MORTGAGE BASIC TRAINING

What is a mortgage?
It is the promise to pay back a loan secured by real property.
 

Etymology: The root of the word: “Mort” and “Gage.” “Mort” in old French means “Death.” “Gage” in old French means “Pledge.” Not all that fun now, huh?
 

What are the parts of a mortgage?
Let’s discuss the 3 C’s of a mortgage: character, capacity, and collateral. These are the questions that need to be answered in the loan process:
 

  • Character: Credit score and credit history. 

    • ​Does the borrower have a score that meets the guidelines? Does the borrower’s credit history reflect a willingness to pay back the mortgage?

  • Capacity: Income and stability.

    • ​Does the borrower earn enough to cover all the debts?

    • Does the borrower’s earning history seem likely to continue

  • Collateral: appraisal and title.

    • Is the property worth more than the requested loan amount?

    • Are there any liens on the property that would supersede the mortgage?

What is an interest rate?
The banking industry buys and sells money. The dollar is a commodity just like oil, gold, and wheat. As you know, the price of a commodity is driven by supply and demand.
 

  • Same supply with more demand makes prices rise.

  • More supply with the same demand makes prices drop.

  • Interest rate is just the price of the dollar.

So let us look at the supply and demand of the dollar. Where do the dollars for a mortgage come from?

  • They come from investors that want a steady low risk investment. Those investors can choose to invest in the US Treasury 10 year bond (T-Bill) or a mortgage backed security. Since the T-Bill has ZERO risk, mortgage rates must have a higher rate to attract those dollars. The T-Bill rate is set by the government based on the health of the economy. As the economy gets better the T-Bill rate goes up, so the mortgage rates must rise to keep investors interested in mortgages.


So if you look at the health of the economy, you will understand what will happen with the T-Bill, then you will understand what mortgage rates will do.
 

What is a credit score?
Credit score is the numerical representation of the likeliness a borrower will pay back a debt. There are three major credit bureaus that are customarily referenced by mortgage lenders to make credit decisions in the mortgage process: Equifax, Experian, and Transunion. Each bureau developed its own proprietary algorithms (scoring models) that boils down a person’s credit history into a number. Each bureau has many different scoring models which weigh different factors more or less heavily based on the purpose of the loan. So a person could have their credit pulled for a credit card, a car loan, and a mortgage all on the same day with 3 different score results. Generally scores range from 300 up to 850. Generally speaking, a score of 640 will make for a relatively easy mortgage process.


The 5 things that contribute to a credit score: Payment history, credit card balance, length of credit history, new credit, and types of credit.
 

What is a dispute?
A dispute is an item on your credit that you have informed the bureau that you do not believe to be accurate. This can be good and it can be bad. The credit bureau algorithm that calculates the credit score ignores disputed line items. This results in an artificially inflated credit score. Therefore there are limitations/consequences for credit reports containing disputes.


What is an appraisal?
An appraisal is a document that a lender uses to ensure the loan is not larger than the value of the property. A licensed appraiser will research the properties that sold recently in the close vicinity of the subject property. The he/she will measure and inspect the subject property. Note, this is not the same as a home inspection. However, the appraiser will inspect the property to the standards of the loan program’s minimum property conditions. After the research and inspection, they will extrapolate a value from the comparable properties (commonly referred to as “comps”).
 

What is a deed?
Deed is the piece of paper (mostly electronic now) that documents ownership of real property. It is sometimes called “title”. The deed is recorded in the local county. It may have encumbrances on it such as a mortgage, a lien, and home owner’s association covenants and restrictions.
 

What is property insurance?
Property insurance, many times called homeowners insurance (HOI) is the insurance coverage that will restore the collateral to the normal standard after a disaster. Each lender will require sufficient coverage to pay off the loan in the event of a total loss of the property. This may not be enough to rebuild the home. Each lender will require the deductible to not exceed a maximum amount.
 

