable)
Prepayment Disclosure
When Your Home is on the Line Disclosure (for
home equity loans)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Disclosure Review: TILA
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TILA’s discrepancy tolerance from
APR:
– 1/8 ( .125%) for a fixed rate note
– 1/4 ( .25%) for an adjustable rate note
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Three-year right of rescission if:
– TIL not given to the consumer or
– APR is not accurate within this prescribed
range
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Loan Processing
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Review data in loan file and verify as necessary
Assemble a loan package:
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Credit report
Verification forms
Preliminary title report
Appraisal
Loan disclosures
Pass to underwriter:
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Evaluates a loan application
Determines its risk level
Makes final decision; may be automated:
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Fannie Mae – Desktop Underwriter® (DU®).
Freddie Mac – Loan Prospector® (LP®).
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Borrower Analysis: Qualifying
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Evaluating borrower’s creditworthiness:
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Assets
Liabilities
Income
Credit report
Qualifying ratios
Determining the risk of the loan:
– Sufficient value in the property (collateral)
– Borrower’s overall financial situation
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Assets and Liabilities
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Assets -- Items of value owned by the
borrower
Liabilities -- Financial obligations or
debts owed by a borrower.
Debts -- Any recurring monetary
obligation that cannot be cancelled
(less than ten payments remaining
generally not considered)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Stable Monthly Income
• Monthly income that can reasonably be
expected to continue
• Secondary sources may include:
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Bonuses
Commissions
Part-time earnings
Overtime
Disability payments
Social Security
Pensions
– Retirement
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Interest-yielding investments
Rental income
Alimony
Child support (continue 3 years)
Maintenance
Unemployment / Welfare (if
extended pattern)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Other Income Considerations
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Alimony, child support, and/or maintenance do not
need to be listed as sources of income if a borrower
does not want them considered
Tax free income may be “grossed up” by 1.25%
Cannot discriminate on source of income (ECOA)
Only head of household considered (unless comortgagor)
To convert hourly wages to monthly:
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Multiply the hourly wage by 40 (hours in a work week)
Multiply by 52 (weeks in a year)
Divide by 12 (months in a year)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Credit Report/Scoring
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Credit report
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Record of debt repayment
• Chapter 7 bankruptcy (liquidation) remains 10 years
• Chapter 13 bankruptcy (reorganization) remains 7 years
Credit scoring
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Objective means of determining creditworthiness
Numeric representation of credit profile
Calculated differently by all credit bureaus
Credit Bureaus
Credit Score
Experian
FICO (Fair, Isaac & Co.)
Equifax
BEACON
TransUnion
EMPIRICA
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Qualifying Ratios
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Loan-to-Value Ratio (LTV)
Loan Amount / Lesser Sale Price or Appraised Value = LTV %
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Housing Expense Ratio
PITI / Gross Monthly Income = Housing Expense %
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Total Debt Service Ratio
Total Debt / Gross Monthly Income = Total Debt Service Ratio %
Borrower must qualify under BOTH
housing expense ratio and
total debt service ratio
Qualifying Ratios
Housing
Expense
Ratio
Conventional
28%
Total Debt
Service
Ratio
36%
FHA Loans
31%
43%
VA Loans
Not used
41%
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisals
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Opinion of market value as of a certain date,
supported by objective data
Only an estimate or opinion, not a guarantee of
value
Only valid as of its effective date, which establishes
terms, conditions, and economic circumstances
upon which the value is estimated
Appraisal approaches independent of the others and
performed separately:
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Sales comparison approach
Cost approach
Income approach
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisals: Sales Comparison
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Compares subject to similar properties
(comparables or comps) recently sold
Comps are adjusted for missing or additional
features
Rooted in market activity
Minimum of 3 comps for secondary markets
Values of comps reconciled to arrive at
subject value
Most useful for residential property
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisals: Cost
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Calculates cost of land, site
improvement, and construction of
structure
Most useful for unusual or non-income
producing property
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisals: Income
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Analyzes revenue, income property
does or could generate
Sometimes called capitalization
approach
Most useful for income-producing
commercial and investment property
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisal Terminology
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Arm’s Length Transaction--One that occurred under typical
conditions in the marketplace, with each party acting in his own
best interests.
As-Is--A typical appraisal; property value determined based on a
complete and thorough examination of the subject property as it
currently sits and in its present condition, as opposed to being
subject to other hypothetical conditions, extraordinary
assumptions, or repairs.
Automated Valuation Model (AVM)--Part of an automated
underwriting system that is able to provide a probable value
range for properties by performing a statistical analysis of
available data. While not true appraisals, AVMs can reduce the
time and costs necessary to close a loan.
Contribution--The concept that a particular item or feature of a
home is only worth what it actually contributes in value to that
piece of property.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisal Terminology
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Depreciation--The loss in value to property for any reason.
Factors contributing to depreciation can be classified as curable,
which means that they can be remedied at a reasonable cost, or
incurable, which means that the cost to remedy the issue would
exceed what it contributes to the value of the property.
Desktop Underwriter® (DU®). The AVM component of Fannie
Mae’s Automated Underwriting System that uses public
information, such as tax records, to determine the
reasonableness of the sale price, and whether the property is
adequate collateral for the loan. If everything appears within
normal parameters, DU recommends the use of Form 2075
Property Inspection Report.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisal Terminology
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External Obsolescence--Something outside the control of the
property makes it less desirable; always considered incurable
since the property owner cannot remedy it. Also known as
economic obsolescence.
Functional Obsolescence--Describes a building that is less
desirable because of something inherent in the structure itself;
may be curable or incurable.
Gross Living Area (GLA)--Residential space that’s finished,
heated, and above grade. Garages, finished basements, and
storage areas don’t count in GLA.
Highest and Best Use. The use that is the most physically
possible, legally permissible, economically feasible, and
maximally profitable or productive.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Appraisal Terminology
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Market Value--The theoretical price a property is most likely to
bring in a typical transaction.
Recertification of Value (Recert)--Completed to update or
confirm the estimate of value of the original appraisal; also
sometimes necessary to confirm whether or not certain conditions
in the original appraisal have been met, such as when the
property was “subject to” some repair or renovation or when the
appraisal was performed on a property under construction. Does
not change the effective date. This use is also known as a
completion report.
Uniform Residential Appraisal Report (URAR)--The primary
form used for single-family residential property appraisals; must
adhere to the standards set forth by USPAP.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Title Report
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Marketable title—free and clear from
undisclosed encumbrances or defects
Title search determines ownership and
quality of title
Abstract of title—chronological
summary of chain of title
Preliminary title report—current status
of property
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Insurance
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Contract that compensates for loss
from designated hazard
Lenders have insurable interest
– Homeowner’s hazard insurance
– Flood insurance
– Mortgage insurance
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Homeowner’s Insurance
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Covers loss / damage from fire or other
disaster
Policy sufficient to replace home or
reimburse mortgage amount
Lenders can place insurance if borrower
does not comply
Usually require first year premium prior to
closing
Annual cost placed in escrow, prorated over
12 months, added to monthly principal and
interest due and forwarded to insurer
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Flood Insurance
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Homeowner’s hazard insurance
doesn’t cover flood damage
Homes in designated flood zones
generally require flood insurance
Must purchase from National Flood
Insurance Program (NFIP)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Mortgage Insurance
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Policy that allows lender to recover part of
loss in the event of borrower default
Private mortgage insurance required for
conventional loans with 80% LTV
Homeowners Protection Act of 1998 (HPA)
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Automatically cancel when LTV < 78%
Borrower can request cancellation when LTV is
80%
FHA loans require upfront mortgage
premium and annual premium on balance
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Conforming Loans
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Meet Fannie Mae / Freddie Mac
standards
Qualifying ratios:
– Housing expense ratio – 28%
– Total debt service ratio – 36%
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5% or 10% down payment with 2
months reserves on deposit
Single family home limit of $417,000
(higher in designated areas)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
FHA Loans
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Insured by federal government through
HUD with lenders approved by FHA
Qualifying ratios:
– Housing expense ratio – 31%
– Total debt service ratio – 43%
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MIP required regardless of down
payment
– Upfront, 1.75% of loan
– Annual premium, .25% or .55% of balance
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
FHA Loans
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Loan limits based on median home price in
community
Minimum down payment of 3.5% of purchase
price or appraisal, whichever is less
Fees not directly benefiting buyer prohibited
Seller contribution limited to 6%
Loan assumption allowed if buyer is qualified
and approved
Prepayment penalties prohibited
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
FHA Loans Programs
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Section 203(b), Standard FHA--owner-occupied
property
Section 203(i), Rural Properties--up to 2.5 acres of
land
Section 203(k), Rehabilitation Loans--extra cash
for repairs
Section 234(c), Condominiums--must meet FHA
standards
Section 251, FHA ARM Loans--limited to one- to
four-family dwellings and condominium units.
