It is during this process that the amount of the loan is analyzed (the amount you can arrow), the terms are reduced to writing through the Good Faith Estimate (SGF), which Includes the interest rate. Discount points. Payback period, down-payment, and escrows, the appraisal, the type and form of loan are selected (conventional, FAA, VALE and whether the loan originator will hold and service the loan or sell it. The old SGF provided a statement as to the number of loans the originator sold (e. G. , 0-25%; 26-50%; 51-75%; or 76-100%). II.
The Secondary Market: If a loan originator decides to sell the loan, It will generally be sold In the secondary market. Two purchasers of loans In the secondary market p until September 2008 were Fannies Mae and Freddie Mac, which are government- sponsored enterprises (Gee’s), and provided a vehicle for the secondary market. Up until September 7, 2008, they guaranteed about one-half of the US mortgage debt. When an originator sells its loans in the secondary market, this provides capital back to the loan originators to Issue on new loans (which creates an efficient primary market).
For a little more background on Gee’s, these entitles are privately owned, but must conform to standards set by Congress, and are subject to congressional oversight. Loans that are sold in the secondary market must use standard (uniform) documentation, including the application, promissory note, deed of trust, and appraisal. The purpose behind this is to provide uniformity throughout the lending process. It can be difficult to determine what type and form of loan is needed these days with the number of choices available. It’s comparable to selecting a Jar of peanut butter from the shelf at the grocery store.
Lenders have increased the loan menu options available to borrowers. There have been two historical attributes with the conventional loan: One was right after World War II, when the restrictions on the 15 year fixed rate with an 80% loan to value ratio (L TV) were relaxed, and the second was the time period between 1995 and 2008, with the lower standards and the increased number of loan options available to borrowers. Although the same number of loans options are still in effect, the change in the economy and the real estate market has resulted in a stricter loan review (underwriting) process.
There are two broad categories of loans: government loans (FAA and VA), and non- government loans (conventional and non-conventional). The following provides an overview for the types of loans available: a. Conventional Loan: This is the most common form of loan, and is not insured by any governmental agency. A conventional loan can be a fixed rate or an adjustable rate loan. A level payment mortgage (LUMP) is a loan with a fixed rate and is amortized over a specific period of time, usually 10, 15 or 30 years. Many lenders have included a 20-year period as part of their mortgage menu options. . Conforming Conventional Loan: The loan meets the check the box standards for automatic underwriting and purchase in the secondary market c. Non-conforming Conventional Loan: The loan does not meet the standards for sale/purchase in the secondary market. A lender that originates a non-conforming loan will be required to service the loan. D. Jumbo Non-Conventional (Non-conforming) Loan: This is a loan that exceeds the monetary requirements to be sold in the secondary market. The Jumbo loan amount in Boxer County, Texas for a residential property $417,000.
In high cost areas this amount may be increased to $625,000. So, any loan that exceeds this amount is considered a Jumbo loan and will generally bear a higher interest rate because there s no immediate access to sell it on the secondary market. E. FAA Loan: A loan originated by a private lender and insured by the government. The FAA loan protects the lender from all risk associated with a default and subsequent foreclosure. An upfront premium of 3. 5% of the loan amount is required, and a monthly premium is also required for the term of the loan.
A borrower can request that a seller pay a portion of borrower’s closing costs, including The FAA Conforming Loan Limit for Boxer County, Texas is $332,500 for a single family residential home. It may be possible for a lender to break up a loan so that part of it s conventional, and the other is non-conventional. This allows the lender to sell one loan in the secondary market, and to service the second loan. F. FAA 203(k) Loan: This is a rehab loan, that allows the borrower to include the purchase price for the house, plus any necessary repairs. G.
VA Loan: A private lender originates a loan, of which a certain percentage is guaranteed by the Department of Veterans Affairs. H. Purchase money mortgage: A purchase-money mortgage is a mortgage created concurrent with the purchase of real property. When a borrower obtains a loan for he purchase of a house, and the house is used as collateral for the loan, then the security interest in the property is a purchase money mortgage. I. Second Loan: A second loan taken out at the same time as a first loan. The second loan may be used to avoid IMP or PM’ when the first loan is for 80% of more related to the value of the property.
The second loan is generally for a shorter term with a higher interest rate. J. Interest-only Amortizing Mortgages: No principle payment is required, yet the interest payments are amortized over a period of time (usual 30 years), but with a determined period (e. G. 15 years) at which time the loan is re-amortized to pay off the loan during the remaining period (1 5 years). K. Interest-only Balloon Mortgage: No principle payment is required. Interest only is paid on the loan, with no reduction of the principle.
The balloon aspect of this is that the loan must be paid in full or refinanced after a period of time (a 5-year balloon means the note is due and payable after 5 years). L. Adjustable Rate Mortgage: A loan in which the interest rate is subject to change. M. Hybrid ARM: A hybrid ARM loan is a combination of a fixed-rate loan and an adjustable rate mortgage. With the hybrid arm, the loan is amortized for a fixed-rate for a specific period of time before it adjusts again. For example, with a 3/1 ARM, the interest rate that is charged is fixed for three years before it adjusts again. N.