What are closing costs?
Closing costs are the sum of all the little costs in the loan. It is loan costs plus title costs plus prepaids plus escrow.
 

What is down payment?
Down payment is the money the borrower uses to reduce the loan amount. It is a risk factor. In theory, if a person has a lot of equity in a property, they are less likely to foreclose. So a bigger down payment is more attractive to investors.
 

What is cash to close? 
Cash to close is the amount of money the borrower needs to bring to closing. It is down payment plus closing costs minus EMD minus seller concessions. For example, our borrower is buying a $200,000 house with 20% down. On the contract, the seller is covering $3000 in seller concessions and the borrower gave an EMD check of $2000. Closing costs are $4700. What is the cash to close?
 

$40,000    Down payment
 -$2,000    EMD
+$4,700    Closing costs
 -$3,000    Seller concessions
$39,700    Cash to close

 

Many people have a tough time grasping this concept
 

What about co-signers?
Co-signers should be considered ONLY when you need additional income. Adding a co-signer does NOT help a borrower with bad credit. The interest rate and loan program is based on the borrower with the lowest score. A few main things to keep in consideration:
 

  • VA is the only loan type that limits who can co-sign. (Spouse only, unless the veteran wants a 12.5% down payment).

  • Adding a borrower to a loan will NOT overcome insufficient credit for the main borrower. The lender will require the lowest middle score of all parties on the loan to be sufficient.

  • A co-borrower will not be able to be taken off the loan unless the main borrower refinances and can re-qualify for the loan by themselves.

  • Adding a co-borrower will NOT have any impact on rate unless they have a lower credit score than the primary borrower.

  • The full mortgage payment will be counted against the co-signer if they were to try to acquire additional financing.

  • A gift for down payment or closing costs is allowed without having to put the donor on the loan.

  • A co-borrower will be required to provide all the same documentation as

  • the primary borrower.

Examples:

  • Student in college with minimal monthly income: Parents can co-sign to overcome the lack of income.

  • New position that is primarily commission-based with less than a 2 year history.

  • Co-signer will make up for non-qualifying income.

  • Business owner with lots of “write offs”: Spouse can co-sign to overcome deductions.
     

What is a pipeline? 

Pipeline is the industry term used to track clients progress through the loan process. It usually starts when the person completes an application.

 

What are milestones? 
Milestones are like highway markers. They tell you the status of the loan in the pipeline. I use prequal, preapproved, application, sent to processing, submitted to UW, approved with conditions (AWC), appraisal ordered, appraisal received, clear to close, and funded. You also have withdrawn and declined.

What is AUS and why is it important? 
AUS: Automated underwriting system. Every mortgage file gets sent electronically to Fannie Mae or Freddie Mac's risk assessment server. That server slices the file into credit score, credit history, assets, income, job stability, loan to value, and debt to income portions. It then assigns a risk factor to each portion of the loan and then adds up those risk factors. The system returns “findings” with two possible options: "approve" or "refer." If you get "approve," it is good. "Refer" is not good. For a government loan, I can close a "refer" file. For a conventional loan, you can never have a "refer" response. The reason this is important, for an “approve” file, the loan approval is basically just making sure the documents match the application with nothing squirrely on the docs. Really an easy loan. For a “refer” response, the loan must be manually underwritten where a person needs to make a decision if the applicant is credit worthy.
 

What is manual underwriting? 
Manual underwriting is the process where an underwriter reviews the files to determine the overall credit worthiness of the client and the overall risk of the file. Not all lenders will close a manually UW file. It is also called a “refer” file. You should understand the AUS portion of this document before you try to understand this part. A file may be automatically classified as a manual UW, or it may be manually downgraded based on other things in the file. Either way, you will have a much more difficult time closing the loan. I recommend it only for very experienced MLOs that have closed over 100 loans.
 

