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Chapter 10

Chapter 10. The Borrower. 10-1. Learning Objectives. Describe the borrower characteristics that are important to loan qualification Describe the steps involved in borrower qualification and loan underwriting

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Chapter 10

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  1. Chapter 10 The Borrower

  2. 10-1 Learning Objectives • Describe the borrower characteristics that are important to loan qualification • Describe the steps involved in borrower qualification and loan underwriting • List the data that must be collected and analyzed and the guidelines that must be observed in loan qualification and loan underwriting

  3. 10-2 Borrower Qualification and Loan Underwriting • Determine loan amount • Estimate settlement costs • Analyze credit history • Calculate borrower’s effective income • Estimate housing expense • Assess borrower’s ability to pay the mortgage

  4. 10-3 Theories of Default • Ability-to-Pay Theory • Default occurs when borrower cannot make payments • Equity Theory • Borrower will default when negative equity is present • Deficiency Judgement

  5. 10-4 Loan Application and Financial Statements • Determine borrower’s ability to make mortgage payments • Financial statement of assets and liabilities • Payment-to-Income Ratios • Conventional Loans • 28% PITI • 36% PITI + Other Expenses • FHA Loans • 29% PITI • 41% PITI + Other Expenses

  6. 10-5 HUD/FHA Borrower Guidelines • Mortgage Insurance Premium (MIP) • Defining Housing Expenses • Includes PITI plus monthly mortgage insurance premium and homeowner association fees • Defining Income • Effective income is gross income from all sources for the first five years of mortgage

  7. 10-6 Borrower’s Guidelines Con’t • Accept/Reject Decision Based on: • Credit • Income stability • Adequacy of effective income • Adequacy of wealth or assets

  8. 10-7 VA Borrower Qualification • Purpose is to help veterans to finance home purchases • Characteristics • no down payment • limits of closing costs • no prepayment penalty • Requirements • Eligibility • Owner-occupied • Meet income requirements • Have good credit

  9. 10-8 VA Qualifications Con’t • To Qualify • 90 days active duty for “ hot war” • 181 days of continuous peacetime active duty • six years for reservists and national guardsmen

  10. 10-9 Conforming Conventional Loan Qualification • Fannie Mae and Freddie Mae have guidelines • For loans with LTV <95%, the payment-to-income ratio limits are 28% and 36% • Fannie Mae will not purchase ARMs with negative amortization • Both agencies set loan limits • Lenders rate loans (A,B,C) based on credit history of borrower • Prime Loans vs. Sub-Prime Loans

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