Chapter 10: Processing and Closing Real Estate Loans


1. Chapter 10

Chapter 10

Processing and Closing Real Estate Loans


2. Loan Processing Steps

Loan Processing Steps

Take loan application

Verify loan application income and asset information

Order appraisal

Order credit report

Order title insurance preliminary report

Prepare loan package

Submit completed package for loan app


3. Loan Applications

Loan Applications

Residential lenders use Fannie Mae/Freddie Mac Uniform Residential Loan Application

Often called the 1003 (Fannie Mae form 1003, Freddie Mac form 65)

Text pages 241-245

Commercial or industrial lenders typically use their own internal forms

Borrowers provide financial statements

Lenders order Dun & Bradstreet business credit re


4. Preparing Borrower for Application

Preparing Borrower for Application

Borrower should be told the type of information that will be requested and advised to collect information for the application, including:

Copy of purchase agreement or property information

Names, addresses and phone numbers for jobs for last 2 years

Addresses where the borrower lived for last 2 years

Names, addresses and account numbers for checking and savings accounts and loans

Copies of pay stubs, W-2s, tax returns, and bank statem


5. Borrower Information

Borrower Information

Borrower’s addresses for last 2 years required

Some lenders may require addresses for last 7 years


6. Employment Information

Employment Information


7. Other Real Estate Owned

Other Real Estate Owned

List properties that are sold (S), pending sale (PS), pending rental (PR), or currently rented (R)

Gross rental income and net rental income only completed for currently rented properties


8. Transaction Details

Transaction Details

Estimated prepaid items includes prepaid property taxes, interest and insurance premiums

Closing costs excludes prepaid items and upfront PMI or MIP

Do not include savings, gift, or other source of down payment as “Other Credits


9. Federal Legislation Covering Loan Applications

Federal Legislation Covering Loan Applications

Equal Credit Opportunity Act (ECOA)

Real Estate Settlement Procedures Act (RESPA)

Fair Credit Reporting Act

Truth-in-Lending Act (effective 10/1/2009)


10. Equal Credit Opportunity Act

Equal Credit Opportunity Act

Applies to loans for personal, family, or household use

All real estate loans secured by the borrower's residence

Consumer loans up to $25,000

Makes it unlawful for lender to discriminate:

on basis of race, color, religion, national origin, sex or marital status, or age

because applicant's income comes from any public assistance pro


11. ECOA (continued)

ECOA (continued)

Lender cannot ask applicant:

if applicant is divorced or widowed

Can ask if married, unmarried, or separated

if applicant receives alimony or child support

Can ask if applicant pays alimony or child support

about applicant’s birth control practices or intentions to have children

Can ask about number of dependents

Lender must notify applicant of action on application within 30 days

If loan is denied, lender must provide applicant written statement of reasons

If applicant pays for appraisal, lender must give copy to a


12. RESPA

RESPA

RESPA covers real estate loans secured with one-to-four family residential property, including most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit

Requires lenders to:

provide good-faith estimate of closing costs within 3 days of application

provide HUD Booklet on settlement costs within 3 days of application

use of Uniform Settlement Statement (HUD-1) to itemize all closing costs

Prohibits unauthorized referral fees (kickbacks) to real estate agents and othe


13. Changes to RESPA

Changes to RESPA

Effective January 1, 2010, lenders and brokers must use a specific form for the Good Faith Estimate

Other changes include limiting closing costs and changes to Uniform Settlement Statement


14. New RESPA Rules

New RESPA Rules

Lender or mortgage broker must provide a GFE not later than 3 business days after receiving an application or information sufficient to complete an application

A lender may collect a credit report fee before providing a GFE, but may not collect any fee for an appraisal, inspection, or similar settlement service before issuing a GFE

Actual charges at closing cannot exceed estimates

Applies to loan origination fee, interest rate (during lock-in period), and transfer taxes

Other charges can increase by no more than 10%

Title insurance premiums, escrow fees when escrow is selected by lender, recording fe


15. New RESPA Disclosures

New RESPA Disclosures

Lenders and mortgage brokers are required to disclose:

Loan terms

Yield spread premiums, if any

Important dates for lock-ins, et


16. Fair Credit Reporting Act

Fair Credit Reporting Act

Requires lenders to inform loan applicant if the loan is declined due to credit information

Notice must give name and address of credit reporting agency

Loan applicant has a right to get information from the credit reporting agency

All information on file

Sources of information

List of creditors who have provided information in last 6 m


17. Truth-in-Lending Act: New Rules Effective October 1, 2009

Truth-in-Lending Act: New Rules Effective October 1, 2009

Current law requires TILA disclosures to be given “before credit is extended” (at closing)

Disclosures will be required within 3 days of application and before any fees are paid (other than reasonable credit report fees)

Disclosures at application include:

Annual Percentage Rate (APR)

Schedule of payments

Total finance charge

Prepaid finance ch


18. Verifying Employment

Verifying Employment

Lenders may use a Verification of Employment form to verify dates of employment, amount of income, and likelihood of continued earnings

Other methods:

W-2s

Paycheck stubs

Tax retu


19. Verifying Deposits

Verifying Deposits

Lenders verify deposits to determine if the borrower has sufficient cash assets for down payment, closing costs, and a reserve for monthly expenses

Deposits are verified using:

Bank statements

Verification of Deposit for


20. Processing to Underwriting

Processing to Underwriting

After the loan processor completes verification of application information and gets appraisal and title information, processor puts a loan package together and sends the loan package to the loan underwriter for review


21. Loan Packages

Loan Packages

Typical loan package includes:

Loan application

Original and final

Appraisal

Verifications of employment and income

Verifications of deposits

Credit report

Preliminary (title) report

Purchase agreement (if purchase money loan)

Escrow instructions

Gift letter (if any)

Each lender will have its own loan package requirements and s


22. Loan Approval

Loan Approval

Loan approval processes will differ depending upon the lender and the type of loan (conventional vs. FHA, VA, or CalVET)

Conventional loans

Some lenders give loan officer approval authority up to certain dollar levels

For example, up to Fannie Mae loan limit

Some lenders have loan review committee that are authorized to approve all loans or loans over a certain loan dollar am


23. Loan Closing

Loan Closing

Closing: completion of a real estate transaction

When the parties sign documents and exchange documents and funds

May be connected to purchase transaction

Refinance involves only loan clos


24. RESPA Requirements

RESPA Requirements


25. Government-Backed Loans

Government-Backed Loans

FHA Loans

Direct Endorsement lenders have authority to issue insurance endorsements without FHA preapproval

Other lenders must submit packages to FHA for approval before closing loan

VA Loans

Lenders approved for automatic process have authority to make the credit decision on the loan without VA's approval, close loan, and receive certificate of guarantee after closing

Other lenders must submit loan package to VA for review and approval before closing loan

Lender must list charges for actual services provided in connection with the loan

Lender or escrow must use HUD-1 Form Uniform Settlement Statement

Settlement statement must be made available to borrower 1 day before cl


26. New Settlement Statement

New Settlement Statement

Effective January 1, 2010, lenders must use the new, 3-page Uniform Settlement Statement

New settlement statement includes a comparison of actual closing costs to the good faith estimates and a summary of important loan payment term


27. Truth in Lending Act

Truth in Lending Act

Applies to loans used primarily for personal, family, and household purpose

All real estate loans

Consumer loans up to $25,000

Requires disclosures:

Annual percentage rate (APR)

Amount financed

Finance charges

Payment schedule

Other loan terms

Borrower has 3 day right of rescission

Except: loans to purchase borrower-occu


28. Finance Instruments

Finance Instruments

Main loan documents:

Promissory Note

Security Agreement

Deed of Trust

favored security instrument in California

Mortg


29. Promissory Note

Promissory Note

Evidences borrower's promise to repay debt

Lists loan amount, interest rate, and other terms of repayment

Is a contract by itself

Promissory note can be unsecured

Promissory note can be secured

Real estate loans are secured by a deed of trust or mort


30. Late Charges

Late Charges

Gives lender right to charge fee if borrower makes payment after the due date

Late charge must be reasonably calculated to compensate lender for actual damages