What is required to close a manually underwritten loan? 
This is my opinion, and slightly conservative. I have closed a ton of manual files, so I am 100% confident in this strategy. You have to run AUS on every file below 680 at PQ. No ifs ands or buts about it. If you have a manual/refer, I will issue a PQ if I meet the following 5 things:
 

  • No late payments in the last 12 months on the credit report

  • Up to 2 30-day late payments in the last 24 months

  • 2 months' reserves

  • No job gaps greater than 30 days in the last 2 years

  • Verifiable on-time rental history for the last 12 months
     

What is credit repair? 
Credit repair is the process where the consumer disputes inaccurate items on their credit report. It is a complex process to do it correctly. People can do it themselves, but it is much smarter to use an expert. There are a ton of crummy credit repair companies out there. You should develop a relationship with a reputable credit repair agent.
 

What is the loan process? 
The loan process - let’s talk a little about what the buyer is going to experience.
 

  • Get prequalified. All I need for that is 10 minutes on the phone to break the ice, then get name, DOB, SSN, current address, and employment info. After that pull credit, run numbers, then call everyone to congratulate them.

  • Get pre approved: collect the initial documents, review and update the loan application with actual numbers, then re-run AUS findings (more on that later).

  • Once we get the contract, we issue the initial loan disclosures for e-sign. It is 80 pages of electronic signatures.

  • Once complete, we submit the file to an UW. That normally takes about 24-48 hours depending on the time of year. At this point we order the appraisal, title, and insurance binder.

  • The UW will issue a conditional approval. We will reach out to the borrower for those conditions. Usually they are things like cleared EMD check, source a bank deposit, better copy of driver’s license.

  • Once we get conditions, appraisal, title, and insurance, we “go all in” to the UW for the last review.

  • Once final approval is received, we start the closing disclosure collaboration with the atty.

  • Once the final CD is approved, the closing package is sent to the atty.

  • The borrower brings certified funds to the closing, and signs their life away.

Loan programs
Conforming loans are loans that “conform” with the requirements to bundle the loan into a mortgage backed security. Basically, the calculated risk in this type of loan has a low probability of default and therefore would not contribute to another mortgage meltdown. Non-conforming loans are outside of the Dodd-Frank bill requirements. That is not saying the borrowers are bad people; they just do not fit into that federally-regulated “box.” Because there are still good borrowers that can not get a conforming loan, the non-QM industry was developed. Sometimes they are called portfolio loans because they will stay in the investor’s loan portfolio and not get sold off to MBS investors.
 

Conventional Mortgages 101: Conventional mortgages are the most basic loan program. It may be utilized for primary residences, second homes, and investment properties.

  • Down Payment: Minimum of 3%.

  • Limit: Most areas have a limit of $510,400 in 2020. Above that is considered a jumbo loan.

  • Credit: To qualify for the loan, the borrower must have a satisfactory score and credit history. Fannie Mae and Freddie Mac require a 620 score.

  • Appraisal: The home must pass an appraisal. Cost is typically around $500. There are very minimal property conditions. However, significant repairs may reduce the appraised value.

  • Funding fee: No funding fee.

  • Mortgage Insurance: If the down payment is less than 20%, PMI is required. It ranges from 0.45 to 1.1% based on credit score and loan to value. PMI will cancel at 80% LTV

  • Condos: Condo regimes must be 51% owner occupied.

  • Student Loans: No matter what the current status, must be included in the DTI calculation as either a fully amortized payment or 1% of the loan balance. There is a small exception for this.
     

FHA Mortgages 101: FHA is the typical home loan for first time home buyers. It has the lowest credit score requirement, the highest loan-to-value, and the lowest down payment. One is not required to be a first-time home buyer to utilize it. It is only for primary residences, no investment properties.

  • Down Payment: minimum down payment is 3.5% with a FICO of 580. 10% with a FICO if 500.