FHA Energy Efficient Mortgage Loans--finance
the cost of adding energy efficient improvements
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
VA Loans
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Guaranteed by Veterans Benefits
Administration with lenders approved by VA
Veteran eligibility based on length of service
Required documentation
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Qualifying ratios:
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DD-214 discharge papers
Certificate of Eligibility
Total debt service ratio – 41%
Residual income considers size of family
No mortgage insurance required
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
VA Loans
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Loan limit set by Certificate of Reasonable
Value (CRV)
No down payment required
Variable funding fee
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Seller contribution
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1.25% - 3.3% at closing
May be waived for disabled veterans
Limited to 4% closing costs
No limits on discount points
Loan assumption allowed if buyer is qualified
and approved
Prepayment penalties prohibited
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
VA Loan Programs
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Primary purchase loan
– Fixed rate
– Fully amortized
– 10 – 30 years
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VA Interest Rate Reduction Refinance
Loan (IRRRL or VA Streamline)
Cash-out refinancing loan
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
USDA Loans
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Administered by U.S. Department of
Agriculture Rural Development via Housing
and Community Facilities Programs (HCFP)
Loan assistance in rural communities
Section 502 loans
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Guarantees loans from approved lenders
Makes direct loans if no lender available
No down payment required
No mortgage insurance of any kind required
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
USDA Loans
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Income requirements based on area
median income (AMI)
Guaranteed Rural Housing (GRH)
Loans
– Made by approved lenders
– Income up to 115% of AMI
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Direct Loans
– Funded by USDA
– Very low (below 50%) or low (50%-80%)
income
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Closing Agent
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Follows instructions of buyer and seller
Gathers necessary documents; ensures
proper signatures
Documents the various adjustments and fees
charged to each party:
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Debits (like debts) are sums of money owed
Credits are sums of money received
Calculates the various prorations
Completes the HUD-1 Settlement Statement
Compares GFE to the HUD-1
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Title and Title Insurance
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Seller expected to deliver marketable title
Title search of public records determines quality of
title
Chain of title--clear and unbroken chronological
record of ownership
Cloud on the title--gap in the chain of title
Suit to quiet title--closes any missing links; removes
clouds
Title insurance protects lenders against loss due to
disputes, defects in title
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Mortgagee policy generally paid with one-time premium
Coverage runs from purchase to subsequent conveyance
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Origination Fee
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Charged on loans that close
Covers administrative costs to close /
service loan
Sometimes called loan service fee
Usually based on percent of loan
amount (1% = 1 point)
Usually paid out of closing funds
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Fees
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May be taken out of closing funds or paid
upfront and credited at closing
RESPA prohibits any fee that was not
properly disclosed on the GFE
Other typical fees:
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Application fee
Credit bureau report
Property appraisal report
Preliminary title report
Inspection fees
Title insurance
Recording fees
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Closing: Promissory Note
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Evidence of promise to pay
Typically includes:
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Date
Names of the parties
Amount of the debt
How and when the money is to be paid
What happens in the event of default
Prepayment penalties, if any
Signature of the maker
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Closing: Mortgage
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Security instrument
Creates voluntary lien on property
Gives lender right to sell property upon
default
Hypothecation--pledge property as
collateral for loan while maintaining
possession
