United States Residential Mortgage Market & Underwriting Guidelines

  Federal Housing Finance Agency News Releases

  Home Affordable Modification Program Guidelines (March 4, 2009)

  Homeowner Affordability and Stability Plan (February 18, 2009)

  CME Group S&P/Case-Shiller Home Price Indices Futures

  Federal Home Loan Bank of San Francisco, 11th District Monthly Weighted Average Cost of Funds Index (COFI )

  Fannie Mae's 2010 Single-Family Mortgage Loan Limits

  FHA Mortgage Limits

  Home Valuation Code of Conduct (HVCC)

  Fannie Mae Economics & Mortgage Market Analysis

  Freddie Mac Economic & Housing Research

Primary Mortgage Market

  S&P/Case-Shiller National Home Price Index

  RealtyTrac.com U.S. Foreclosure Market Report

  National Association of Realtors News Release

  U.S. Census Bureau and the Department of Housing and Urban Development Joint Release - New Residential Sales

  U.S. Census Bureau and the Department of Housing and Urban Development Joint Release - New Residential Construction

  Office of Federal Housing Finance Agency (FHFA) House Price Index (HPI)

  Lender Processing Services (LPS) Mortgage Monitor Report

  U.S. Census Bureau Home Ownership Rates

The Primary Mortage Market consists of residential and small multi-family (2 to 4-family buildings) property Sellers, Purchasers and the financial institutions that finance those purchases. In the United States, purchasers (and home owners who refinance a first mortgage) historically could typically finance 80% of the purchase price of primary residence with a loan maturity out to 30 years. This is substantially higher than other nations where home financing is around 65% to 75% of the purchase price. With the addition of Private Mortgage Insurance (PMI) the actual level of financing can be increase to 95% of the purchase value of a residence (mortgage insurance insures the amount of the loan that exceeds 75% of the property value up to the 95% level). However, by 2004 many institutions began to offer 100% financing, and sometimes even in excess of this amount in order to cover closing costs.

In the United States, mortgages are offered on detached single family residences, attached single family residences (townhouse), detached and attached owner-occupied multi-family residences (1 to 4-family), Coop unit, Condominium unit, attached and detached single family units in a Planned Unit Development (PUD / gated communities), attached and detached single family second / vacation properties and Manufactured Housing (trailer units and modular units).

The largest mortgage lenders in the United States include:

Wells Fargo Home Mortgage (includes former Wachovia Bank)

Bank of America Mortgage (includes former Countrywide Finance)

Chase Home Finance (includes former Washington Mutual Bank)

Citigroup

The largest Warehouse Lender had been Colonial BancGroup, which was seized by its regulator on August 14, 2009, the FDIC was appointed the Receiver and the entity was purchased by Branch Banking and Trust Company (BB&T).

Rent Vs. Buy

A Rent Vs. Buy comparison (or price to rent ratio) allows one determine when it is time to purchase a residence based on a solely economical basis. When housing prices increase and rental rates remain stable then the condition indicates that one should select leasing a property over purchasing a property. Divide the cost of the property by the annual rent. In the United States, the average is 16.5 (the price of the house is simlar to what it would cost to rent it for 16.5 years). All metropolitan areas in the United States have a different ratio so one must locate what the ratio has been over the past five years and then compare the current ratio to that historic ratio. When the price of the house is near or below the historical average then conditions favor purchasing the property.

Simple Rent vs. Buy Calculator

Do not enter commas. This simple model does not factor in mortgage rates and the deduction of mortgage interest and real estate taxes from income on the IRS 1040 tax filing. Conversely, it does not consider what alternative investment is available for the down payment if not used to purchase a property nor the annual expenses related to owning a property.

Mortgage Calculation

Mortgage payments are calculated based on an amortization table: with each monthly payment a portion of the principal amount of the mortage is paid. Conventional mortgages are usually granted with either a 15-year and 30-year maturity. The interest rate charged on the mortgage can be either a fixed-rate (the interest rate does not change over the life of the loan) or an adjustable rate mortgage (ARM), which means that the interest rate is adjusted every 1-, 3- or 5-years based on a margin added to a base index rate. There are also interest-only loans that do not amortize any of the principal balance during the first five or seven years of the loan. The advantage of interest-only loan is that the interest-only payment is lower than an amortizing loan payment and if the Mortgagee does not intend to reside in the property for longer than the interest-only payment period then they can save some money. However, after the initial interest-only period, the monthly mortage payments are structured to be amortization payments and the repayment of the outstanding principal is now compressed into the remaining years of the term of the mortgage (for instance, if the first 7 years were interest-only, the loan must now be repaid based on a 23-year amortization schedule, which will result in a higher payment than a 30-year amortization schedule).

Fixed-Rate Mortgage Calculator (enter principal as a whole number, no commas; enter interest rate as whole number and/or with a decimal, ex. 5, 5.75, 6.25):

In the United States, Purchasers can apply for a mortgage directly to a bank or can apply through a mortgage Broker or to a mortgage Banker. A mortgage Broker will help the Purchaser, for a fee, to fill out the application, obtain some of the necessary documentation and then shop the application around to various banks to obtain a financing commitment from a bank. A mortgage Banker may do much of the same, however they may use a source of funding to close the loan and then sell the closed loan to a bank program or to one of the secondary market programs (FNMA, FHLMC or GNMA).

A Mortgage Commitment is firm offer from a bank to provide a mortgage, however it usually is subject to a satisfactory appraiisal of the subject property and the verification of all the information on the mortgage application. The stated interest rate on the Commitment is not always the real rate of interest on the financing as there may be "points" charged for the mortgage. A "point" is usually 1.00% (100 basis points) of the amount of the loan. Points are charged by, and paid to, the Lender in order to increase the actual amount of interest earned by the bank. Thus, the points must also be calculated into the cost of the financing. The Federal Reserve requires that the lending instituion issue a Regulation Z Disclosure Form to the Borrower, which indicates the APR of the loan and reflects all of the incurred costs in taking the loan.

APR Calculator (all numbers entered below can be changed):

Residential Property Sellers & Purchasers and Property Values

The dynamics behind purchasing and selling a residential property is straight out of an economics text book case study and/or reality television. In order to have a sales agreement both sides of the transaction have to believe that they are selling / purchasing at what the market will bear for the specific property. However, both sides are motivated by different factors.

What motivates the Seller of a property?

Desire to obtain top dollar for the property.

Belief that a better offer may still be forthcoming from another potential bidder / purchaser.

Belief that the market is going to "change" (prices for the local or regional residential property market will generally be increasing or decreasing in the future).

Length of time the property has been listed on the market and/or previous contract with purchaser fell through.

Need to sell to eliminate the burden of the mortgage payment (if they themselves have completed the purchase of a new residence).

What motivates the Purchaser of a property?

Belief that they are paying a fair price for a property they desire to reside in (usually reinforced with the appraised value conducted by the bank / mortgage provider).

Belief that a property has been renovated / upgraded or conversely, that the property requires renovation / upgrading.

Belief that a specific neighborhood compares favorably / unfavorably with a contiguous or nearby neighborhood.

Belief that the market is going to "change" (prices for the local or regional residential property market will generally be increasing or decreasing in the future).

Length of time one has been searching for a property and/or have been outbid on one or more properties.

Need to locate a property (related to a move / relocation or growing family).

A property is only worth what it can be sold for.

Residential property prices are effected by:

Inflation: in the long-term, from 10 to 20 years, even the value of less desirable properties (located on a corner lot, located across from a highway) and poorly maintained properties still rise in value too.