  • Limit: The local tri county area limit is $388,700. Some major cities are higher, such as Washington DC. https://entp.hud.gov/idapp/html/hicostlook.cfm

  • Credit: To qualify for the loan, the borrower must have a satisfactory score and credit history. I can originate 3.5% down with a 580 score. Below 580 requires 10% down.

  • Appraisal: The home must pass an FHA appraisal. Cost is about $500. Keep in mind when you are showing the home: safe, sanitary, no broken windows, no damaged drywall, no active roof leaks, no unfinished plumbing, no exposed electrical, all installed appliances are working.

  • Funding fee: The FHA charges a 1.75% funding fee. The borrower usually add that to the loan amount. This may cause the loan amount to appear odd to the borrower.

  • Mortgage Insurance: FHA charges 0.85% of the original loan amount per year, for the duration of the loan.

  • Student Loans: Student loans, no matter what the current status, must be included in the DTI calculation as either a fully amortized payment or 1% of the loan balance.

See the book I Hate Renting for more info on FHA loans – FHA flip rules. For FHA buyers only, if the house was purchased by the current owner less than 90 days ago, you can not write a contract until day 91. No if’s, and's or but’s about it. If less than 180 days, but more than 90 days, you will need a 2nd appraisal and the new price is double the price the seller paid for the house. If the 2nd appraisal comes in at 95% or less than 1st appraisal, the sales price must be adjusted to the 2nd appraised value. This does not apply to VA, conventional, or USDA buyers. There are allowed exceptions for an inherited property or a foreclosed property or a house being sold by FHA.

VA Mortgages 101: The eligibility requirements are a page long, based on when you joined. Generally:

  1. During war time 90 consecutive days

  2. During peacetime 180 consecutive days

  3. National guard or reserves 6 years

  4. Non-remarried spouse of a vet who died or a service related illness or injury

  • Limit: There is no loan limit set by the VA. There is an eligibility limit. With just one loan, there is no eligibility limit. If the vet has an existing VA loan, or have a VA foreclosure, that eligibility will be limited and therefore limit the loan amount. That new limit may be exceeded if the veteran brings a down payment. What the VA actually does is issue an insurance policy, on that loan, of 25% of the loan amount. So if the vet wants to borrower more than the eligibility limit, he/she will have a down payment of 25% of the amount above the limit.

  • Credit: While the VA does not have a minimum credit score, the lenders usually do. To qualify for the loan, the veteran must have a satisfactory score and credit history. I can originate with a 500 score. Usually, below 580 the program is for vets with a lack of credit, not bad credit. No late payments at all in the last 12 months.

  • Appraisal: The home must pass a VA appraisal. Cost is currently $425 in SC. The things to keep in mind when you are showing the home before you write the offer: safe, sanitary, no broken windows, no damaged drywall, no active roof leaks, no unfinished plumbing, no exposed electrical, all installed appliances are working.

  • Funding fee (FF): The VA charges the veteran a funding fee on the loan. First time use is 2.3%. The vet may (and usually does) add that to the loan amount. If the veteran has a disability rating of 10% or higher, that fee is waived. You should have the FF chart on the wall by your desk.

  • Condos: Use this link to search for approved condos in your area: https://lgy.va.gov/lgyhub/condo-report

  • There is a big myth that I hear about once a week, that a vet can only have one VA loan at a time. That is false. I think it is because people believe that requirement that VA loans are only for primary residence, is a limit. Let’s say the vet purchase a home in Texas for $200k. Lived there for a few years and then was transferred to Charleston. That vet could purchase a home here up to the limit of the eligibility (follow’s Freddie Mac’s conforming loan limit), in 2020 that limit is $484,350. So $484,350 - $200,000 is $284,350. If the vet wants to exceed that remaining eligibility, there will be a down payment of 25% of the loan amount above the eligibility. 

USDA Mortgages 101: USDA mortgage program was designed to promote homeownership in rural areas. It has the highest credit score requirement, the lowest loan to value, and no down payment. It is only for primary residences, no investment properties.

