The Mortgage Lending Process

Chapter 3
The Mortgage
Lending Process
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 1

Chapter 3: The Mortgage Lending Process
Overview
Chapter 3 discusses:
• Roles of the mortgage professional
• Pre-qualification and pre-approval and important
differences between the two
• The loan process
• Standards relating to income, credit history, and
net worth
• Housing expense ratios and total debt service
ratios using secondary market guidelines

Key Terms
• Assets • Housing Expense

• Credit History Ratio
• • Liabilities
Credit Scoring
• • Loan Originator
Debts
• • Loan Processor
FICO Score
• Loan-to-Value
Ratio (LTV)

Key Terms
• PITI • Servicer
• Point • Stable Monthly
Income
• Pre-Approval
• Total Debt Service
• Pre-Qualification
Ratio
• Reserves • Underwriter

The Role of the

Mortgage Professional
• Work for any bank, credit union mortgage
lender, mortgage investor, or mortgage
broker
• Duties vary depending upon the size of the
company
• Important to understand basics of
mortgage lending and what the duties may
be depending on the type of lender you
work for

Functions of
Mortgage Professionals
In addition to typical office duties and

paperwork:
• Origination
• Underwriting
• Servicing

Functions of
• Originating: The process of making or

initiating a new loan
• The Processor: Typically responsible for
verification of the information contained in
the file (such as sending out employment
verification forms), and also coordination of
the various aspects of the loan (such as
working with the title company)

Functions of
• Underwriting: The process of evaluating

and deciding whether to make a new loan
• Servicing: The continued maintenance of
a loan after the loan has closed
• Many mortgage companies offer a
combination of these services to their
clients

Getting a Buyer
Approved—In the Past
People completed loan applications only

when ready to buy a particular home
• Why loan applications ask for detailed
information about prospective buyers so
lenders can make informed decisions
about whether to grant credit

Getting a Buyer Approved—

Today
• Growing trend toward pre-approving buyers

for loans
• Pre-approval can be a useful negotiating tool
• Pre-approval is NOT the same as

pre-qualifying buyers
−The two terms are not interchangeable

Pre-qualification
• Process of pre-determining how much of a

loan a potential home buyer might be eligible
to borrow
• May be done by an agent or the lender
• Does NOT guarantee approval
• Not binding on the lender
− Lender simply saying it looks favorable that
the buyer will eventually get approved

Pre-approval
• Process by which a lender determines if potential

borrowers can be financed through the lender, and for what
amount of money
• Borrower completes several steps of the loan process
• Lender is stating the borrower’s situation has been
checked-out
• Provided all circumstances stay the same, willing to
loan a person up to a certain amount of money
• Powerful negotiating tool

Loan Approval Process
The real estate loan approval process can

be broken down into four steps:
1. Consulting with the lender
2. Completing a loan application
3. Processing a loan application
4. Analyzing the borrower and property

Consulting
with the Lender
• Do not interject your own opinion into the situation
• Always let clients or customers have the final say as to how
they apply for a loan and with whom
• If you represent more than one company program, always
consult with your mortgage broker or employer regarding
policies in all areas before giving any type of advice or
recommendation

Common Fees Associated

with Real Estate Loans
• Application fee
• Pulling buyer’s credit bureau report
• Securing a property appraisal report
• Preliminary title report
• Completing inspections
− If loan closes, title insurance, recording fees,
and origination fee (aka loan service fee)

Completing the
Loan Application
• The loan application is the form lenders require
potential borrowers to complete, listing all
pertinent information about the borrower and
property
• The same application is often used for
pre-approvals, with the same information being
asked about the borrower, since the lender
anticipates a pre-approval will eventually lead to
a loan

Data Needed for Application
Will vary by lender, but usually includes:

• Sales contract for home borrower wants to buy
• Two years of residence history
• Two years employment history
• Income Information
Continued on next slide 

Data Needed for Application
• List of assets
• List of liabilities
• Copy of gift letter, if applicable
• Certificate of Eligibility for VA loans and
DD-214, if applicable
• Sales information regarding present home
• Any other info the buyer feels is relevant or is
requested by the lender

Loan Application
• Borrower typically completes during the

initial consultation with lender
• Designed to elicit responses that detail
borrower’s history, trends, and attitude as a
means of trying to predict future loan
repayment behavior

