The Loan Officer’s Practical Guide to Residential Finance

1 The Loan Officer's Practical Guide to Residential Finance Copyright 2013. May 1, 2013. By Thomas A. Morgan The Loan Officer's Practical Guide to Residential Finance SAFE Act Version 2013. 29th Printing ISBN 0-9718205-0-3/ISBN 13 - 9780971820500. "The Loan Officer's Practical Guide to Residential Finance ". 2009 Thomas Morgan, QuickStart ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a re- trieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher and the copyright holder. This publication is designed to present, as simply and accurately as possible, general infor- mation on the subject. It should be noted that the information presented is not all-inclusive.

2 Products, programs and guidelines change due to rapid changes in the industry. This publica- tion should not be used as a substitute for referring to appropriate experts and is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other per- sonalized professional service. If legal or other expert assistance is required, the services of a competent professional should be sought. The Loan Officer's Practical Guide to Residential Finance SAFE Act Version 2013. Table of Contents Table of Contents .. i Introduction .. xi SAFE Act Curriculum Syllabus - Nationwide Licensing Test Preparation .. xiv National Test Preparation Source Reference .. xiv Chapter 1 Mortgage Math .. 1. Decimals and Fractions.

3 1. Understanding the Mortgage Business .. 2. Types of Lenders/Primary Originators .. 2. Retail 3. Reading the Rate Sheet .. 3. Points .. 3. The Origination Fee/Discount Points .. 5. The Mortgage Broker Business .. 6. Originator Compensation and its Impact on Pricing .. 7. Understanding Interest Rate Lock-in Terms .. 7. Reading the Pricing Sheet .. 7. Principal and Interest or Interest Only - Amortization .. 8. Solving for X - Mortgage Math and the Financial Calculator .. 8. Choosing a Financial Calculator .. 9. What is the Payment? .. 10. What is the Balance over Time? .. 12. What is the Maximum Loan Amount I Qualify For? .. 12. I Know How Much I Need to Borrow. What is the Maximum Rate? .. 13. How Much Income is Required for a Certain House?

4 13. What is the Maximum Loan Term with a Specific Payment? .. 13. Understanding Ratios Loan to Value - LTV .. 15. Understanding Ratios Qualifying Ratios .. 15. The Effect of Computer Automation on Qualifying Practices .. 15. "Pre" and "Re" Qualifying - Doing the Math .. 16. Using a Pre-Qualification Worksheet .. 16. Qualifying and Pre-Qualification Two Different Things .. 16. Advanced Concepts - The Concept of Leverage .. 18. Advanced Concepts - The Concept of Taxable Equivalency .. 18. Tax Deduction The Mortgage Payment and Rental Equivalent .. 18. Chapter 2 - Major Loan Types .. 22. Choosing a Fixed Rate Mortgage .. 23. Interest-Only (Non-Traditional Loan Type) .. 23. Prepayment as an Interest Savings 23. Other Prepayment Strategies - The Bi-Weekly Mortgage.

5 24. Other "Fixed Rate" Mortgages .. 24. Balloon Mortgages .. 25. The Two-Step ARM .. 25. Buydowns - The Low Down on Interest Rate Reduction .. 25. Primary Reason for Buydowns Qualify for More .. 27. Using Discount Points to Create Beneficial Programs .. 28. ADJUSTABLE RATE MORTGAGES (Non-Traditional Loan Types) .. 29. ARM Components - The Basic 29. The Role of the Index in the Interest Rate 30. The Margin The Spread Over Market .. 31. Table of Contents - Page i The Loan Officer's Practical Guide to Residential Finance - SAFE Act Version 2013. Interest Rate Caps & Payment Caps Limiting the Change .. 32. Initial Adjustment Cap .. 33. The Option ARM The Ultimate Non-Traditional Loan .. 33. Comparing ARMS .. 36. Conversion Options.

6 37. Second Mortgages .. 38. Piggybacks or Blends (Non-Traditional Loan Type) .. 38. Computing the Blended Rate .. 39. Bridge Loans and Reverse Bridge Loans - 2 Strategies .. 39. Seller held Mortgages, Assumptions and Wraps .. 40. Reverse Mortgages for Seniors .. 40. Chapter 3 - Loan Plan Specifications .. 42. Program Specifications - Understanding Guidelines .. 42. Conventional Loans - What is Conforming? .. 44. Generic Jumbo Non-Conforming .. 48. Automated Underwriting Electronic Decision Engines .. 48. Simple Troubleshooting Strategies .. 48. Variance Tolerance .. 49. Common Problems with AU (Automated Underwriting) .. 49. DU or LP? .. 49. First Time Homebuyer Programs .. 51. Private Mortgage Insurance (PMI) .. 51. Mortgage Insurance Coverage Requirements.

7 52. Mortgage Insurance Premium Plans .. 52. Choosing the Right Plan - Premium Plan Options .. 53. PMI Underwriting Guidelines .. 54. HOPA and PMI Cancellation .. 54. The Federal Housing Administration (FHA) .. 55. The Direct Endorsement Program (DE) .. 57. 2007 2010 Transitional Issues with FHA .. 58. Risk-Based Insurance Premiums No Longer in Effect .. 58. Financing Mortgage Insurance .. 58. The Refinance Conundrum .. 59. FHA Secure Refinance Program Cancelled 12/31/08 .. 59. Documented Underwriting Compensating Factors .. 59. The Department of Veteran's Affairs (VA) .. 60. Expanded Criteria and Price Bumps .. 63. Chapter 4 - QUALIFYING -Ratios and Credit History .. 66. Owner Occupancy and Qualifying .. 67. The Mathematics of Qualifying Ratios.

8 69. The Housing Expense Ratio .. 70. The Total Debt Ratio .. 72. Regular Business Expenses/Self Employed Borrowers .. 76. Credit History .. 77. Credit Bureaus vs. Credit Repositories .. 77. Obtaining a Credit Report .. 80. Understanding the Ratings - What is "Bad" .. 80. Sub-Prime Lending .. 83. High-Rate, High-Fee Loans (HOEPA/Section 32 Mortgages) .. 84. Credit Counselors/Agencies .. 85. Understanding Credit 86. Risk Grading .. 87. Consider the Impact .. 90. Income Fraud Alerts/Red Flags .. 90. Chapter 5 QUALIFYING: Income & Other Restrictions .. 92. Understanding 92. "Stable" Income .. 93. Base Income with 93. Getting the most of Overtime, Bonus, & Commissions .. 94. Bonus, Tips and Commission .. 95. Table of Contents - Page ii The Loan Officer's Practical Guide to Residential Finance SAFE Act Version 2013.

9 Future 96. Dividends & Interest .. 97. Self-Employment .. 97. Who is Self-Employed? .. 98. Analyzing Self-Employment Income and Required Documentation .. 99. Income Analysis - Start With the Personal Returns .. 100. Income Sources & "Add-backs" .. 101. Partnership and S Corporation Tax Returns and Income 101. Analyzing the US Corporation Income Tax Return .. 102. The Profit and Loss Statement .. 103. No Income Verification Loans .. 104. Documentation Types and Their Meanings .. 104. What is a Compensating Factor? .. 105. Co-borrowers .. 106. Income Red Flags .. 106. Eligible Borrowers .. 108. Resident Aliens .. 108. Non-Immigrant 108. Chapter 6 QUALIFYING: Assets, Down-Payment and Closing Costs .. 111. Understanding Closing Costs.

10 112. The Components of a Buyer's Closing Costs .. 112. 1.) Loan Fees and Points .. 112. 2.) "Hard" Closing Costs .. 113. Title Insurance .. 113. 3.) Government/Municipal Title Related Charges .. 114. 4.) Prepaid Items .. 114. Interim Interest .. 115. Insurance Escrow .. 116. Real Estate Tax Escrows .. 116. Estimating Closing Costs Qualifying for Cash .. 118. Seller Contributions .. 123. Avoiding Problems with Seller Contributions .. 124. Structuring Seller Paid Closing Costs .. 124. Sources of Assets for Down Payment, Closing Costs and Reserves .. 125. Borrower's Own Funds .. 126. Reserves .. 126. Lender Credits for "Above Par" Pricing Towards Closing Costs .. 126. Tips for Using Gifts .. 127. Shared Equity .. 127. Red Flags for Assets and Deposits.