1
Chapter 12
Controlling Default Risk,
Borrower Qualification, and
Loan Underwriting
Some Basic Mortgage
Underwriting Questions
Who should you grant a loan to?
How do we determine the appropriate
interest rate for a loan?
What is the maximum dollar amount we
should lend on a given property?
If someone walks in your mortgage office
seeking a loan, what questions should you
ask?
Classification of Mortgage Loans
Conventional mortgages
A lender and borrower agree on a set of
terms for a real estate loan
Insured conventional mortgages
When the amount of the loan, relative to the
value of the property exceeds a certain
ratio (say 80%) then mortgage insurance
may be required
Conforming
Means the loans conform to the FNMA or
FHLMC standards
Classification of Mortgage Loans
(con’t)
FHA insured mortgages
Privately originated mortgages written to
guidelines promulgated by the FHA that are
insured by the FHA
VA guaranteed loans
Privately originated mortgages written to
guidelines promulgated by the VA that are
insured by the VA
VA loans are a benefit to vets
Two Sources to Evaluate
1. Evaluate the
Property
2. Evaluate the
borrower
Property Evaluation
Appraisal
Sales comparable (common for residential)
Present Value of Income generation
Cost to replace, less depreciation
Legal Description
Survey (boundary lines)
Inspections
Structural and needed repairs
Pests
Preliminary Title Report
2
Value of Property
The value of the property used in loan
underwriting is:
MIN(Sales Price, Appraised Value)
The down payment depends on the
property value
Example
You have signed a purchase agreement for
$125000 that you will fund with a 90% LTV
mortgage. (LTV=Loan to Value)
The house appraises for $122,500
The maximum amount you can borrow is 90% of
the value, i.e. 0.9*122,500 = 110,250
Your down payment must be:
125,000 – 110,250 = 14, 750
which is more than 10% of the purchase price.
You also need funds for closing costs
Example (continued)
If the house h