Transcript Slide 1
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8
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