Parts of the
Loan Application
• Section I: Type of Mortgage and Terms
of the Loan
• Section II: Property Information & Purpose
of the Loan
• Section III: Borrower Information
• Section IV: Employment Information
• Section V: Monthly Income and Combined
• Section VI: Assets and Liabilities

Parts of the
Loan Application
• Section VII: Details of the Transaction
• Section VIII: Declarations
• Section IX: Acknowledgment, Agreement,
and Borrower’s Signatures
• Section X: Information for Government
Monitoring Purposes

Processing the
Loan Application
Other pertinent information about the buyer:
• Check stubs or W-2 forms
• Copies of bank statements and other original
documents
• Verification forms sent out to buyer’s employer,
banks, other creditors, and any previous
mortgage lender.
• Credit report will be ordered and a preliminary title
report prepared
• An approved appraiser will be contacted to
appraise the property

Analyzing the Borrower

and the Property
When reviewing a borrower’s loan application,
the lender considers five main categories:
1. Capacity
2. Collateral
3. Credit
4. Character
5. Conditions

Analyzing the Borrower

and the Property
The lender will also want to know the source
of the buyer’s down payment:
• Savings, sale of a prior home, or gifts are
all acceptable sources
• Buyer usually can't use borrowed funds
or gifts for the first 5%

Underwriting Process
• Involves reviewing the information it contains

and verifying items as necessary
• When lender receives the credit report,
verification forms, preliminary title report, and
appraisal, a loan package is put together and
given to an underwriter
• The underwriter is usually the final decision
maker on a borrower's loan application
• Process can be automated or done by an
individual who works for the lender
Automated Underwriting
• Information from a loan applicant is fed into a

computer
• An evaluation comes back within minutes
advising the lender to:
• Accept the loan applicant based on that
information
• Or refer the loan application for further
review and analysis by a loan underwriter

Desktop Underwriter® (DU®)and Loan

Prospector®
• DU® is Fannie Mae’s Automated

Underwriting System
– The electronic system puts lenders in direct
contact with Fannie Mae
– Provides streamlined process of document
submission, underwriting, and loan approval
• Loan Prospector® is Freddie Mac’s direct
electronic underwriting system

The DU®
• Looks at 14 separate factors about the

borrower and the property
• According to Fannie Mae, the 3 most
important factors it considers are:
1. Equity in the property
2. Credit history of the borrower (including
credit score)
3. Liquid reserves the borrower has in the
bank
The Art of
Qualifying a Borrower
• Qualifying a borrower simply means
evaluating a borrower's creditworthiness
• Borrower is evaluated to make sure he
meets minimum qualifying standards
• Property is evaluated
• Evaluation process is loan underwriting,
where an underwriter evaluates various
risk factors associated with the loan

The Art of
• Primary concern: Determining degree of risk a loan
represents
• Underwriter’s fundamental questions:
1. Is there sufficient value in the property pledged as
collateral to assure recovery of the loan amount in the
event of default?
2. Does the borrower’s overall financial situation,
comprised of income, credit history, and net worth,
indicate he or she can reasonably be expected to make
the proposed monthly loan payments in a timely
manner?

The Art of
• When qualifying a borrower for a
conventional loan use Fannie Mae and
Freddie Mac underwriting criteria
• The most important information reviewed
when qualifying a borrower for a particular
loan is:
− Income
− Credit history
− Net worth
Income
Qualifying Standards
• When considering a borrower's income, there
are two important income factors that lenders
look at:
1. Housing expense ratio
2. Total debt service ratio
• Borrowers must qualify under both ratios

Housing Expense Ratio
• A borrower's housing expense ratio is the

relationship of the borrower's total monthly
housing expense to income, expressed as a
percentage
Total Housing Expense ÷ Income = Ratio

%

Housing Expense Ratio
• Conventional lenders consider a borrower’s

income adequate if the proposed total
mortgage payment of principal, interest,
taxes and insurance (PITI) does not exceed
28% of stable monthly income
• Stable monthly income is income that can
reasonably be expected to continue in the
future

Total Debt Service Ratio
• A borrower's total debt service ratio is the

relationship of the borrower's total monthly
debt obligations (including housing and long-
term debts with more than ten payments left)
to income, expressed as a percentage
Total Debt Service ÷ Income = Ratio %