  • Down Payment: $0.

  • Limit: There is no loan limit, but there are income caps and DTI limits.

  • Income cap: To qualify, all adults in the household may not make more than about $81,000 for a family of 4. Family size 5-8 has a limit of about $103,000. These are 2020 numbers and will change in the future.

  • Credit: To qualify for the loan, the borrower must have a 580 fico and clean credit history.

  • Appraisal: The home must pass an USDA appraisal. Cost is typically around $500. The things to keep in mind when you are showing the home before you write the offer: safe, sanitary, no broken windows, no damaged drywall, no active roof leaks, no unfinished plumbing, no exposed electrical, all installed appliances are working.

  • Funding fee: The USDA charges a funding fee on the loan of 1%. The borrower may (and usually does) add that to the loan amount. This may cause the loan amount to appear odd to the borrower.

  • Mortgage Insurance: USDA charges 0.35% of the original loan amount per year. This is for the duration of the loan.

  • Student Loans: Student loans, no matter what the current status, must be included in the DTI calculation as either a fully amortized payment or 1% of the loan balance.

 

There are 3 different types of USDA refinances. Here is a matrix from
USDA’s site:

 

 

 

 

 

 

 

 

 

 


 

 

 

 

Reverse Mortgages: are beyond the scope of this text. Simply, they are a mortgage where homeowners age 62 and older to borrow from their home's equity without having to make monthly mortgage payments. They may choose to take funds in a lump sum, line of credit or via structured monthly payments. There are LTV requirements. The borrower will still be required to pay taxes and insurance.


HELOCs: are beyond the scope of this text. Simply, they are a mortgage where homeowners can get a 2nd or 3rd mortgage on their property to access equity. HELOCs are like a credit card in that your payments are based only on what you borrowed. The rate is usually adjustable and much higher than the first mortgage since it is a riskier loan.

 

Credit 101

  • Credit scores

  • Credit history

  • Credit report comprehension

 

You cannot just look at the scores. Scores matter, but history matters more. You want to review the report for potential issues and questions that may come up. Look for: score, potential score improvement, public records, derogatory accounts, credit card balances, and mortgage accounts.
 

  • Reviewing the credit report, liabilities and payment info, several things you'll want to look at.

  • Are there any disputed accounts? If yes, are they over $1,000? If yes, stop working on the credit report and inform the client that they must remove the disputes and credit must be re-pulled. Insert credit report dispute line item here.

  • Are there any late payments? If there is a late payment in the last 12 months, the file can not be submitted for a manual underwrite.

  • Are there more than 10 inquiries? If so, a letter of credit inquiry will be required for the file.

  • How many mortgages are on the credit report? Check for mortgage rates. Short sales modifications must be longer than a year, bankruptcy or foreclosure. If there was a foreclosure, pull the deed to show the dates waiting. If bankruptcy, request the BK papers.

  • If you own multiple properties, do you have current mortgage statements?

  • If you do not escrow tax bills for all properties, be sure to include those in the calculations.

  • Do you need alternative credit? Alternative credit could be rental history, landlord utility, insurance statements? Request the landlord's contact information for the VOR.
     

A credit report must report less than 120 days old.

 

Employment 101 

  • Types of employment

  • Job hopping: While I can not find an official definition, in my experience 3 or more job changes in the last 24 months will probably get flagged as unstable employment. If there was a really good reason, you could build a case, as I have. Show that the multiple changes were for career progression with raises each time. Be prepared to get WVOEs for everything. I would get them before you issue the PQ.

  • 1099: This is an independent contractor. It is nearly identical to self employment. You will need the full tax returns for the last 2 years to calculate income. Do not issue the PQ letter before you receive the tax returns and enter the numbers into an income calculator.

