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Understanding Underwriting and Financing of Residential Properties

This chapter provides a comprehensive overview of different types of mortgage loans, including conventionally insured, FHA insured, and VA guaranteed loans. It outlines qualification requirements for each mortgage type and discusses the underwriting process, including income evaluation, borrower assets, and credit history. Additionally, it covers crucial topics such as affordability ratios, closing costs, and key federal regulations like the Real Estate Settlement and Procedures Act (RESPA) and the Federal Truth in Lending (FTL) Act.

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Understanding Underwriting and Financing of Residential Properties

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  1. CHAPTER EIGHT UNDERWRITING AND FINANCING RESIDENTIAL PROPERTIES

  2. Chapter Objectives • Differentiate conventionally insured, a FHA insured, and a VA guaranteed mortgage • Qualification requirements for the above mortgage types

  3. Classification of Mortgage Loans • Conventional mortgages • Insured conventional mortgages • FHA insured mortgages • VA guaranteed loans

  4. Insured Conventional Mortgage Loans • Private Mortgage Insurance (PMI) • Loans that have a LTV > 80% • The loan in excess of 80% of the property (LTV) is usually covered under the policy • Private insurance companies

  5. FHA Insured Mortgage Loans • FHA- Federal Housing Administration • Insures the lender 100% against any default • FHA created in 1934 to stabilize housing industry • FHA charges a premium • FHA loans usually have lower loan limits

  6. VA Guaranteed Mortgage Loans • Department of Veteran Affairs • VA provides guarantees to lenders for loan losses • The guarantee usually equals or exceeds 25% of loan amount

  7. The Underwriting Process- Income • Employment • Working spouse • Rentals • Alimony or child support • Commissions • Self employment • Bonuses

  8. The Underwriting Process- Income Continued • Dividends or interest • Retirement annuity • Social security • Public assistance

  9. The Underwriting Process- Other Conditions • Borrower assets • Credit history • Estimated housing expense • Other obligations and debt

  10. Affordability Ratios • Payment to income • PITI/ gross income equals or is less than 28% • Total obligations to income • PITI plus other obligations/ gross income equals or is less than 36% • Percentages vary with kind of loan program

  11. Closing Costs- Financing • Loan application • Credit report fee • Loan origination • Attorney fees • Appraisal fees • Fees for survey

  12. Closing Costs- Financing Continued • Loan documentation fees • Discount points • Prepaid interest

  13. Closing Costs- other • Property taxes, prorations and escrow accounts • Mortgage insurance • Hazard insurance • Title insurance • Pest inspection • Real estate commissions • Statutory costs

  14. Real Estate Settlement and Procedures Act (RESPA) • Consumer information • Advance disclosure of settlement • Title insurance • Prohibition of kickbacks and referral fees • Uniform settlement statement • Advance inspection of settlement statement • Escrow deposits

  15. Federal Truth in Landing (FTL) • Effective cost of mortgage credit (since 1968) • Commercial real estate transactions excluded • APR is the most important required disclosure • ARMs and determining APR is more difficult

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