Total Debt Service Ratio
• Conventional lenders: Not to exceed 36% of

stable monthly income
• Alimony, child support, or any other court-
ordered obligations must count as debt against
this ratio.
• Debts with less than ten payments may still be
counted against the borrower if payments are
high
• Student loans currently in deferment will need to
be calculated into the expenses
Using Ratios to Determine

Maximum Mortgage Payment
• Determine the maximum mortgage payment under
the 1st ratio:
− Multiply borrower’s stable monthly income by the
maximum housing expense ratio (28% or 0.28)
• Determine the maximum mortgage payment under
the 2nd ratio:
− Multiply the borrower’s stable monthly income by
the maximum total debt service ratio (36% or
0.36)
− This gives you the amount of total long-term debts
the borrower is permitted to have

Using Ratios to Determine

Maximum Mortgage Payment
• Take this 2nd total amount and subtract the monthly
long-term obligations the borrower already has
(not including mortgage payments)
• This gives you a figure that represents the largest
mortgage payment allowed under the second ratio
• Since borrower must qualify under both ratios,
smaller of the 2 is the maximum allowable
mortgage payment

Stable Monthly Income
• Monthly income that can reasonably be

expected to continue in the future
• All income sources may be counted, however
the lender must do a thorough analysis
• Underwriters study the quality
(dependability) and durability (probability of
continuance) of income

Stable Monthly
Income Sources
• Bonuses, commissions, • Rental income
• Alimony, child support,
and part-time earnings and maintenance
• Overtime • Self-employment income
• Disability payments • Co-mortgagor
• Social Security •Unemployment and
• Pensions and retirement welfare (if verifiable,
benefits continuous, and ongoing)
• Interest-yielding
investments

Evaluating Income
When deciding which income will count

toward a home purchase and deciding its
strength, the lender takes each income
source and looks at:
• Employment history
• Advancement
• Education/training

Employment History
• Underwriter will also analyze the individual’s

employment stability
• Borrowers with a history of steady, full-time
employment receive more favorable
consideration than those who change
employers frequently
• Unless the changes are properly explained
• General rule: Borrower should have
continuous employment for at least two years
in the same field
Advancement
• Favorably viewed by underwriter:

− If the borrower has changed employers for the
sake of advancement within the same line of
work
• Unfavorably viewed by underwriter:
− Persistent job-hopping without advancement
usually signifies a problem–individual’s earnings
may be regarded as unstable

Education and Training
• Special education or training that prepares a person

for a specific kind of work can strengthen a loan
application
• Can offset minor weaknesses with respect to
earnings or job tenure, especially if the underwriter is
convinced there's:
− A continuing demand for people in this line of
work
− Job stability in that particular field
− Opportunity for advancement

Computing
Monthly Income
• After deciding which income will count, all gross
monthly income from those sources is added together
to arrive at a total gross monthly income figure
• If a borrower earns an hourly wage, it must be
converted to a monthly figure:
• Multiply the hourly wage by 40 (hours in a work week)
• Multiply by 52 (weeks in a year)
• Divide by 12 (months in a year)

Verifying Income
• The borrower can substantiate

employment/income by providing:
– W-2 forms for the previous 2 years
– Original payroll stubs for the previous
30-day period
• Verbal employment confirmations are normally
done on each borrower prior to closing
• Verification of Employment forms may be used

Credit History
• Record of debt repayment

• How a person paid credit accounts in the past
as a guide to whether he is likely to pay
accounts on time and as agreed in the future
• Debts: Any recurring monetary obligation that cannot be
canceled
• Credit scoring: An objective means of determining the
creditworthiness of potential borrowers based on a number
system
• Credit score: A numeric representation of the borrower's credit
profile

Credit History
• Underwrite analyzes borrower’s (and co-borrowers)

credit history by obtaining a credit report from a
national credit bureau
• Slow payment record or other derogatory credit
information could cause loan application to be
denied or put the borrower into a high-risk
category
• In some cases, these issues don’t prevent a
borrower from obtaining a loan if the credit
problems can be explained.