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Closing: Other Documents
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HUD-1 Settlement Statement--shows
all fees, credits, debits, and costs
associated with loan
Final Truth in Lending Statement-discloses finance charge expressed as
APR (annual percentage rate)
Initial Escrow Statement--itemizes 12months of escrow funds:
– Insurance premiums
– Estimated property tax
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Funding the Loan
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Conditional approval--additional items
required
Clear to close--issued by lender when
all conditions are met and loan papers
ready to be signed
Funds disbursed
3-day right of rescission:
– Loans secured by a primary residence
– Section 32 loans (high-cost loans)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Principal and Interest
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Interest--the cost of borrowing money
Principal--the balance of the loan
Principal x Interest Rate = Annual Interest
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example: Principal and Interest
Loan Balance: $135,000
Interest Rate:
7.5%
Monthly Mortgage Payment (P&I): $985
.075 x $135,000 = $10,125 (annual interest)
$10,125 / 12 = $843.75 (monthly interest)
$985 - $843.75 = $141.25 (applied to principal)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Interest Per Diem
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Mortgage loan interest paid for
previous month
Seller debited daily interest amount
Principal x Interest Rate / 365 = Per Diem Rate
Closing Day x Per Diem Rate = Debit to Seller
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example 1: Interest Per Diem
Existing Loan: $40,000
Interest Rate: 5%
Close Date:
June 10
$40,000 x .05 = $2,000 (annual interest)
$2,000 / 365 = $5.48 (per diem interest)
10 Days x $5.48 = $54.80 (debit to seller)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example 2: Prepaid Interest
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$100,000 new loan
Interest rate of 6%
Loan closes on June 10
$100,000 x .06 = $6,000 (annual interest)
$6,000 / 365 = $16.44 (per diem interest)
Closing Day + 20 days left in June = 21 days
21 x $16.44 = $345.24 (debit to buyer)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Loan-to-Value
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Amount borrowed for first mortgage
compared to value of property
Used by lenders to determine how
much willing to loan
Use the lower of appraised value or
sale price
Loan Amount / Property Value = LTV
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example 1: LTV
Sale Price:
Appraised Value:
Down Payment:
Loan Amount:
$120,000
$125,000
$ 24,000
$ 96,000
$96,000 / $120,000 = .80 or 80% LTV
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example 2: LTV, Down Payment
Sale Price:
Appraised Value:
Required LTV:
$148,000
$150,000
85%
$148,000 x .85 = $125,800 (loan)
$148,000 - $125,800 = $22,200 (down)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example 3: LTV, Down Payment
Sale Price:
Appraised Value:
Required LTV:
$220,000
$218,000
80%
$218,000 x .80 = $174,400 (loan)
$220,000 - $175,400 = $45,600 (down)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Combined Loan-to-Value
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Percentage of property value through
multiple loans
Sometimes called total loan-to-value
(TLTV)
Use the lower of appraised value or
sale price
Loan Amount + Loan Amount = Total Loan Amt.
Total Loan Amount / Property Value = CLTV
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example: CLTV
Appraised Value: $100,000
First Mortgage:
$80,000
Second Mortgage: $10,000
$80,000 + $10,000 = $90,000
$90,000 / $100,000 = 90% CLTV
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Qualifying Ratios
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Housing Expense Ratio
Total Housing Expense (PITI) / Income = Ratio %
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Total Debt Service Ratio
Total Debt Service (PITI + all recurring monthly
debts) / Income = Ratio %
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Borrowers must qualify under both
Different programs have different ratios
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example: Qualifying Ratio
Gross Monthly Income: $3,400.00
Loan:
$120,000.00 at 5.5%
Principal & Interest:
$681.35
1/12 Annual Taxes:
112.60
1/12 Insurance:
+ 25.80
PITI:
$819.75
$819.75 (PITI) / $3,400 (Income) = 24.1%
Housing Expense Ratio
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example: Qualifying Ratio
Monthly Debt:
Total Monthly Debt:
$ 220.50 (Car Payment)
35.00 (Revolving Credit)
+ 145.00 (Child Support)
$ 400.50
$1,220.25 (PITI + Debt) / $3,400 (Income) =
35.9% Total Debt Service Ratio
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Discount Points
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Additional funds paid to lender at
beginning of loan to lower interest rate
and monthly payment
1 point = 1% of loan
Also called a buydown
May be paid by buyer, seller, builder,
etc.