Economic cycle: during a recession, with the threat of possibly losing employment, potential home buyers postpone a purchase. During a time of improving job and income opportunities home prices start increasing as first time purchasers enter the market or existing home owners trade up to a larger / more desirable property.

Interest rates: as nominal rates decline the cost of financing a purchase declines correspondingly, however without some level of inflationary increase the the real cost of interest payments relative to income is actually not low over the long-term.

Available housing stock: prices are always higher in urban areas due to less available new land and the proximity to jobs and services, however this does not mean that prices will continue to rise annually or indefinitely.

Demographics: older persons retiring and moving to another location increases available supply; birth-rates, family formation and immigration increases potential purchasers. Similarly, in the United States there is a continued movement of residents from the northeast and north central regions to the southeast and western regions of the country (for job opportunity and warmer weather). For instance, during the the beginning of 2008, Michigan continues to see a decline in population while South Carolina continues to see an increase in population.

Ratio of house prices to average earnings: if prices increase too far ahead of ater-tax income then potential purchasers are unable to afford the cost of the mortgage along with the real estate tax expense, escrows, insurance and utilities.

Performance of alternative investments: if there is a perception that equities and bonds are not favorable long-term investments then investors purchase larger primary residential properties and investment residential properties.

Storage of value: there is a belief that residential properties do not decline too far or too long in value, which is not accurate after the experience of the property market in Japan and what recently developed in the United States.

In the United States over the next 18 to 24 months (2008 through 2010) a substantial amount of foreclosed properties will come on the market. Homeowners living near foreclosed properties will see a corresponding decline in property values (in addition, the lack of maintenance on foreclosed homes may cause a further decline in the property value and the overall appearance of the surrounding areas).

Real Estate Agents / Brokers

In the United States, real estate sales agents are licensed within the respective state that they operate in after attending a certain minimum amout of classes of instruction from an accredited school. The course of instruction includes the relevant laws and code of ethics. Once licensed after sucessfully completing a state administered examination, real estate agents are employed as independent contractors by real estate brokerages (companies that list real property for sale and will also represent the Seller or the Buyer, but not both simultaneously, in the transaction). The real estate agent usually is not compensated by the brokerage. Rather, the agent earns a commission on a completed, successful property sale and then must share part of the commission with the brokerage.

Additionally in the United States, the availability of the World Wide Web has brought a great deal of efficiency to the home selling / purchasing transaction. On-line, discount brokerages offer Sellers the opportunity to list their properties and reach a very large, widespread audience. Conversely, a Buyer can thoroughly research a property prior to physically visiting the location.

Realogy owns / franchises the ERA Real Estate, Centrury 21 Real Estate, Sotheby’s International Realty and the Coldwell Banker real estate broker operations.

Condominium

A condominium is a building or development with individually owned apartments or houses. The owner has his/her own deed, and very likely, his/her own mortgage on the unit. The owner also holds a common or joint ownership (common interest) in all common areas and facilities that serve the project such as the land, roofs, hallways, entrance elevators, etc.

Cooperative

A cooperative is a building or development that is owned by its shareholders and is organized as a corporation. It may also be called a stock cooperative or co-op. Ownership of shares in the corporation entitles each shareholder to hold the lease for one or more apartments (houses). If the person or persons owning the cooperative shares also occupies the unit, the cooperative unit is considered owner-occupied.

In New York City there are Mitchell-Lama Cooperatives. These units were constructed under the New York State or New York City Mitchell-Lama cooperative program, which is designed to enable moderate and middle-income families to secure affordable housing through limited equity cooperative ownership.

When a mortage is secured for the purpose of purchasing a cooperative unit, the purchaser does not pay a mortgage recording tax because the purchaser is essentially buying shares in a corporation that owns the building. The purchaser is pledging the shares in the corporation as collateral for the loan not a parcel of real property.

Loan Products

Alt-A Mortgages

Although the term “Alt-A” applies technically only to securities, not mortgages, it has become common practice to refer to near-prime or non-traditional mortgages as Alt-A loans. Loans marketed in Alt-A securities are typically higher-balance loans made to borrowers who might have past credit problems—but not severe enough to drop them into subprime category, or who, for some reason (such as a desire not to document income) chose not to obtain a prime mortgage. In addition, many loans with nontraditional amortization schedules such as interest only or option adjustable rate mortgages are sold into securities marked as Alt-A.

No Income Verification (NIV)

No Income Verification (NIV) means exactly that: the applicant indicates on the mortgage application that they are employed (either with a company or self-employed) but the stated income is not verified with the employer (either pay stubs or a formal VOE / Verification of Employment) or an Accountant / CPA. This product initially was offered in the early 1990s and was offered at a higher interest rate and a lower LTV than full income verification loans.

This product also led to the adaption of the No Asset variable, which similarly meant that the assets stated on the mortgage application were not verified by either submitted bank statements or a formal VOD / Verification of Deposit.

By the mid-2000s, this type of loan product had evolved into the NINJA loan: No Income verification, No Job verification, No Asset verification. This type of product was also known as a Signer's Loan (the applicant was essentially agreeing to make the specified payments).

Interest Only Mortgage

In an interest-only mortgage there is no amortization of the principal, just a straight interest charge on the outstanding balance (annually). While this type of mortgage will allow one to purchase a higher priced property than one could afford with a monthly conventional interest and principal, there is a drawback which is that the purchaser will never build up any additional equity in the property other than market appreciation in excess of the original purchase price. Conversely, if property values were to decline substantially then the purchaser could actually be making interest payments on a loan that exceeds the market value of the property.

Flexible Payment Mortgage

A Flexible Payment mortgage usually at least two monthly payment options, one of which is the lowest possible minimum payment. However, these types of mortgages can result in a situation known as negative amortization.

Piggyback Mortgage

A "piggyback" mortgage is a combination of a conventional 80% first mortgage and a home equity line of credit. This type of arrangement is used by purchasers to avoid the requirement of private mortgage insurance (required when a mortgage loand to value exceeds 80% of the purchase price/appraised value of the property) or to avoid a higher priced jumbo mortgage (in excess of the FNMA/FHLMC maximum loan amount). Thus, the financial institution provides 80% of the acquisition financing, the purchaser provides 10% and a second mortgage is secured for the remaining 10%. Also known as a Split Loan, Structured Mortgage or 80-10-10 Loan.

Purchase and Renovate Mortgage

A Purchase and Renovate mortgage allows a buyer to purchase a property that requires some work at a lower price and include the additional funds necessary to cover the cost of renovating the property (and increase the value of the property) in the mortgage. The ionterest rate charged on this type of mortgage is usually higher than a conventional mortgage.

Reverse Mortgage (Home Equity Conversion Mortgage / HECM)

The U.S. primary mortgage market is seeing an increase in the amount of Reverse Mortgages (Home Equity Conversion Mortgage / HECM) being underwritten. A Reverse Mortgage is a product in which the borrower and real estate are not analyzed by conventional industry practices. Rather, in addition to an application the only other bank requirement is an acceptable appraisal. Once approved, the Lender begins making payments to the borrower (home owner) based on the amount of the equity in the property. The Lender is collateralized by a security interest in the equity of the property. The product is well-suited for retired senior citizens who can generate a monthly cash flow from their primary residence.