Credit Scoring
• An objective means of determining

creditworthiness of potential borrowers based
on a number system
• The numbers adjust up and down based on
strengths and weaknesses of particular
qualification
• Play important role in automated underwriting

FICO/BEACON Scores
These scores (which range from about 300 – 850)

consider:
• Number of open accounts • Presence of adverse

• Total credit limit public records
• Types of credit • # of recent credit
• Length of credit history inquiries
• Total amount of debt • Re-establishment of
outstanding positive credit history
• # of late payments in the after past payment
past 30-60-90 days problems
Secondary Market
• Applies pricing adjustments to the

interest rate depending upon FICO score
and LTV
• Fannie Mae and Freddie Mac guidelines:
– Above 720  acceptable credit risk
– 620 – 660  marginal credit risk
(comprehensive review)
– Below 620  will not accept loans for
certain products and programs

Explaining
Derogatory Credit
• If a few derogatory items appear on credit
report, explanations for their occurrence can
be explained, and showing prior and
subsequent good credit ratings can help
• The Notice to the Home Loan Applicant
Credit Score Information Disclosure, as
mandated by the Fair and Accurate
Transactions Act, must be provided to
borrowers

Bankruptcy
• As established by federal law, it is a court

process that cancels debt and provides some
relief for creditors
• There are 2 basic proceedings:
1. Chapter 7 Bankruptcy
− Liquidation proceeding
1. Chapter 13 Bankruptcy
− Allows debtor to pay off debt over time

Bill Consolidation
and Refinancing
• Even without derogatory ratings, lenders
may find other concerns that indicate the
borrower is a marginal credit risk
• Subjective consideration is likely to
influence the lender’s decision if a borrower
is weak in other areas (e.g., income or net
worth)

Verifying Credit History
• Lenders will accept only credit reports they obtain directly

from credit reporting agencies
• Borrowers must give written authorization to obtain a
credit report (verbal authorization must be documented in
loan log)
• Consumers may request one free credit report per year
from each of the national credit bureaus (
www.annualcreditreport.com) if:
– Information in a credit report resulted in some sort of adverse
action
– Victim of ID theft and fraud alert inserted
– File has inaccurate information because of fraud
– Consumer is on public assistance or unemployed

Net Worth
• Determined by subtracting liabilities from total

assets
− The value of all property (real and personal) a
person has accumulated after subtracting all
debts or obligations owed
• Fannie Mae says that, “accumulation of net worth
is a strong indication of credit worthiness”
• A marginal total debt service ratio can be offset
with an above average net worth

Evaluating Net Worth
1. Confirmation the borrower has sufficient assets and

personal money to make the down payment and pay
closing costs
2. Confirmation that the borrower has adequate reserves
to cover two months of PITI mortgage payments after
making a down payment and paying closing costs.
3. Confirmation the borrower has other assets, showing
an ability to manage money and a resource, if
needed, to handle emergencies and make mortgage
payments

Down Payment
Borrower must have sufficient liquid assets

to make the cash down payment and pay
closing costs and other expenses
incidental to the property purchase:
• Liquid assets
• Two months of bank statements
• Verification of Deposit form

Reserves
• Cash on deposit or other highly liquid

assets a borrower has available
• Lenders would like to see enough to cover
2 months’ PITI mortgage payments (after
down payment and closing costs are paid)
− 6 months’ for investment properties

Other Assets
• Real estate equity

– The difference between the market value of the
property and the sum of the mortgages and
other liens against the property
• Equity in automobiles, furniture, jewelry,
stocks, bonds, and cash value life
insurance policies

Verifying Deposits for

Down Payment/Reserves
• 2 months’ bank statements and a Verification of

Deposit form may be used
• Questions considered by the underwriter:
1. Does the verified information conform to
statements in the loan application?
2. Is there enough money in the bank to pay costs of
buying the property?
3. Has the bank account been opened recently
(within the last few months)?
4. Is the present balance notably higher than the
average balance?

Gift Letter
• A letter signed by the donor of the monetary gift

• Should clearly state the money does not have to be
repaid
• Usually must be from an immediate family member,
though rules can vary
• Must verify the donor has the funds available with a copy
of the gift check and a copy of the deposit receipt

Verifying Assets
• A section devoted to assets is included in

every loan application
• Underwriter takes necessary steps to verify
the nature and value of assets held by a
borrower
• Purpose: Ensure the borrower has sufficient
assets or reserves to handle typical household
emergencies

Closing the Loan
• Closing is the transfer of ownership of real

property from seller to buyer, according to the
terms and conditions in the sales contract or
escrow agreement
• This is the final stage in a real estate transaction,
when seller receives value for property (cash,
mortgage, etc.) and buyer gets title

Closing Procedures
• Two types of closings:

