Chapter 13
Loan Origination,
Processing, and Closing
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Chapter 13 Learning Objectives
 Understand the steps involved in processing of a loan
application and closing a mortgage
 Understand the operation of mortgage bankers
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Loan Processing
 Involves several steps including property appraisal,
analysis of application, submission for credit approval,
and closing the loan
 Appraisal – Three stages
 Ordering the appraisal; since 1995 Uniform Residential
Appraisal Report used for nearly all loans
 Monitoring the appraisal
 Evaluating the appraisal
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Loan Processing
 Appraisal valuation section – generally accepted
appraisal standards require the use of three
approaches for determination of value:
 Market Approach
 Cost Approach
 Income Approach
 Appraisal reconciliation phase – arriving at final
estimate for value
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Loan Processing - Analysis of Application
 Complete analysis of the financial position of the borrower
and the disclosure of information required by the Real
Estate Settlement Procedure, Regulation Z and the ECOA
 RESPA requires lenders to:
 Provide, in advance, general information on the settlement costs
 Provide within 3 days after receiving the application estimated
closing costs and monthly payments
 Provide within 3 days after receiving the application good-faith
estimate of the cost of the loan over its term, including APR
 The lender verifies the credit standing of the applicant
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Loan Processing – Submission of Insurance
 Applying for Mortgage Insurance
 FHA, VA, or PMI
 Common form for submission for FHA and VA
 Mortgage insurance is in addition to homeowners
insurance
 Paid along with homeowners insurance
 May be paid by the borrower or through escrow
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Loan Processing – Submission of Insurance
 Many lenders participate in FHA’s direct endorsement
program
 The lender performs the underwriting process
 A lender that is a direct endorser is essentially an agent of
the FHA
Saves processing time
 If the application for insurance is accepted FHA issues
mortgage insurance certificate
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Loan Processing – Submission of Insurance
 For FHA approval, lender submits a package containing:
1. Mortgage Credit Analysis Worksheet
2. Application for commitment of insurance
3. Copy of sales contract
4. All verifications of deposits
5. All verifications of employment
6. Credit reports
7. Verification of indebtedness
8. Other documents
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Loan Closing
 Two distinct transactions:
 Transferring title
 Signing documents (e.g. promissory note)
 Standard mortgage or deed-of-trust form for FNMA and
FHLMC; similar form for FHA and VA
 Mortgage or deed-of-trust includes same information as the
note and also provide description of the property
 Settlement statement – record of what went on at the closing
 Truth-in-lending disclosure must be given to the borrower and
must include major financial terms
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Loan Closing
 Disbursement
 Lender may give separate checks to the closing agent payable to each
party (title company, mortgage insurer, real estate agent, etc.)
 Lender gives one check to the closing agent for the full amount of the
loan
 Recording
 Gives public notice that the buyer is the new owner of the property and
the mortgage has a lien on the property
 Serves as a protection of the owner/lender against others that may
claim to have a valid deed
 Mortgage insurance payment
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Mortgage Banking
 The origination, servicing, and the sale of mortgage
loans by a firm or a individual
 Mortgage bankers:
 Non-depository institutions
 Do not hold loans in portfolio
 Retain servicing rights
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Mortgage Brokers
 Alternative to mortgage bankers
 Licensed companies that offer mortgages from variety
of lenders
 Can provide borrowers with their best loan options
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Mortgage Banking – Sources of Funds
 Two principal sources of funds:
 Commercial paper – short term (180 to 720 days) obligation
with rate approx. equal to the prime rate
 Warehousing loans – short term loans from commercial
banks; structured as line of credit; mortgage loans used as
collateral
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Mortgage Banking - Revenues
 Four main sources for revenues
 Origination fee – 1% of the amount of mortgage
 Servicing fee – 0.25 – 0.5% of the outstanding mortgage
balance
 Warehousing rate difference – Income from the differential
between the rate on the mortgage loan and the rate on
credit line
 Marketing rate difference – The difference between the
amount originated and the amount received from the sale
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