– Permanent (fixed for life of loan)
– Temporary (early in loan; interest rates
rise later)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example 1: Discount Points
Loan:
P&I:
PITI:
Discount:
$100,000.00 at 6% for 30 years
$599.55
$729.55 (P&I + taxes and insurance)
3/4% = six points (lender determined)
$100,000 x .01 = $1,000 (price of 1 point)
$1,000 x 6 = $6,000 (debit to the seller)
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example 2: Graduated Buydown
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Closing Costs
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Proration--division of expenses between buyer and
seller in proportion to the actual usage
Represented by a particular expense as of the day
the loan is funded
Expenses either accrued (paid in arrears) or prepaid
(paid in advance):
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Accrued expenses--cost has been incurred, but the
expense has not yet been paid ; prorated on the settlement
statement as a debit to the seller and a credit to the buyer
Prepaid expenses--costs have already been paid; prorated
on the settlement statement as a credit to the seller and a
debit to the buyer
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Proration Calculation
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Expenses may be prorated using:
– 360-day year, 12 months of 30 days each
– 365-day year, counting the exact number
of days in each month (taking leap years
into account)
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Local custom dictates which factor is
used
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Proration Calculation
1. Determine if the expense is accrued or
prepaid.
2. Divide the expense by the appropriate period
to find a monthly (daily) rate.
3. Determine how many months (days) are
affected by the expense.
4. Multiply the monthly (daily) rate by the
number of affected months (days).
5. Determine which party is credited and which
is debited.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Example: Proration
Assume that property taxes of $1,234.42 are paid on
June 30 for the first six months of the year (paid in
arrears). The transaction closes on March 31.
1. The buyer pays on June 30, so the expense is
accrued.
2. The $1,234.42 tax bill is for 181 days (Jan. 1 to June
30), for a daily rate of $6.82.
3. The seller lived in the house for 89 days (Jan. 1 to
March 30).
4. The portion of the tax bill owed by the seller is
$606.98 (89 days x $6.82).
5. Accrued expenses are a debit to the seller and a
credit to the buyer.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Adjustable Rate Mortgages
•
Periodic adjustments to interest rate
Index + Margin = Fully Indexed ARM Interest Rate
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
ARM Examples
Initial Index Value:
Margin:
Fully Indexed Rate:
5.75%
+ 2.25%
8.00%
Initial ARM rates are usually discounted:
Initial Index Value:
Margin:
Discount Rate:
Initial Interest Rate:
5.75%
+ 2.25%
- 1.25%
6.75%
If the index rate does not change at the first adjustment period:
Initial Index Value:
Margin:
Fully Indexed Rate:
5.75%
+ 2.25%
8.00%
If the index rate increases to 6.25% at the first adjustment period:
Current Index Value:
6.25%
Margin:
+ 2.25%
Current Index Rate:
8.50%
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
ARM Caps
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Limit interest rates and mortgage
payments
2/6 cap is maximum 2% increase at
any adjustment with a lifetime cap of
6% above the initial rate
– Initial Rate:
– Lifetime Cap:
– Max. Interest Rate:
6.75%
+ 6.00%
12.75%
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Term Review
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2-1 Buydown A graduated payment buydown where the
payments are subsidized for only two years, usually 2% the first
year and 1% the second year.
3-2-1 Buydown A graduated payment buydown where the
payments are subsidized for three years, usually 3% the first
year, 2% the second year, and 1% the third year.
Assumption When one party takes over the responsibility for the
loan of another party and the terms of the loan or note remain
unchanged. (Usually lender approval is needed. Also, a release is
needed or original party remains secondarily liable for the loan.)