Owner-occupied single-family properties:

Late charge cannot exceed greater of 6% of the late payment or $5

Borrower has "grace period" of 10 d


31. Prepayment

Prepayment

Non-residential loans: no right to prepay unless the promissory note or deed of trust allows prepayment

Residential loans (1-4 family): borrower has right to repay unless the promissory note or deed of trust contains a prepayment clause

Can pay up to 20% of original loan amount in each of the first 5 years

No prepayment penalty after 5 years

Exception: Seller carry back lo


32. Prepayment Example

Prepayment Example

Original loan: $420,000, 6.5% fixed rate, 30 year term

Borrower prepays loan after making 15 payments

Loan balance at time of prepayment:

$414,083.62

20% of original principal amount:

$84,000

Prepayment amount subject to penalty:

$414,083.62 - $84,000 = $330,083.62

Prepayment penalty:

$330,083.62 x 6.5% ÷ 2 = $1


33. TILA Amendments: Prepayment Penalties on Higher-Priced Loans

TILA Amendments: Prepayment Penalties on Higher-Priced Loans

Effective October 1, 2009 a “higher-priced mortgage loan” may not contain any prepayment penalty if the payment can change in the initial four years

For other higher-priced loans, a prepayment penalty period cannot last for more than two years


34. Security Agreements

Security Agreements

Create a lien giving lender a security interest in the borrower’s real property as collateral

2 Types in California:

Deed of Trust

Most common

Contains “power of sale” which allows lender to use a non-judicial foreclosure procedure

Mortgage

Lender must use judicial foreclose proc


35. Closing Costs: One-time

Closing Costs: One-time

Nonrecurring costs paid one time at closing:

Loan Origination Fee

Lender's title insurance policy premium

Credit report fee

Appraisal fee

Tax service fee

Escrow fee

Survey fee

Recordi


36. Closing Costs: Recurring Costs

Closing Costs: Recurring Costs

Property taxes

Hazard insurance premiums

Loan interest


37. Closing Costs: Prepaid Interest

Closing Costs: Prepaid Interest

Interest on real estate loans:

Interest charged in arrears

Payments typically due on first day of month

Lender charges interest from (and including) closing date to date interest from first payment accru


38. Loan Interest Example


39. Loan Interest at Closing: Example

Loan Interest at Closing: Example


40. Impound Accounts

Impound Accounts

Collected by the lender monthly, used to pay property taxes, hazard insurance premiums, and mortgage insurance premiums when due

RESPA limits: maximum impound = prorated taxes and insurance premiums plus two months' advance charges

California Law:

RESPA limits apply to all lenders

Lender cannot require an impound account unless:

Government program requires impound

Loan is insured or guaranteed by government

Borrower misses 2 consecutive payments

LTV o


41. Post-Closing: Servicing

Post-Closing: Servicing

After loan is closed, loan file is completed with copies of closing documents and loan documents

Closer will transfer completed loan file to servicing department, either at the lender’s office or at a separate servicing compan


42. Loan Servicing Duties

Loan Servicing Duties

Typical duties performed by the loan servicer:

Collecting payments

Collecting taxes and insurance impounds and paying these items when due

Conducting or directing foreclosures

Processing requests for payoffs

Processing requests for loan assumpt


43. TILA Amendments: Impound Accounts on Higher-Priced Loans

A commentary provision has been added to clarify that creditors and servicers are not required to escrow optional insurance items chosen by the consumer and not otherwise required by creditor. See comment to § 226.35(b)(4)(i).


44. TILA Amendments: Servicing Owner-Occupied Loans

A commentary provision has been added to clarify that creditors and servicers are not required to escrow optional insurance items chosen by the consumer and not otherwise required by creditor. See comment to § 226.35(b)(4)(i).


45. Loan Sales and Servicing

Loan Sales and Servicing

Borrower must be notified when loan is sold

15-day advance notice

Lenders must provide toll-free phone numbers for complaints

Borrower cannot be charged a late fee during first 60 days after transfer if borrower sent payment on time, but to wrong lend