1. Escrow closings conducted by a
disinterested third party
2. Roundtable closings conducted with all
parties present
• In both cases, the mechanics of closing are
normally the responsibility of an escrow or
settlement agent or attorney

Closing Procedures
• Escrow agent may be lender’s in-house escrow

dept., an independent escrow company, or a title
insurance company
• Escrow agent follows the instructions of both buyer
and seller
• A copy of the sales contract or escrow instructions
must be provided to the escrow agent, the title
company, and the lender
• Escrow agent gathers all necessary documents,
making sure they're properly signed

Closing Procedures
• If there are no unforeseen problems during

closing, loan papers are signed and there's one
final check to be sure everything is in order
• Escrow agent calculates the various prorations,
adjustments, and fees charged to each party
• Loan funds are disbursed to the proper parties
according to the sales contract or escrow
instructions
• Each party is given a settlement statement that
complies with RESPA
Settlement Reconciliation
• Debits: Sums of money owed

• Credits: Sums of money received
– Debits owed by the buyer are totaled and added to the
purchase price
– Credits are totaled and subtracted from the total debits
to determine how much money the buyer must bring to
closing
– Similar process occurs on the seller’s side
• Acquisition cost: Total of the amount of money
necessary to purchase the property

Proration
• Division of expenses between buyer and

seller in proportion to the actual usage of the
item represented by a particular expense as
of the day the loan is funded
– Accrued expenses: the cost has been incurred,
but the expense has not yet been paid
– Prepaid expenses: Items on a settlement
statement the seller has already paid

Proration
• Expenses may be prorated using:

– 360-day year (12 months of 30 days each)
– 365-day year (counting the exact number of
days in each month, leap years accounted for)
• Often, local custom dictates which factor is
used
• Either way, the steps to calculate the
adjustment are similar

Calculating Proration
• Determine if the expense is accrued or prepaid

• Divide the expense by the appropriate period to
find a monthly (daily) rate
• Determine how many months (days) are affected
by the expense
• Multiply the monthly (daily) rate by the number of
affected months (days)
• Determine which party is credited and which is
debited

Exercise 3-1
Sam Able wants to buy a home, and it’s estimated

that an 80% conventional loan will have a mortgage
payment of $878. He has an automobile payment of
$212 a month with 14 installments remaining. He
earns $700 per week. His down payment and closing
costs are estimated at $18,400. Sam is selling a
home with equity of $14,000. He has a checking and
savings account with a local bank, and plans to draw
on that account to close the transaction. The
Verification of Deposit came back showing that
Sam’s savings account has an average monthly
balance of $1,000 and a current balance of $3,600.

Exercise 3-1
1. What is Sam’s housing expense ratio?

$700 weekly income x 52 weeks = $36,400 annual income
$36,400 annual income ÷ 12 months = $3,033.33 monthly income
$878 mortgage payment ÷ $3,033.33 monthly income = 0.29
(29% housing expense ratio)
2. What is Sam’s total debt service ratio?
$878 mtg payment + $212 auto pymt = $1,090 total debt service
$1,090 total debt service ÷ $3,033.33 monthly income = 0.36
(36% total debt service ratio)

Exercise 3-1
3. Will Sam have any problems closing this

transaction? Explain.
Yes, Mr. Able will have a few problems closing

this transaction. The equity in his home
($14,000) plus money in the bank ($3,600)
equals only $17,600, but his down payment plus
estimated closing costs = $18,400. He needs to
show two additional months of cash reserves,
and his housing expense ratio of 29% exceeds
guidelines.
Exercise 3-1
4. Do you see any problems with Sam’s

Verification of Deposit? Explain.
Yes, Mr. Able’s Verification of Deposit is a

problem because his current balance of
$3,600 is significantly higher than his average
balance of $1,000. He will need to have a good
explanation of where the funds came from so
the lender knows that he did not borrow the
down payment.
Exercise 3-2
Two months ago, Lisa Zorn was honorably

discharged from the Air Force, where she spent
four years training as an airplane mechanic. After
discharge, she moved to take an apprentice
mechanic job with a major airline company where
she earns $18/hour. Last month, her husband
Dave found a job with a local hospital as a nurse
making $625 per week. They just bought a new
car and pay $400 each month on that loan.