Automated Underwriting Process where loan applicant
information is entered into a computer and an evaluation comes
back within minutes advising the lender to accept the loan, or
refers the loan application for further review.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Term Review
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Basis Point A unit that is equal to 1/100th of 1% and is used to
denote the change in a financial instrument, commonly used for
calculating changes in interest rates; 1% change = 100 basis
points.
Closing The final stage in a real estate transaction where
ownership of real property is transferred from seller to buyer
according to the terms and conditions set forth in a sales contract
or escrow agreement.
Co-Mortgagor A person who signs a mortgage with the primary
mortgagor and thus accepts a joint obligation to repay the loan.
Credit History A person’s record of debt repayment detailing
how a person paid credit accounts in the past; used as a guide to
how likely the borrower is to pay accounts on time and as agreed
in the future.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Term Review
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Discount Points Amount paid to a lender when a loan is made
to make up the difference between the current market interest
rate and the rate a lender gives a borrower on a note.
Junk Fees Set dollar amounts charged by a lender, rather than a
percentage of the loan amount, that do not show up as points on
the loan.
Loan-to-Value Ratio (LTV) The amount of money borrowed
compared to the value or price of the property.
Mortgage Insurance Premium (MIP) Fee charged for FHA
mortgage insurance coverage; initial premium (upfront
mortgage insurance premium or UFMIP) can be financed and
there may be a renewal premium.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Term Review
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Origination Process of making or initiating a new loan.
Origination Fee Upfront fee charged by some lenders, usually
expressed as a percent of the loan amount.
PITI Typical mortgage payment that includes Principle, Interest,
Taxes, and Insurance.
Points One percent of the loan amount, charged for any reason,
but often used for buydowns (also be called discount points);
used to increase the lender’s yield on a loan.
Pre-Approval Process by which a lender determines if potential
borrowers can be financed through the lender, and for what
amount of money.
Principal With regard to a loan, the amount originally borrowed.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Term Review
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Private Mortgage Insurance (PMI) Insurance offered by private
companies to insure a lender against default on a loan by a
borrower.
Processing Compiling and maintaining the file of information
about a mortgage transaction, including the credit report,
appraisal, verification of employment and assets, and so on.
Qualifying Process of determining whether or not a borrower is
likely to default on a loan and that the property is worth enough to
satisfy the debt if the borrower does default.
Rate Protection Protection for a borrower against the danger
that rates will rise between the time the borrower applies for a
loan and the time the loan closes. This protection can take the
form of a "lock" where the rate and points are frozen at their
initial levels until the loan closes; or a "float-down" where the
rates and points cannot rise from their initial levels but they can
decline if market rates decline.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Term Review
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Reserve Cash on deposit or other highly liquid assets a
borrower must have in order to cover two months of PITI
mortgage payments, after they make the cash down payment and
pays all closing costs.
Secondary Financing When a buyer borrows money from
another source in addition to the primary lender to pay for part of
the purchase price or closing costs.
Seller-Paid Items Closing costs paid by the seller instead of the
buyer. This usually refers to items normally paid by the buyer, but
in some instances are paid by the seller to help close the sale.
FHA and VA loans limit this.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Key Term Review
•
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Servicing The process of collecting payments, keeping records,
and handling defaults for loans.
Teaser Rates Low initial rate on an ARM. The rate usually
returns to normal at the first adjustment date.
Underwriter Individual who evaluates a loan application to
determine its risk level for a lender or investor. The underwriter is
usually the final decision maker on a borrower’s loan application.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
1. The lender usually does not allow
the source of a borrower’s down
payment to be
a.
b.
c.
d.
borrowed funds.
a gift from a relative.
proceeds from the sale of a house.
savings.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
2. When calculating the debt ratio, the
calculation that best represents the
front ratio is monthly
a. debt divided by gross monthly income.
b. debt divided by net monthly income.
c. housing debt divided by gross monthly
income.
d. housing debt divided by net monthly income.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
3. A unique property, such as a
geodesic home, being purchased
as a primary residence would most
logically employ what method of
appraisal?
a.
b.
c.
d.
cost approach
income approach
salability approach
sales comparison approach
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
4. What is the loan-to-value if the loan
amount is $118,000, the appraised
value is $131,000 and the sales
price is $135,000?
a.
b.
c.
d.
