Transcript Slide 1

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Underwriting and
Financing Residential
Properties
©2008 The McGraw-Hill Companies,
All Rights Reserved
McGraw-Hill/Irwin
Classification of Mortgage Loans
• Conventional Mortgages
 Usually 80% loan to value ratio
 No government guarantee or insurance
required
 Conforming loans
• Meet GSE loan limit requirements (< $417K)
 Nonconforming “jumbo” loans
• Large dollar amount loans
• Higher interest rate
8-2
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Classification of Mortgage Loans
• Insured Conventional Mortgages
 LTV usually > 80%
 Private Mortgage Insurance
• Insurer assumes default risk of the larger loan
• Covers loan amount > 80% LTV
• Generally no loan maximum
8-3
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
 Lower borrower down payments
 Loan maximums
• VA Guaranteed Mortgage Loans
 Qualified veterans meeting length of service
requirements
 Guarantee usually around 25% of loan
 Veteran pays a funding fee
8-4
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
8-5
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
8-6
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
8-7
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Affordability Ratios
• Payment to income
 PITI / gross income < = 28%
• Total obligations to income
 PITI + other obligations/ gross income
equals to or is less than 36%
• Percentages vary with kind of loan
program
 Lower ratio (25%) for ARMs/GPMs/Insured
Mort.
8-8
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved