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Underwriting and
Financing Residential
Properties
©2008 The McGraw-Hill Companies,
All Rights Reserved
McGraw-Hill/Irwin
Underwriting Default Risk
• Qualifying the borrower and property
 Borrower loan application
 Property appraisal
• Default insurance
• Payment-to-income ratio
 28% test
• Loan-to-value ratio
8-2
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Classification of Mortgage Loans
• Conventional Mortgages
 Usually 80% loan to value ratio
 No government guarantee or insurance
 Conforming loans
• Meet GSE loan limit requirements
 Nonconforming “jumbo” loans
• Large dollar amount loans
• Higher interest rate
8-3
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Classification of Mortgage Loans
• Insured Conventional Mortgages
 LTV usually > 80%
 Private Mortgage Insurance
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Insurer assumes default risk of the larger loan
Covers loan amount > 80% LTV
Homeowners Protection Act of 1991
Generally no loan maximum
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Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Classification of Mortgage Loans
• FHA Insured Mortgage loans
 Lender completely insured against default
loss
 Standardized borrower and property
qualifying
 Lower borrower down payments
 Loan maximums
 Section 203b most common program
8-5
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Classification of Mortgage Loans
• VA Guaranteed Mortgage Loans
 Qualified veterans meeting length of service
requirements
 Guarantee usually around 25% of loan
 Veteran pays a funding fee
 Certificate of reasonable value
 Loan entitlement
 Residual income qualifying
8-6
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Underwriting Process
• Borrower Income
 Verify employer, wages, expected continuity
 Verify other income
• Will it continue?
• Is it verifiable on prior tax returns?
 Dual income
• Stability of joint income
8-7
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Underwriting Process
• Borrower Assets
 Verify closing cost and down payment funds
 Additional savings and investments
• Credit History
 Credit reports
 Credit scoring models
8-8
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Underwriting Process
• Housing Expenses
 Principal & Interest & Taxes & Insurance
(PITI)
• Additional Expenses
 Installment loans
 Credit cards
• Compensating Factors
8-9
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Strategic Concepts for Borrowers
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Lock-in Period
Prepayment Penalty
Private Mortgage Insurance
Buying down interest rates
Subprime loans
Power Payment Options
8-10
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
The Closing Process
• Close loan and transfer property
 Conveyance occurs when buyer accepts the
deed
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Lender fees for financing
Property taxes and prorations
Mortgage and hazard insurance
Escrow Accounts
8-11
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
The Closing Process
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Mortgage Cancellation Insurance
Title insurance, lawyer’s title opinion
Release fees, attorney’s fees
Pest inspection
Real estate sales commission
Recording fees
Transfer taxes
8-12
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
RESPA
• Consumer Information Booklet
• Advance disclosure of settlement costs
 3 day window
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Title Insurance Placement
Kickbacks & Referral Fees
Uniform Settlement Statement
Advanced Inspection of Settlement Statement
Escrow Deposit Limits
8-13
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved