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Chapter 12

Chapter 12. Controlling Default Risk, Borrower Qualification, and Loan Underwriting. 12-1. Chapter 12 Learning Objectives. Understand the important borrower and property characteristics that are the focus of borrower qualification

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Chapter 12

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  1. Chapter 12 Controlling Default Risk, Borrower Qualification, and Loan Underwriting

  2. 12-1 Chapter 12Learning Objectives • Understand the important borrower and property characteristics that are the focus of borrower qualification • Understand the legal relationship between the lender and the borrower • Understand how the lender controls default risk

  3. 12-2 Borrower Qualifications • Mortgage Credit Analysis includes • Determining Maximum Loan Amount • Estimating Closing Costs • Analyzing Credit History • Calculating Income and Housing Expense • Assessing Ability to Repay

  4. 12-3 Characteristics of the Property • Value determined by appraisal • Appraisal is affected by physical characteristics, location, financing, etc.

  5. 12-4 Characteristics of the Borrower • Type and Stability of Income • Other Debt and Living Expenses • Prime Vs. Sub-prime Loans • Risk-based Lending, A-F Ratings

  6. 12-5 Default Risk • Ability-to-pay Theory • For Whatever Reason, Borrower Cannot Make the Payments • Equity Theory (Put Option) • The Lower the Equity, the Greater the Likelihood That the Borrower Will “Put” the Property in Place of the Debt, i.e., Default on the Mortgage

  7. 12-6 Borrower Qualifying Ratios • Loan-to-Value Ratio (LTV) • The Higher the LTV Ratio, the Higher the Default Risk • Payment-to-Income Ratio • Conventional FHA/VA • PITI 28% 29% • PITI+other 36% 41%

  8. 12-7 Mortgage Contracts • Mortgage - Defines the Debt and Creates the Lien Against the Property • Promissory Note - Outlines the Provisions of the Loan • Recourse vs. Non-Recourse • Interest and Payment Structure • Pre-Payment • Default and Acceleration • Due-on-Sale Clause • Amount of Loan • Assignment of Rents and Income

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