The only qualifications for these types of loans are that:

There are 2 types of reverse mortgages: government insured and private (bank). The FHA is the government agency the insures theses loans and refers to these products as Home Equity Conversion Mortgages and the HUD's Federal Housing Administration sets a limit / cap on the maximum on a home's equity value that can qualify for a reverse mortgage at $417,000. If the value of the property declines, one can never owe more than the value of the property at the date of sale in the future (the shortfall is covered under the U.S. government insured program; Private banks assume the risk for any shortfall in value in the uninsured HEMC). With the private (bank) reverse mortgage one may be able to get more than the FHA / HUD limit but the costs are higher (bank LTVs range from 50% to 70%). An HEMC has a non-recourse limit, which means that the lender, when seeking repayment of the loan, generally does not have legal recourse to anything other than the value of the property at sale and cannot seek repayment from the heirs of the borrower. However, the HEMC usually includes an acceleration clause in the event that either the borrower's or property's status changes such as obtaining additional debt against the property or renting it to a third party.

Those owners who qualify and accept a government insured loan must also attend a credit counseling class.

The interest rate on the HECM loan can be either a fixed rate or an adjustable interest rate. The accrued interest is added to the oustanding principal amount due on a daily basis. Thus, it is the original or disbursed amount of the prinicipal plus the accrued interest that is due at the time of sale / payoff, which is substantially more than just the amount of the prinicipal.

The financial institution must have a first priority mortgage lien against the property thus any existing first mortage must be paid off and satisfied by the proceeds of the HECM, or the existing loan / lien holder must agree to a subordinate / second lien position to the HEMC.

The closing costs related to the financial institution extending the HECM can be paid for by financing them and having them paid from the proceeds of the loan (the costs are added to your loan balance, which increases the amount of the principal balance).

The HECM loan / pyaments can be received several ways:

Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

Term - equal monthly payments for a fixed period of months selected.

Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.

Modified Tenure - combination of line of credit with monthly payments for as long as you remain in the home.

Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

The repayment of the loan is from either the sale of the property by the resident or by the heirs of the owner when it is sold as part of the estate settlement. The borrower is not required to repay the loan as long as one of the borrowers continues to live in the house as their primary residence and keeps the taxes and insurance current.

A financial institution providing the HECM may not cross sell products (i.e. the proceeds of the HECM is then used to purchase an annuity from the financial institution).

The cash that the borrower receives from the reverse mortgage is tax free, nor does it reduce that amount that borrower may already receive under Social Security or Medicare. The advantage to the Lender is that they charge higher upfront origination fees for this type of product compared to a conventional purchase or refinance mortgage (selling the property is less expensive than the HECM loan). Similarly, if one plans on selling and moving within a few years then the HECM upfront fees are expensive.

Energy Efficiency Mortgage (EEM)

Fannie Mae offers the EEM product on residential properties that meet certain guidelines. If the property qualifies then the property's estimated annual energy savings (to a maximum of 5% of a new construction and to a maximum of 15% of a retrofit) are added to the applicant's / purchaser's gross income, which may allow them to qualify for a higher mortgage amount. Energy Efficient Mortgages are also insurable by Federal Housing Administration (FHA) and the Veteran’s Administration (VA). All homes that meet the ENERGY STAR specifications will qualify for an Energy Efficient Mortgage, which can include:

Similarly, there are also federal and state government financial incentives offered to home owners to install energy efficient products and materials. For instance, under the terms of the Energy Policy Act of 2005, as of January 1, 2006, homeowners who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in the home can receive a tax credit of up to $500. The act also provides a credit equal to 30% of qualifying expenditures for purchase for qualified photovoltaic property and for solar water heating property used exclusively for purposes other than heating swimming pools and hot tubs. The credit shall not exceed $2000. Improvements must be installed in or on the taxpayer’s principal residence in the United States. Tax credits for improvements to new homes were extended until December 31, 2008, however tax credits for improvements to existing homes ended on December 31, 2007.

Highlights of the Energy Policy Act of 2005 for Individuals (IRS)   www.irs.gov/newsroom/article/0,,id=153397,00.html
Federal Tax Credits for Energy Efficiency (Energy Star)   www.energystar.gov/index.cfm?c=products.pr_tax_credits

Unfortunately, the consumer will find that the cost of "green" (environmental sensitive) products is higher, approximately 5% to 20% premium, than the average price for standard construction / home fixture products. Secondly, earning back the premium in the form of comparatively lower utility costs can take years, even with the government agency rebates and incentives.

Federal Housing Administration (FHA)

The U.S. Congress created the Federal Housing Administration (FHA) in 1934 and the FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965.

The FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. The FHA insures mortgages on single family, multifamily, manufactured homes and hospitals. FHA mortgage insurance protects lenders against loss if the homeowner defaults on their mortgage loan. Thus, loans must meet certain requirements established by FHA to qualify for insurance.

FHA loans can be used for both purchasing a new home or the for the refinancing of an existing home. The FHA also has a loan for rehabilitating and repairing single-family properties called the SF Rehabilitation Loan program (203k). The FHA offers both fixed-rate mortgage and adjustable rate mortgage (ARM) terms.

FHA loans have a low down payment (3.50%) and the money can come from a family member, employer or charitable organization as a gift.

Only lenders approved by FHA can take an application, process and close an FHA loan. Only DE (direct endorsement) Certified Underwriters are allowed to analyze FHA loan applications, which means that the analyst is an FHA-registered underwriter who is authorized to review and certify mortgage origination documents for compliance with the requirements of the FHA’s mortgage insurance program. When the underwriter is assigned an ID by the FHA, the ID number remains associated with the individual throughout his/her tenure as a DE Underwriter, no matter what lender is his/her employer. The underwriter name, address, and employment information may change but not the underwriter's ID number. During the first half of 2008 it would appear that DE Certified underwriters were in demand as the FHA was really one of the only active loan guarantors left for low to moderate income borrowers. However, the actual DE Certification is nothing more than being listed in the FHA Underwriter Registry on the FHA Connection website and becoming familiar with the FHA manual.

In response to the sub-prime mortgage market problems in 2007, FHASecure is a program that was instituted in 2007 and expands the FHA's ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payments.

The FHA became a major loan insurer during 2009, insuring approximately 30% of new mortgages issued in the United States during the year. The FHA incurred problems in the agency's portfolio of seller-financed down payment loan program during 2009. This portion of the FHA's portfolio, approximately 35% of the FHA's total portfolio, has encountered substantial delinquency and foreclosure rates in recent years even though they are full document, fixed-rate loans. These types of loans include the feature where downpayments are financed by sellers on the behalf of purchasers by channeling the downpayment loan through a nonprofit organization. Without the downpayment assistance the purchaser would never be able to afford the property and thus may never have been capable of also being able to service the FHA-insured loan. The substantial number of abover average default rates and foreclosures in these type of FHA-insured loans is the source of the potential deficit.

On January 20, 2010, the FHA publicly indicated that would implement a set of policy changes to strengthen the FHA’s capital reserves:

Increase the mortgage insurance premium (MIP) by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.

New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.

Allowable seller concessions will be reduced from 6.0% to 3.0%.

Enhance monitoring of lender performance and compliance with FHA guidelines and standards and HUD is pursuing legislative authority to increase enforcement on FHA lenders.

Press Release HUDNo.10-016

Rural Development Agency (U.S. Department of Agriculture)

Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. Applicants for loans may have an income of up to 115% of the median income for the area. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must have reasonable credit histories. Loan terms are for 30 years.