Exercise 3-2
1. What is the maximum housing

expense a lender would allow?
$18 hrly wage x 40 hrs in a wk x 52 wks = $37,440 annual income
$37,440 annual income ÷ 12 months = $3,120 Mrs. Zorn’s monthly income
$625 weekly income x 52 weeks = $32,500 annual income
$32,500 annual income ÷ 12 months = $2,708.33 Mr. Zorn’s monthly income
$3,120 + $2,708.33 = $5,828.33 total stable monthly income
$5,828.33 x 0.28 = $1,631.93

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 maximum housing expense 77
Exercise 3-2
2. What is the maximum total debt service a

lender would allow?
$5,828.33 x 0.36 = $2,098.20 maximum debt service allowed

$2,098.20 - $400 (car loan) = $1,698.20 max. housing
expenses allowed
Remember: Use the lower monthly payment

allowable, which is $1,631.93.

Exercise 3-2
3. Can the Zorns get approved for a loan even

though they’ve only been at their jobs a short
time? Explain.
Yes, although Lisa and Dave have only

been at their jobs a short time, Lisa had
special training in the Air Force, and Dave
is a vocational nurse, which also implies
special training.

Summary
1. The common areas of work for a mortgage
professional are loan originator, loan processor,
underwriter, and servicer. A loan originator takes
applications, pulls credit reports, orders appraisals,
and assembles documents for mortgage loans. A
loan processor works on the file assembled by the
originator, verifying the information in the file and
coordinating other aspects of the loan and closing.
The underwriter is responsible for reviewing the file
and arriving at a credit decision for the lender or
investor, based on the credit risk associated with a
particular loan. If there are conditions on the loan,
they must be satisfied prior to closing. A servicer
oversees the collection of mortgage payments and
pursues late payments on behalf of the mortgagee.
Summary
2. Borrowers can get pre-qualified or pre-

approved. Pre-qualification is when a real
estate agent or lender reviews a borrower’s
history to determine if they’re likely to get
approved for a loan, and for about how much.
Pre-qualification is not binding on the lender.
Pre-approval is when a lender determines that
potential borrowers can be financed for a
certain amount. Mortgage brokers and real
estate agents cannot give a buyer a pre-
approval, only a lender can.

Summary
3. The loan process consists of four steps: 1. Consulting with a
lender; 2. Completing the application; 3. Processing the
application; 4. Analyzing the borrower and the property.
Common fees include credit report, appraisal, title work,
inspections, etc. A lender may require an application fee
and/or require a deposit, or get costs from closing. The loan
application asks a number of personal and financial
questions, along with information about the property the
borrower wishes to purchase. Address and employment
information must go back two to three years. Income doesn’t
have to include alimony/child support. Those who are self-
employed may need personal and company tax returns and
financial statements. Assets and liabilities must all be
disclosed, including alimony and child support, if it’s an
obligation. Net worth is assets minus liabilities. Borrowers
must answer declarations truthfully (e.g., “Is it part of down
payment borrowed?” “Will the buyer use the home as the
primary residence?”).
Summary
4. The borrower and property are analyzed, and

all information is verified. The underwriting
process looks at: Capacity (ability to pay),
collateral (down payment, home value), credit
(good payment history), character (job stability,
reserves), and conditions (health of job market,
economy). Automated underwriting is a
computerized look at the first three Cs, and it
can recommend accepting the loan, or refer it to
a human for consideration.

Summary
5. Some elements of the mortgage process are

automated to reduce time and costs for lenders.
Fannie Mae’s automated underwriting system is
Desktop Underwriter® (DU®), which puts lenders
in direct contact with Fannie Mae, providing
streamlined document submission, underwriting,
and loan approval. (Freddie Mac’s system is called
Loan Prospector®.) The three most important
underwriting factors DU considers are equity in the
property, credit history, and liquid reserves. Equity
is the appraised value of a property, minus the loan
amount still owed.

Summary
6. Fannie Mae and Freddie Mac look at monthly

income stability, quality, and durability. Bonuses,
commission, part-time earnings, and overtime all
count if shown to be a consistent part of the
borrower’s income for the past few years. Lenders
will not usually count unemployment, welfare, and
temporary income. Credit history is a record of
debt repayment. Debt is any recurring money
obligation that cannot be cancelled. Credit scoring
is an objective means of evaluating credit. Lenders
will verify assets and may require financial
statements. A gift letter can show part of the down
payment/closing costs are a non-repayable gift
from relative.