Option ARM: The primary characteristic of the option arm is the option to make minimum payments. O. Home Equity Loan: A home equity loan is a loan that allows a homeowner to borrow against the equity in the home. In Texas, home equity loans are governed by fixed amount, and the repayment is generally based on a fixed-rate amortization. This is also referred to as a closed-end loan. . Home Equity Line of Credit: A home equity line of credit (HELLO) is similar too home equity loan, except that a borrower can take out a line of credit for the available equity, and draw down on the line of credit as needed.
This differs from a home equity loan in that it is a one-time loan, and a borrower can only take out one home equity loan per year. A HELLO allows the borrower to have one loan he or she can draw down against as many times as needed, so it offers more flexibility. A. Amortization: Systematic repayment of a debt. B. Number of payments: Term of the loan, generally in months. C. Annual Percentage Rate: This is not the Promissory Note rate for which you applied. The Annual Percentage Rate (PAR) is the cost of the loan in percentage terms taking into account various loan charges of which interest is only one such charge.
Other charges, which are used in the calculation of the PAR, are: Private Mortgage Insurance (IMP) FAA Mortgage Insurance Premium (when applicable) Prepaid Finance Charges Discount Points Origination Fees Prepaid Interest Other Credit Costs The PAR is calculated by spreading these charges over the life of the loan, which results in a rate higher than the interest rate show on your Promissory Note. If interest is the only Finance Charge, then the interest rate and the PAR would be the same. D. Interest Rate: The rate the bank charges the borrower for the loan. . Finance Charge: The amount of interest, Prepaid Finance Charge and certain insurance premiums (if any), which the borrower will be expected to pay over the life of the loan. F. Amount Financed: The Amount Financed is the loan amount applied for less the Prepaid Finance Charges. Prepaid Finance Charges can be found on the Good Faith Estimate. For example, if a borrower’s Promissory Note is for $100,000 and the Prepaid Finance Charges total $5,000, the Amount Financed would be $95,000. The g.
Total Payments: This figure represents the total of all payments made toward principal, interest and mortgage insurance (if applicable). H. Maturity Date: The due date of the loan. I. Balloon Payment: The due date of the loan before the amortized term. J. Prepayment Penalty: The prepayment penalty is a percentage the lender charges the lender if the borrower refinances or pays of the loan before its maturity date. The purpose for the prepay penalty is so the lender can achieve its yield for the loan. This fee is common with commercial properties, and is rarely charged with residential investment loans. K.
Late Charge: If a payment is delinquent 10 days or more, the borrower will pay a late charge of X%, in accordance with the terms of your note. L. Assumption: Someone buying a home [will / will not] be able to assume the remainder of the mortgage on its original terms. M. Private Mortgage Insurance: Mortgage insurance provides risk protection to lenders, and is required when the LTV ratio is greater than 80%. The rate of the private mortgage insurance (IMP) will depend up on the loan amount, the repayment erred, and the borrower’s credit risk. N. Mortgage Insurance Premium: Mortgage insurance charged by the FAA.
As a borrower, there are number of factors that must be taken into consideration when shopping and applying for a loan. The traditional approach to underwriting entailed a lender reviewing a borrower’s credit report and looking for issues that may raise or lower the risk of that borrower. A lender looks at three big picture factors – the three Co’s of underwriting: Collateral, Creditworthiness, and Capacity – which is now an automated process. Two advantages of automated underwriting are that (1) it s faster than traditional underwriting, and (2) it enables lenders to more safely make “affordable housing” loans.
A few reasons why the automated process has replaced the traditional process are: Faster or streamlined loan approval Used universally in home mortgage lending Utilized for FAA and VA loans Loan with a PICO greater than 660 will be approved, and subsequently will be purchased in the secondary market approving a loan (the qualitative analysis), and focuses primarily on a quantitative statistical and proprietary analysis of approving or denying a loan. The three Co’s of underwriting are outlined below in more detail: a.
Collateral: The appraisal provides the basis for the collateral and the decision by the lender to loan funds to a borrower, and also establishes the loan-to-value ratio. B. Creditworthiness: Based on a statistical analysis of a borrower’s credit score by means of the PICO (Fair Isaac Corporation). In automated underwriting, the three CSS are used as factors with other criteria in a statistical evaluation that is designed to distinguish risky from safe borrower. The automated underwriting process uses the PICO and credit score to determine risk. The Range 330 – 850
PICO > = Lower Risk PICO < 620 = Higher Risk c. Capacity: There are two aspects in reviewing a borrower's capacity. One is the housing expense ratio, or front-end ratio. The second is the total debt ratio, or back- end ratio. The following is an analysis using the FHA's requirements: i. Mortgage Payment Expense to Effective Income: Total Fixed Payment to Effective Income: This ratio takes the borrower's total mortgage obligation related to the property (principal, interest, taxes, insurance, mortgage insurance premium, and HOA dues) and divides it by the borrower's gross monthly income.