Approved lenders under the Single Family Housing Guaranteed Loan program include:

• Any State housing agency;
• Lenders approved by:
  • HUD for submission of applications for Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae mortgage backed securities;
  • the U.S. Veterans Administration as a qualified mortgagee;
  • Fannie Mae for participation in family mortgage loans;
  • Freddie Mac for participation in family mortgage loans;
• Any FCS (Farm Credit System) institution with direct lending authority;
• Any lender participating in other USDA Rural Development and/or Farm Service Agency guaranteed loan programs.

  Single Family Housing Guaranteed Loan Income Limits (by state)

State Housing Finance Agencies

Every state in the United States has a housing finance agency that provides residential property financing to state residents (primarily low to moderate income home purachsers / owners) or guarantee loans made state residents. These agencies often also provide financing to developers of affordable housing for very low-, low- and moderate-income households and seniors. (In the absence of a specific housing finance agency, the function is usually carried out by a department of housing or department, departmet of community affairs or a development corporation). Loans originated by these agencies are usually sold to investors who can take advantage of the tax-exempt nature of the loan (or pool of securitized loans). However, during 2009 many states have had to substantially reduce their lending operations due to unavailable state funding and / or the absence of investors (directly in the securities or the purchasers of state-issued bonds). The inability to attract financing or investors resulted in interest rates increasing to a level where the financing offered to low- to moderate-income borrowers was no longer viable.

Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is only used in the instance of purchasing a new residential property; it is not used when a property is being refinanced. If the purchaser / borrower cannot put down the traditional 20% down payment then a PMI company will guarantee a portion of the additional amount of the purchase price being financed over the traditional 80% maximum amount. PMI helps to make the property more affordable because due to the high cost of housing in many U.S. markets it is hard for home buyers, especially first-time buyers, to come up with the full 20% down payment (on a $350,000 residential property the potential purchaser would have to come up with a down payment of $70,000 under traditional guidelines; PMI would allow the purchaser to only have to come up with, traditionally, 10% or $35,000, and the PMI company would fund the additional 10%; recent industry practices allowed purchasers put down as little as 3% to 5%). Conversely, the PMI policy protects the lender in the event that the borrower defaults and the full amount of the loan can not be recovered from a sale of the real estate.

Some of the most active PMI companies in the U.S. include:

AIG United Guaranty

Genworth Mortgage Insurance Corp.

MGIC Investment Corp.

PMI Group, Inc.

Radian Group, Inc.

Republic Mortgage Insurance Company (Old Republic International Corp.)

The approval of a PMI policy (endorsed to the lender) provides the borrower with the additional financing required to complete the purchase of the property. There are several options of payment for the PMI coverage:

Once a level of equity has been built up in the property and the borrower can demonstrate that the mortgage amount equals 80% of the property's value by submitting a current appraisal that is acceptable to the lender, the borrower may request PMI cancellation (if market values on local properties are rising the borrower could even refinance with another lender and the necessity for PMI would be eliminated). Under the terms of the The Homeowner's Protection Act (HPA) of 1998, PMI must automatically be cancelled by the lender once the borrower has paid down their mortgage to 78% of the value if they are current on the loan.

Under the terms of the Mortgage Forgiveness Debt Relief Act of 2007, Congress extended the tax deduction for private mortgage insurance premium to December 31, 2010 but one must have closed on the mortgage on or after January 1, 2007. A family's adjusted gross income must be $100,000 or less to take the full deduction, and families with an adjusted gross income over $100,000 but up to $109,000 may receive a partial federal income tax deduction (Section 6050H of the Internal Revenue Code of 1986). See 2007 Instructions for Schedules A & B (Form 1040):   http://www.irs.gov/pub/irs-pdf/i1040sa.pdf

Secondary Mortgage Market

Please also see   Mortgage-Backed Securities (MBS) Section

The residential property and mortgage market in the United States is the largest and most well developed in the world, particularly due to the liquidity provided by the government-sponsored enterprises such as the Federal Home Loan Bank System (FHLB), Federal National Mortgage Association (FNMA, or Fannie Mae), Federal Home Loan Mortgage Corp. (FHLMC or Freddie Mac) and the Government National Mortgage Association (GNMA or Ginnie Mae). These entities bring additional capital into the home loan market by purchasing mortgages originated by various types of financial institutions, which allows these institutions to get the loans off their balance sheets (especially long-term fixed rate mortgages which cannot be funded by short-term bank deposits) and have new capital to lend to new borrowers and earn fees on the origination of the loans.

GNMA, FNMA and FHLMC purchase owner-occupied, primary, single-family residential and multi-family mortgages for its own investment portfolio or for pooling them into mortgage-backed securities (which they guarantee).

The U.S. Department of Housing and Urban Development (HUD) provides support and financing for local public housing agencies to provide multi-family buildings for low-income residents that maintain rent levels that lower-income families can afford. HUD also has separate low-income, primary residential programs for Native American locations.

GNMA is actually an agency within HUD that guarantees the investment quality of mortgage-backed securities made by approved lending institutions. Ginnie Mae ensures that adequate funds are available for mortgage loans that are insured or guaranteed by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).

FNMA was originally a private, shareholder corporation (FNMA was actually listed on the NYSE and is part of the S&P 500 composite), however it as not a direct lender and operated under a congressional charter to work with approved financial institutions, as indicated above, by purchasing closed, conventional mortgage loans that meet its guidelines. In addition, FNMA received no government funding nor was there an explicit government backing. However, FNMA was publicly acknowledged to be a "Government-Sponsored Enterprise" (GSE), which has always been interpreted to mean that there is an "implicit" guarantee that the U.S. Federal would make sure that the FNMA would always be in a position to complete its obligations. On September 7, 2008,Fannie Mae / FNMA was placed into conservatorship by the U.S. Treasury Department. FNMA will be supervised by their regulator the Federal Housing Finance Agency (FHFA) / Office of Federal Housing Enterprise Oversight (OFHEO). In addition to purchasing mortgages from primary lenders, Fannie Mae will purchase mortgages insured by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the Rural Housing Service of the U.S. Department of Agriculture (RHS).

FHLMC was also a private, shareholder corporation listed on the NYSE, and operated under a congressional charter to work with approved financial institutions, as indicated above, by purchasing closed, convential mortgage loans that meet its guidelines. Again, contrary to public perception FHLMC received no government funding nor was there an explicit government backing. Similar to the FNMA, FHLMC is also a GSE and enjoyed the same perception of an implicit U.S. Federal government guarantee. On September 7, 2008, Freddie Mac (FHLMC) was placed into conservatorship by the U.S. Treasury Department. The entity will be supervised by their regulator the Federal Housing Finance Agency (FHFA) / Office of Federal Housing Enterprise Oversight (OFHEO).

In addition to GNMA, FNMA and the FHLMC in the United States, there is also the Federal Home Loan Bank (FHLB) System. Although the FHLB system was chartered by an act of Congress in 1932 as a Government Sponsored Enterprise (GSE), it is private system with each district bank capitalized by its shareholders, which are the financial institutions (community banks, savings & loan, commercial banks, credit unions and insurance companies) located within each respective district. There are 12 district banks within the FHLB system, located in Atlanta, Boston, Chicago, Cincinnati (Ohio), Dallas, Des Moines (Iowa), Indianapolis, New York, Pittsburgh, San Francisco, Seattle (Washington) and Topeka (Kansas). The function of the FHLB is to provide support, correspondent banking services and credit to local financial institutions engaged in primary, single-family residential mortgage lending. The FHLB system acts as an alternative to the existing secondary market for originated mortgages by purchasing 15- and 30-year conventional and FHA fixed-rate loans, within the conforming loan limits.

A FHLB district bank will make an advance to a member financial institution at a variable or fixed rate of interest with a short-, medium- or long-term maturity.