  • Self employed: This is defined as someone that owns >=25% of a business. If so, you will need the full tax returns for the last 2 years to calculate income. Do not issue the PQ letter before you receive the tax returns and enter the numbers into an income calculator. You will need business and personal taxes. Sometimes the business taxes are just the 1040 Schedule C.
     

Income 101

  • Salary

  • Hourly calcs

  • OT/bonuses/commission

  • Self employed

  • 1099 income

  • Child support

  • Alimony

Assets 101
I firmly believe the most difficult portion of the mortgage process is sourcing funds. This includes earnest money, down payment, odd bank deposits, gifts, and appraisal payments.
 

Remember the mortgage meltdown? One of the corrective actions established by the government is that all funds must be sourced. The premise is we have to prove that the listing agent, the selling agent, the seller, and the mortgage partner did not give any inducements to purchase (kick backs). Yes, people can contribute, but there are interested party contribution limits, based on loan type. Cash transactions can not be sourced, therefore are not allowed.
 

How this complicates things: if there is an outsourceable deposit, that dollar amount must be ignored and the available balance in the account must be artificially lowered. The available funds may now be below what is required. Same with EMD.
 

If it is not sourceable such as cash, Walmart cashier’s check, money from Mom, etc., those funds can not be used in the transaction. If the client was already tight on funds, we just created a tremendous stress in their lives, and in the UW process.

  • Checking/saving

  • Large deposits

  • Trusts

  • Retirement accounts

  • Gifts

  • DPA
     

Liabilities 101 

  • Student loans are the most complex liability you will come across. You need to have a deep understanding of all the different loan programs and how they apply to student loans, based on the status of the loan. Student loans are considered federal debt. Therefore if they are delinquent, the person could not be approved for a mortgage based on the declarations section of the 1003. There is a special program for student loans in default. The exact details are beyond the scope of this text. However, you should develop a relationship with a student loan resolution company. Basically the company can set up the student loans into a very small repayment plan. After the borrower has made their 9th payment in the plan, all the delinquencies will be removed from the credit report and the student loans will report as a fresh liability. This can only be done once in the lifetime of the client and can be easily screwed up. So they do not want to go with some cut rate company. It will cost them $800-$1,000. 

  • Alimony/child support

  • Child care expenses (VA loans only)

  • Wage garnishments
     

Property Types
Property types matter a lot. Loan programs are drastically affected by the collateral. Basic property types: Single Family Detached, Single Family Attached, Condominium, Cooperative, Modular Homes, and Manufactured homes.
 

Mortgage Math
The 5/6/7 rule: This is the way to quickly estimate the monthly payment based on the purchase price. Now this works in my area based on our typical taxes and homeowners insurance. You may need to look at a few dozen closed loans in your area and develop slightly different numbers.

  • For a conventional loan with a 20% down payment, the mortgage will be about $5/month for every $1,000 in purchase price. That means $150k purchase $30k down they will be about $750/month.

  • For a VA and USDA loan, the thumb rule is about $6/month for every $1,000 contract price. So $300k VA loan will be about $1,800/month.

  • For FHA, every $1,000 purchase price, use $7/month. Therefore for a $200k contract price, you are looking at about $1,400/month.
     

Loan to value. Probably the most simple calculation: Loan amount divided by the appraised value. If there is a 1st and a 2nd loan, we have Combined Loan to Value sum of both loans divided by the appraised value.
 

Debt to income ratio calculations. DTI is pretty simple: take the monthly debt and divide it by the monthly income. There are 2 DTI calculations to worry about: Front end ratio (sometimes called the housing ratio or top ratio) and the back end ratio (sometimes called the total ratio or bottom).

 

  • Front end ratio. Take the proposed housing payment and divide that by the monthly income. Make sure you include all parts of the payment, even if not escrowed: principal, interest, PMI, insurance, taxes, and HOA. Example: Payment is $1,000 and income is $3,000. $1000/$3000 = 33%.

  • Back end ratio. Take the total debt payment including proposed housing payment and divide that by the monthly income.

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