Summary
7. Conforming loans sold on the secondary market

(e.g., Fannie Mae and Freddie Mac) require income
ratios of 28% for housing expense and 36% for
debt service. The housing expense ratio is the
relationship of the borrower’s total monthly housing
expense (Principal, Interest, Taxes, Insurance or
PITI) to income (stable monthly income), expressed
as a percentage. Total debt service ratio is the
relationship of the borrower’s total monthly debt
obligations (including housing and long-term debts
with more than ten payments remaining) to income
(stable monthly income), expressed as a
percentage. A borrower must qualify under both
ratios.

Summary
8. Closing is the transfer of ownership of real
estate from a seller to a buyer, per terms and
conditions in the sales contract or escrow
agreement. Seller receives value for property
(cash, mortgage, etc.) and buyer gets title.
Closings can be escrow (done by a
disinterested third party) or roundtable
(conducted with all parties present), and must
comply with RESPA.

Quiz
1. A senior citizen cannot be

discriminated against during the loan
application process due to
a. Equal Credit Opportunity Act.
b. Fair Housing Act.
c. Real Estate Settlement Procedures Act.
d. Regulation Z.

Quiz
2. A borrower must provide employment

information including
a. one year of prior employment.
b. two or three years of prior employment.
c. two previous employers, regardless of
length of employment.
d. three previous employers, regardless of
length of employment.

Quiz
3. If the borrower is self-employed, he or

she should provide
a. average monthly income amount earned over
the previous two years.
b. employment verification from the last
employer.
c. profit and loss statements for the previous six
years.
d. tax returns for the previous two or three years.

Quiz
4. A gift letter
a. can come from a borrower’s parent or
guardian only.
b. cannot be used for part of the down
payment.
c. must be signed by the donor.
d. must state when the gift is to be repaid.

Quiz
5. The escrow agent may be from a(n)

a. independent escrow company.
b. in-house escrow department.
c. title insurance company.
d. any of the above.

Quiz
6. Conforming loans follow guidelines of

a. ECOA.
b. Fannie Mae and Freddie Mac.
c. the FHA.
d. RESPA.

Quiz
7. When qualifying for a conventional

loan, stable monthly income can
include
a. alimony received (that a borrower chooses
to reveal).
b. Christmas bonuses received for the first
time last year.
c. erratic unemployment earnings.
d. income from other family members.

Quiz
8. What can be used to offset a marginal

or high total debt service ratio?
a. any co-mortgagor
b. average credit score
c. below-normal net worth
d. solid co-mortgagor

Quiz
9. The borrower’s age can

a. be a legitimate reason for turning down a
borrower under age 18.
b. be a legitimate reason for turning down a
borrower over age 65.
c. always be considered in the loan
underwriting process.
d. never be considered in the loan
underwriting process.

Quiz
10. A borrower has a stable monthly

income of $3,200 and recurring
monthly debts of $370. What is the
maximum mortgage amount (PITI) he
could get for a conforming loan?
a. $782
b. $896
c. $928
d. $1,152

The Mortgage Lending Process

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The Mortgage Lending Process

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Chapter 3

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 1

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 2

• Assets • Housing Expense

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 3

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 4

The Role of the

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 5

In addition to typical office duties and

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 6

• Originating: The process of making or

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 7

• Underwriting: The process of evaluating

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 8

People completed loan applications only

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 9

Getting a Buyer Approved—

• Growing trend toward pre-approving buyers

• Pre-approval is NOT the same as

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 10

• Process of pre-determining how much of a

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 11

• Process by which a lender determines if potential

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 12

Loan Approval Process

The real estate loan approval process can

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 13

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 14

Common Fees Associated

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 15

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 16

Data Needed for Application

Will vary by lender, but usually includes:

Continued on next slide 

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 17

Data Needed for Application

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 18

• Borrower typically completes during the

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 19

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 20

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 21

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 22

Analyzing the Borrower

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 23

Analyzing the Borrower

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 24

• Involves reviewing the information it contains

• Information from a loan applicant is fed into a

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 26

Desktop Underwriter® (DU®)and Loan

• DU® is Fannie Mae’s Automated

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 27

• Looks at 14 separate factors about the

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 29

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 30

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 32

Housing Expense Ratio

• A borrower's housing expense ratio is the

Total Housing Expense ÷ Income = Ratio

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 33

Housing Expense Ratio

• Conventional lenders consider a borrower’s

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 34

Total Debt Service Ratio