Mortgage Partnership Finance (MPF) Program was developed by the Federal Home Loan Bank of Chicago and it is a single family mortgage purchase program (15- and 30-year conventional and FHA fixed-rate loans).

The loans originated and closed by banks and financial institutions are known as the primary mortgage market. When thousands of primary loans are purchased by GNMA, FNMA and FHLMC and packaged (securitized) into a pool of asset (security), then this is known as the secondary mortgage market. Over time, the performance of mortgages were anlyzed and it was found that U.S. home owners had certain predictable payment and duration of ownership characteristics. Thus, holding a portfolio of mortgages was like holding a debt security that had a predictable yield, maturity and default rate. By packaging enough mortgages into a pool or group, one esentailly had a single security, again with an aggregate interest rate and maturity. It is these packaged Mortgage Backed Securities (MBS) or Collateralized Mortgage Obligations (CMO) that are sold to investors (pension funds, financial institutions, mututal funds, investment banks and insurance companies) and resold / traded in very active secondary market. The investor receives an undivided interest in the loan pool that makes up the security and a pro rata share of interest and principal amortization as the home owners make their scheduled monthly payments (Pass-through Certificate). These types of securities perform quite well, can be structured in several ways (for instance just interest payments can be stripped out), and have an underlying asset (home loans) that allow similar assets to be swapped into and out of existing securitization pools.

By issuing these securities, FNMA, FHLMC and GNMA obtain new funds which allows them to continue the process of providing capital to the primary mortgage market. All three organizations also hold portfolios of mortgages. The secondary mortgage markest is one of the largest financial credit markets in the world and FNMA and FHLMC were 2 of the largest financial institutions in the world. Both institutions were also very active in the derivatives market, primarily interest rate products that they use to hedge the exposure of their portfolio and loan securitization pipeline.

The recording of mortgage assignments was streamlined with the introduction of the MERS (Mortgage Electronic Registration Systems) in 1997. In order to eliminate the actual physical recording of an assignment printed on paper with the respective county where the property is located, MERS acts as nominee (did not actually own the mortgage it registered but was listed as a nominee for the owner of the Note or the original holder of the mortgage) in the county land records for the lender and servicer. Any loan registered on the MERS System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) was approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major rating agencies. MERS is compensated for its services through fees charged to participating MERS members. Tens of millions of loans in the United States have been registered with the system.

Residental Mortgage Underwriting Guidelines (Conventional / Conforming Loan)

The standard mortgage application is the Uniform Residential Loan Application / FNMA Form 1003.
www.efanniemae.com/sf/formsdocs/forms/1003.jsp
www.efanniemae.com/sf/formsdocs/forms/1003s.jsp   (FNMA Form 1003 En Español)

The purpose of underwriting (credit analysis) a mortgage is to determine the ability and willingness of the potential Borrower to successfully make their monthly payments on time and to establish that the real estate property offered as security is of sufficient value to collateralize the loan. This is accomplished by reviewing the Borrower submitted mortgage application, reviewing the credit history of the applicant through an industry-supplied credit report, accurately computing the loan amortization payment and other primary residence-related expenses (real estate taxes, insurance, etc.), accurately identifying and computing other obligations of the applicant(s), accurately verifying the income and assets of the potential Borrower and review the appraisal of the property (collateral) in order to determine that the applicant(s) can successfully service the mortgage payment without going into default or in the event of default there will be sufficient equity in the collateralized real estate to satisfy the mortgage and any expenses related to paying off the mortgage.

FANNIE MAE (FNMA / Federal National Mortgage Association) and FREDDIE MAC (FHLMC / Federal Home Loan Mortgage Corp.) establishes RESIDENTIAL PROPERTY LOAN LIMITS ("conforming" loans) with an annual survey conducted nationwide every October (conforming loan limits are increased correspondingly based on the percentage increase in average home prices). Beginning in 2008, there are two sets of loan limits - "General" and "High-Cost". The "High-Cost" areas are determined by Fannie Mae's regulator, the Federal Housing Finance Agency (FHFA). The Economic Stimulus Act of 2008 temporarily increased the loan limits in high-cost areas. Then, the Housing and Economic Recovery Act of 2008 permanently changed Fannie Mae's charter to expand the definition of a "conforming loan" to include "high-cost" areas on loans originated on or after January 1, 2009. Pursuant to the American Recovery and Reinvestment Act of 2009, beginning January 1, 2009 through December 31, 2009 Fannie Mae could purchase loans up to $729,750 for a one-unit dwelling in designated high-cost areas. In October 2009, Congress extended the $729,750 limit through December 31, 2010.

First Mortgages (General):

One-family:   $417,000

Two-family:   $533,850

Three-family:   $645,300

Four-family:   $801,950

 

First Mortgages (High Cost):

One-family:   $729,750

Two-family:   $934,200

Three-family:   $1,129,250

Four-family:   $1,403,400

 

The maximum "General" and "High-Cost" limits in Alaska, Hawaii, U.S. Virgin Islands and Guam are 50% higher than the "General" and "High-Cost" limits for the rest of the U.S.

 

First Mortgages (General / Alaska, Guam, Hawaii, and the U.S. Virgin Islands):

One-family:   $625,500

Two-family:   $800,775

Three-family:   $967,950

Four-family:   $1,202,925

 

First Mortgages (High Cost / Alaska, Guam, Hawaii, and the U.S. Virgin Islands):

One-family:   $938,250

Two-family:   $1,201,150

Three-family:   $1,451,925

Four-family:   $1,804,375

 

Second Mortgage:

$208,500 (1st and 2nd combined not to exceed $417,000) on a single family; $312,750 in Alaska, Hawaii, Guam and the USVI single family (1st and 2nd combined not to exceed $625,500).
$266,925 on a two-family / $400,387 on a two-family in Alaska, Hawaii, Guam and the USVI.
$322,650 on a three-family / $483,975 on a three-family in Alaska, Hawaii, Guam and the USVI.
$400,975 on a four-family / $601,462 on a four-family in Alaska, Hawaii, Guam and the USVI.

Historical GSE Loan Limits   www.fanniemae.com/aboutfm/pdf/historicalloanlimits.pdf   (.pdf format)

Loan amounts in excess of the Fannie Mae limits are known as Jumbo Mortgages. A jumbo mortgage usually requires a larger downpayment than conforming mortgage loan requirements and usually have a higher interest rate than that offered on conforming loans. As part of the underwriting guidelines for a jumbo mortgage, the borrower may also have a certain amount of liquid assets / investments to cover approximately 50% of the borrower's annual income.

The maximum single-family mortgage amount that the Department of Housing and Urban Development will insure in 2005 through the Federal Housing Administration is $172,632 (low-cost areas, compared to $160,176 in 2004) and $312,895 (high cost areas, compared to $290,319 in 2004).

DOWN PAYMENT

Conventional mortgages usually require a 20% downpayment (equity investment) by the Borrower. Of this amount, gift funds (from a close family member and no repayment required) may equal up to 5%. With mortgage insurance, the downpayment can drop to only 10%. FHA loans require a downpayment of only 3%. In 2003, the American Dream Downpayment Act provided grants to low-income home buyers that essentially resulted in no downpayment from the Borrower.

RATIO GUIDELINES (industry standards for conventional / conforming loan) for matching the residential obligation and the total obligation against the Applicant(s) income:

Monthly residential obligation: 28% (PITI / Principal, Interest, Taxes and Insurance) (35% max. for occupant w/co-borr.)