88%
90%
95%
100%
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
5. Market value can best be defined as
a property’s
a.
b.
c.
d.
appraised value for property tax purposes.
listing price.
most probable selling price.
most recent selling price.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
6. A borrower with a gross income of
$3,000 per month would qualify for a
housing payment of what amount—
including taxes and insurance—using
the housing expense ratio for a
conventional mortgage?
a.
b.
c.
d.
$840
$870
$1,080
$1,230
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
7. What is the correct calculation used
to determine gross monthly
income, for a borrower paid by the
hour?
a. hourly rate x hours worked weekly x 4
b. hourly rate x hours worked weekly x 4.33
c. hourly rate x hours worked weekly x 4 x 52 /
12
d. hourly rate x hours worked weekly x 52 / 12
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
8. What is the minimum number of
comps required by most secondary
lenders to ensure an accurate
estimate of value when performing
the sales comparison approach?
a.
b.
c.
d.
two
three
four
five
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
9. When qualifying a borrower, an
installment debt does not need to
be included in the debt ratio when
the balance of the term of
repayment is less than how many
months?
a.
b.
c.
d.
5
10
15
20
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
10. Qualifying guidelines on an FHA
loan are
a.
b.
c.
d.
28% housing ratio and 36% total debt ratio.
29% housing ratio and 41% total debt ratio.
31% housing ratio and 43% total debt ratio.
36% housing ratio and 41% total debt ratio.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
11. Section 502 loans are a program of
which government entity?
a.
b.
c.
d.
Federal Housing Administration
Housing and Urban Development
USDA Rural Development
Veterans Administration
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
12. A borrower offers $105,000 for a
house that was appraised for
$112,000. If the seller accepts the
offer, what is the minimum down
payment required for an FHA loan?
a.
b.
c.
d.
$3,675
$3,920
$5,250
$5,600
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
13. A Chapter 7 bankruptcy could show
on a credit report for a maximum of
how many years?
a.
b.
c.
d.
five
seven
eight
ten
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
14. The loan amount (principal) is
$50,000 and the annual interest paid
is $5,500. What is the annual
interest rate?
a.
b.
c.
d.
9%
10%
11%
12%
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
15. An closing agent is responsible for
all of these tasks EXCEPT
a. following instructions according to the sales
contract.
b. gathering all necessary documentation to
close.
c. issuing the final loan approval.
d. preparing the settlement statement.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
16. What is used the VA to determine
the maximum mortgage amount?
a.
b.
c.
d.
appraisal
Certificate of Reasonable Value
tax assessment roll
URAR
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
17. A borrower is buying a house for
$150,000 at 6.5%. He provides a
down payment of $15,000. How
much would he have to pay for
three discount points?
a.
b.
c.
d.
$2,925
$3,000
$4,050
$4,500
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
18. The UFMIP is charged on what type
of mortgage loans?
a.
b.
c.
d.
conforming loans sold to GNMA
FHA loans
subprime loans sold to FNMA
VA loans
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
19. In a loan closing, hypothecation
occurs. This is described as
a. assigning the mortgage from the broker to the
lender.
b. assigning the mortgage from the broker to the
lender.
c. the transfer of title through the deed.
d. using property as collateral without
surrendering use or possession of it.
MLO Boot Camp/Chapter 3: Mortgage Loan Origination Activities
Chapter Quiz
20. A borrower is purchasing a home for
$120,000 and closing costs total 4% of
the purchase price. The seller has
agreed to contribute 2% of the purchase
price toward the buyer's closing costs.
How much cash would the borrower
need at closing in order to obtain an LTV
of 85%?
a.
b.
c.
d.
$18,360
$18,720
$20,400
$20,800