Mortgage P&I (Fixed Term or Adjustable, if One-Year Adj., increase by 1%)

Real Estate Tax

Home Owner's Insurance premium

Flood Insurance (if required)

Mortgage Insurance (if financing is in excess of 80% LTV)

Condominium Association Dues (if Condominium property)

Cooperative Corp. Fee (if Cooperative property)

HELOC (1% of total balance)

 

Monthly combined obligations: 36% (43% max. for occupant w/co-borr.)

Monthly Residential

Revolving Charge Cards

Fixed Term Loan Student Loan (do not use if less than mos.)

Fixed Term Auto Loan (do not use if less than 6 mos.)

Fixed Term Boat Loan (do not use if less than 6 mos.)

Alimony and/or Child Support (if extends past 10 mos.)

Real estate owned monthly obligation (s)

Judgments

Indirect (co-signer/co-maker on a loan)

DOCUMENTATION MAY NOT EXCEED 120 DAYS PRIOR TO THE DATE THE NOTE IS SIGNED, UNLESS IT IS NEW CONSTRUCTION THEN 180 DAYS IS ACCEPTABLE.

BORROWER (S)

What is the relationship between Borrower, Co-Borrower and Co-Signer?

Citizenship?

Check SS# is consistent through file.

Intention to occupy the Property.

Check main addresses in the file that they match submitted correspondence (post office box not acceptable).

INCOME SOURCES:

VOE (Verification of Employment)   (Annual divide by 12 mos.) (FNMA Form 1005)

Confirm business address

Determine business address not on any other documentation in file

 

Verbal verification: speak directly with Personnel Department

 

Did the Borrower recently change jobs and increased their income substantially?

 

Previous year's W2

Look at FICA if it is low and Salary is high then it has been altered.

 

Pay-stubs (Consecutive for 1 mos / prior 2 pay-stubs)

 

Rental property income (Check lease duration, use 75% of total monthly income)

 

Bonus and Overtime in excess of 25% of regular income must be supported by past two years tax returns.

 

Alimony (Check children's ages; Verify by Judgment Decree - 3 years )cancelled checks and bank statement deposits.

 

Social Security (Evaluate at 125%)

 

Automobile allowance in excess of 2 years receipt

 

Boarder (family member)

 

Co-Borrower must reside in property if LTV exceeds 90%

IRS Form 4506-T Request for Transcript of Tax Return

Every borrower is required to sign a blank copy of the IRS Form 4506-T. This allows the financial institution the opportunity to request a copy of an applicant's federal tax return in order to verify the income stated on the application (the IRS permits the transcript to be sent to a third party on line 5 of the form). The process requires approximately 10 business days. Please Note: if an exact complete copy of all IRS forms, including Form W-2, filed as part of an annual 1040 filing are required then file form 4506; There is no charge by the IRS for transcripts received using Form 4506-T; There is a charge for exact copies received using Form 4506).

IRS Form 4506-T   www.irs.gov/individuals/article/0,,id=110571,00.html

SELF-EMPLOYED BORROWER

Income:

2 years complete Federal 1040s

Schedule C (Self-Proprietorship)

 

If 1040 is older than 3 months add YTD Profit & Loss

 

Form 1120S is used by borrowers so that the net income of the business will be taxed at the individual's personal tax rate and not at a corporate rate, nor will the income be double taxed (net income of the business and then again as a disbursement to the owner / shareholder).

 

K1 Statements represent the interest that a Limited Partner has in a Partnership. The limited Partner receives a pass-through percentage share of the total Income or Deductions. The deductions may be non-cash deductions from passive investments and need to be added back to an Applicant's total income.

 

Passive income is income generated from an investment in a business or asset in which the investor does not materially participate in the operation or management of the asset, company or investment (passive activity). The investor merely receives their share of a profit or a loss. In many cases, the recipient is a limited partner in a partnership, and it is the general partner that does all of the work.

 

Accountant Statement: Must have been Accountant for the past 2 years, must indicate likelihood of continued business and solvency, new business sources if income is projected to increase

 

Self-Employed Income Analysis: Form 1084A or 1084B

Comparative Income Analysis Form 1088

 

IRS Form 4506 (Request for Copy of Tax Form)

ASSETS:

The Underwriter must determine that the applicant has sufficient assets to complete the purchase of the property and still have some financial assets left in reserve.

VOD (Verification of Deposit) (FNMA Form 1006)

Sufficient assets to close without being left with no money in bank. If the name of the Depository is unfamiliar then confirm it.

Any charges for insufficient funds?

Monthly bank statements current within 45 days of application.

Quarterly bank statements current within 90 days of application.

 

Age, employment and lifestyle support accumulation of assets?

 

Bank Statements

Is there another name on the account and what is the relationship to the account holder?

When was the account opened?

Depository, Stocks (Equities), Bond investment accounts

Check for prohibition or penalty for redemption

Check current pricing on equities

 

Gift Letter: (Purchase)

Amount and Terms

What is the relationship to the Borrower?

Does the Giver have the assets to make good on the Gift amount? (bank statements)

Does the Borrower's Depository Statements indicate the receipt of the gift?

 

Gifts of Equity are permitted when Buyer and Seller are immediate family and that the Borrower has made the prerequisite 5% down payment from personal funds.

CREDIT REPORTS / CREDIT SCORES

As of 2010, both FNMA and FHLMC require a FICO of 740 (plus a minimum down payment of 20%) in order to avoid any additional loan charges. Applicants with FICO scores of 700 through 739 may incur additional loan charges (paid upfront) of 0.250% to 0.750% of the total loan amount. Applicants with FICO scores of 680 through 699 may incur additional loan charges of 1.50% of the total loan amount.

The 3 major Credit Reporting Agencies (CRA) are Equifax, Trans Union and Experian. The information on a credit report is reported to one or all of the CRAs by a credit granting entity (bank, co-branded MasterCard or Visa with a bank, financial institution such as American Express, credit company such as Discover or AT&T Universal, retail store, automobile retailer, etc.). The accounts reported are either open or closed revolving credit accounts, installment loans, leases, mortgages, home equity loans, student loans, etc. The reports will also include pending legal judgements, satisfied judgements, collection accounts, bankruptcy filings, divorces and liens if applicable. The report will also indicate inquiries from any financial institution / credit granting entity to whom the applicant may have recently applied to for credit.

The 3 CRAs do not share information with each other, thus in underwriting a mortgage the analyst must obtain a consolidated report that combines the reporting from all three agencies into one report.

Make sure that the full legal names and social security numbers match with the applicant. If the applicant is a "Jr." or III, or has the same first name but a different middle name, there could be overlapping information with a parent or even with a sibling.

Credit reports will present information on accounts in the form of "R1", which means revolving account paid in a satisfactory manner. An "I" is an installment account and an "M" is a mortgage. Numbers after the Letter (type of account) denote payment history with the number "2" through "9" indicating unsatisfactory / negative information. A "0" (zero) after the Letter indicates that not enough information is known about the account.

All of the credit rating agencies now produce some version of credit score for the Borrower similar to the original scoring format developed by Fair Issac & Co. The score is a composite rating profile based on longevity of credit, amount of credit, high balances, payment history, present balances, new credit, types of credit in usse, etc.

Minimum 2 years of active credit history required.

 

Minimum of 3 credit references (traditional and non-traditional) active for 12 mos.

 

Age of Derogatory info? Frequency and Severity of bad info?

 

No revolving accounts 60 days or more past due or no more than 2 payments 30 days past due over the past 12 months.

No more than 1 mortgage payment in excess of 30 days in the past 12 mos., and none within the past 3 months.

 

A Residential Mortgage Credit Report is preferred by FNMA

(R is Revolver and I is installment)

Reporting no later than 90 days old

 

Reporting Agencies FICO version:

FICO   (Fair Isaac & Co.)

Equifax: Beacon System (FICO version)

Experian: Experian/FI (FICO version)

Trans Union: Empirica (FICO version)

 

Scoring

700 or Better: very good (charged the lowest interest rate)

660 to 680: Average

660: Minimum for a Cash Out Refinance

620: Minimum acceptable (charged highest rate, below 600 credit may be denied)

Out of Scope: Little or no Credit (Desktop Underwriter; Can be rectified by submitting non-traditional credit profile: Rental, Utilities (Gas & Water), Furniture, Telephone, Medical

 

Exception to Foreclosure:

Property was the primary residence

Long-term illness

Death of wage earner

Laid-off from primary, long-time employer

Re-established good credit since foreclosure

 

Bankruptcy:

Permissable if now 2 years since established new, good credit profile

RATE / TERM REFINANCE

Refinance may include closing costs, financing costs, points and pre-paid

Limited Cash-out / Other funds to Borrower may not exceed 2% of the new principal amount

FNMA / FHLMC ON-LINE UNDERWRITING

DU (DESKTOP UNDERWRITER)   FANNIE MAE / FNMA

DU is a software application for loan evaluation used by the Lender/Bank

DU Underwriting Findings Report

Approve/Eligible

A-I (Approval but with pricing adjustements)

A-II

A-III

Ineligible: CHECK FOR MISTAKES

Refer with caution: DECLINE

Out of Scope: CREDIT INSUFFICIENT

Standard Application: Uniform Residential Loan Application (Form 1003)

 

DO (DESTOP ORIGINATOR)   FANNIE MAE / FNMA

DO is a software application for loan evaluation used by Mortgage Brokers

The Lender must be a participating, sponsoring Lender

 

LP (LOAN PROSPECTOR)   FREDDIE MAC / FHLMC

LP is a software application for loan evaluation used by the Lender/Bank

LP Feedback Certificate

Eligible/Accept

Streamlined Accept documentation if credit score is high, LTV 80% or less and good assets

 

GE AU CENTRAL

REAL ESTATE APPRAISAL AND VALUATION

Property valuation is important because it is the collateral that is offered in order to secure the loan. There must always be sufficient value in the property in the event that the loan goes into default and the property must be sold to satisfy the outstanding mortgage loan balance.

There are several different real estate property values to be considered:

Appriasal Value - which is established by a licensed real estate appraiser

Purchase Price - which is established by a bona fide, arms-length transaction contract of sale

Market Value - which is suggested by real estate professionals, closed sales or contracts of sale for similar properties

Assessed Value - which is established by municipal tax records and is suposed to approximate market value

In most cases the appraised value is the primary property valuation figure to be utilized in underwriting a mortgage unless the transaction is a purchase. In the the case of a purchase, the mortgage underwriter must utilize the lower amount of either the purchase price or the appraised value in order to not lend an excessive amount against the property offered as collateral for a mortgage loan. The appriased value is established by a licensed professional. The appraisal reflects what a "typical" person would pay for the property based on its design, configuration, condition, location, etc. The market value normally reflects what the property should be priced at in order to sell it within a reasonable period of time (again, the same length of time that it took to sell a similar property). Appraised value, Market value and length of time from listing to closed sale change over time in response to general, prevalent economic conditions such as interest rates, inflation, job growth, and in response to demographic trends. However, and this may sound confusing, in the end what the Appraiser is attempting to establish is the "true" market value of the property: the amount a typical purchaser would pay within a reasonable amount of elapsed sales listing time.

The standard residential property appraisal is based on the Sales Comparison Approach. The Appraiser locates at a minimum of three similar properties within the immediate neighborhood that have sold within the past six months. However, as this is not always possible the Appraiser may have to make certain positive and negative adjustments due to the comparable properties not being exactly the same as the subject or they may be located outside of the vicinity or the sales information may be dated.

Reviewing an Appraisal Form:

Check the correct address has been appraised and is consistent throughout the report.

Check legal description matches Sales Contract

Correct number of rooms, multi-family.

Ratio of Improvements to Cost of Land does not exceed guidelines

Comparable Sales are less than 6 mos. old.

Comparable sales are located less than 1 mile from the Subject Property.

Comparable Adjustments are not excessive.

Has the market increased in excess of 10% within the past 12 months?

Is the value excessive?

Is the subject in a Planned Unit Development (PUD)?

 

Has the correct square footage of the property been determined and has the methodology been disclosed?

 

In the United States it is customary that a single family residence square footage measurement include just the first and second floor above grade levels. The basement area is not included in the total square foot calculation even if it is a finished basement. If the property is determined to be a split-level, bi-level or raised ranch construction and partially above / below grade floor levels are traditional and acceptable within the market then this area is included in the determination of the total square foot measurement. The square footage measurement of an individual level is usually determined by measuring the exterior width and length of the property and mutiplying accordingly. This means that closets, hallways, space occupied by interior walls and stairwells are included in the total square foot figure.

 

The square footage of a Cooperative unit is usuually determined by measuring the length and width of the unit from the inside edge of the interior walls and multiplying accordingly. This means that closets, space occupied by interior walls and corridors are included in the total square foot figure.

 

The square footage of a Condominium unit is usuually determined by measuring the length and width of the unit from the outside edge of the exterior walls and multiplying accordingly. This means that closets, space occupied by interior walls and corridors are included in the total square foot figure. It also means that the width of the exterior wall is included in the total square foot figure, which can add a substantial amount to the total figure but is not usable space.

Area Measurement

1 Meter = 1.09 yards

1 Yard = 0.91 meter

1 Acre = 0.404685 hectares

1 Hectare = 2.471001 acres

1 Acre = 43,560.20137 sq. feet

1 Acre = 4,840 sq. yards

1 Acre = 0.0015625 sq. mile

1 Sq. mile = 27,878,400 sq. ft.

1 Sq. mile = 640 acres

1 Sq. mile = 258.998810 hectares

1 Sq. kilometer = 100 hectares

CONTRACT OF SALE

Arms-length transaction

Check Date signed and Check duration of contract

Check the Seller and the Purchaser match the mortgage application information

Check the property is correctly identified

Check for any give backs or discounts from the Seller that effectively lowers the sales price of the property

If expiring prior to closing a formal written extension is required

PROPERTY INSPECTION

A property inspection is not the same as a real estate appraisal. Rather, it is the determination of the soundness of the structure, the quality of the construction and the quality of the appliances. It is an attempt by a prospective purchaser to uncover any water leaks, unsafe conditions or pending problems that should be dealt with at the the time of purchase and specifically mentioned in a contract of sale. It is quite likely that an astute and observant appraiser may locate and/or identify some of the same conditions that an inspection may also uncover however at that time it may be too late to negotiate a resolution of the condition unless the financial institution financing the purchase makes it a condition of closing the loan.

Inspectors may not destroy property as part of the inspection however they may probe a condition that indicates a problem.

Inspectors look at / for:

Evidence of a buried / undergound heating fuel storage tank

Evidence of termites

Good terrain grade / slope for drainage

Water pipes and heating pipes in proper working function

Sinks, showers and toilets (water pressure and no leakage)

No leaking around windows

Safe and correct electrical wiring, sufficient circuits and sufficient amperege

Hot water heater capacity and condition

Roofing (exterior) and attic (interior) evidence of leakage

TITLE INSURANCE

The largest title insurers in the United States include First american, Fidelity National Financial, Old Republic International, Stewart Information Systems.

HOME OWNER'S INSURANCE

If a borrower is granted a mortgage on a property then they must obtain a home owner's insurance policy. The policy is really designed to protect the financial institution as they have the greatest amount of funds invested in the property in relation to the home owner. The policy will be maintained throughout the term of the loan and in most cases the annual insurance premium will be collected on a monthly basis with the mortgage payment (which includes principal, interest, taxes and insurance) and placed into an escrow account until the payment to the insurance company is required.

The insurance policy must at a minimum cover 100% of the property's estimated replacement cost. Replacement Cost is not the same as Market Value. Rather, replacement cost is the amount required to repair the damage or to rebuild the property to its pre-loss condition. The amount is not equal to the market value of the property, the purchase price or the outstanding amount of the mortgage (in most cases, replacement cost will be less than market value). In addition, it does not include the value of the land on which the structure is located. Over time, any upgrades, additions or renovations to the structure increases the replacement cost and the insurance policy should reflect it. Replacement cost is the cost to rebuild the structure however, due to inflation that cost of materials increase which is why there should be an inflation increase clause to compensate for the increases in construction costs.

This example is for a $150,000, 30-Year mortgage at an interest rate of 6.5% (You can substitute any numbers for the duration, interest rate or principal amount).

 

Press the ON button in the lower left-hand corner.

 

Press the Yellow " f " button and then press the "FIN" button (clears information in memory).

 

Press the Yellow " f " button and then press the "REG" button (clears information in memory).

 

Press the Blue " g " button and then press the "END" (Number 8) button (computes payment at the end of the month).

 

Enter 30, then press the Blue " g " button and then press the 12X (AMORT / n) button in the upper left-hand corner (converts payments into a monthly figure).

 

Enter 6.5, then press the Blue " g " button and then press the 12 ÷ (INT / i) button next to the AMORT/n/12X button (converts interest rate into a monthly figure).

 

Enter 150000, then press the "PV" (NPV / CFo) button (the amount of the mortgage).

 

Press the "PMT" button (next to the PV button), which will compute the monthly payment (the display will have a negative sign as this is an outgoing payment).

Information Sources

S&P/Case-Shiller Home Price Indices   www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/2,3,4,0,0,0,0,0,0,0,0,0,0,0,0,0.html

Building Permits for the previous month is reported by the U.S. Census Bureau, Manufacturing and Construction Division.
www.census.gov/const/www/permitsindex.html

New Residential Sales for the previous month is reported by the U.S. Census Bureau, Manufacturing and Construction Division.
www.census.gov/const/www/newressalesindex.html

New Residential Construction (Building Permits, Housing Starts, and Housing Completions) for the previous month is reported by the U.S. Census Bureau, Manufacturing and Construction Division.
www.census.gov/const/www/newresconstindex.html

Philadelphia Housing Sector Index (HGX) reports trading activity in the stocks of U.S. home builders.
www.phlx.com/products/sectors/hgxcomp.htm

KBW Mortgage Finance Index, Keefe, Bruyette & Woods, Inc. (KBW), was developed to help investors track the performance of the Mortgage Finance sector (approximately 24 companies) within the Financial Services industry. Options on this index trade on the Philadelphia Stock Exchange (PHLX) under the ticker MFX.   www.phlx.com/market/quote.asp?symbol=MFX

Existing Home Sales for the previous month is reported by the National Association of Realtors and is indicative of which regions of the country are expanding or contracting and indicates how consumers are responding to existing mortgage rate levels.
www.realtor.org/press_room/news_releases/2008/ehs_jan08_existing_home_sales_down.html

Mortgage Loan Application Survey is reported by the Mortgage Bankers Association and is an indication of mortgage applications for new purchases and refinances of primary residential real estate properties.
www.mbaa.org/

FNMA Single-Family Forms   www.efanniemae.com/sf/formsdocs/forms/

Canada Housing and Mortgage Corp. (CHMC)   www.cmhc-schl.gc.ca/   (Français / English)

Department of Housing and Urban Development   www.hud.gov/

EPA EnviroMapper for Envirofacts   www.epa.gov/enviro/emef/

EPA Mold Resources   www.epa.gov/mold/moldresources.html

European Mortgage Federation   www.hypo.org/

Federal Home Loan Bank of Atlanta (FHLBA)   www.fhlbatl.com/

Federal Home Loan Bank of Boston (FHLBBoston)   www.fhlbboston.com/

Federal Home Loan Bank of Chicago   www.fhlbc.com/

Federal Home Loan Bank of Cincinatti   www.fhlbcin.com/

Federal Home Loan Bank of Dallas   www.fhlb.com/

Federal Home Loan Bank of Des Moines   www.fhlbdm.com/

Federal Home Loan Bank of Indianapolis (FHLBI)   www.fhlbi.com/

Federal Home Loan Bank of New York (FHLBNY)   www.fhlbny.com/

Federal Home Loan Bank of Pittsburgh   www.fhlb-pgh.com/

Federal Home Loan Bank of San Francisco   www.fhlbsf.com/

Federal Home Loan Bank of Seattle   www.fhlbsea.com/

Federal Home Loan Bank of Topeka   www.fhlbtopeka.com/

Federal Home Loan Banks, Office of Finance   www.fhlb-of.com/

Federal Home Loan Mortgage Corp. (FHLMC / Freddie Mac)   www.freddiemac.com/

Federal Housing Finance Board   www.fhfb.gov/   (Regulates the 12 regional home loan banks)

Federal Housing Administration   www.fha.gov/

Federal Housing Finance Agency   www.fhfa.gov/

Federal National Mortgage Association (FNMA / Fannie Mae)   www.fanniemae.com/

Federal Reserve Bank of New York, Dynamic Maps of Nonprime Mortgage Conditions in the United States   www.newyorkfed.org/mortgagemaps/

FEMA Map Service Center   msc.fema.gov/webapp/wcs/stores/servlet/FemaWelcomeView?storeId=10001&catalogId=10001&langId=-1

FEMA Mapping Information Platform   hazards.fema.gov/femaportal/wps/portal

Government National Mortgage Association (GNMA / Ginnie Mae)   www.ginniemae.gov/

HUD Locator   egis.hud.gov/egis/

HUD USER   www.huduser.org/

International Union for Housing Finance (IUHF)   www.housingfinance.org/

International Valuation Standards Committee (IVSC)   www.ivsc.org/

Joint Center for Housing Studies (Harvard University)   www.jchs.harvard.edu/

Mortgage Bankers Association   www.mbaa.org/

National Association of Home Builders   www.nahb.org/

National Association of Realtors 2009 Local Market Reports   www.realtor.org/research/subscription_data/09localmarketreports

National Flood Insurance Program   www.fema.gov/nfip/

National Multi-Housing Council   www.nmhc.org/

Neighborhood Reinvestment Corporation   www.nw.org/

Office of Federal Housing Enterprise Oversight   www.ofheo.gov

U.S. Department of Agricuture, Rural Development Agency, Rural Housing Service   http://www.rurdev.usda.gov/rhs

U.S. Department of Veterans Affarirs, Loan Guaranty Services   www.homeloans.va.gov/

U.S. Treasury, Proposed Interagency Appraisal and Evaluation Guidelines   www.federalreserve.gov/newsevents/press/bcreg/bcreg20081113a1.pdf