Creating a Mortgage

Chapter Four - Creating a Mortgage

Loan Origination Process

  • The loan origination starts with a loan application.
      - Clarifies the borrower's intent.
      - Kickstarts the underwriting process.
      - Sets a number of deadlines in motion.
  • When applying, borrowers typically use the Uniform Residential Loan Application (URLA).
      - URLA serves as the standard application used by banks to assess an applicant's ability to secure a mortgage loan.

Overview of the Uniform Residential Loan Application (URLA)

  • The URLA consists of nine different sections, including:
      - Borrower and co-borrower information.
      - Employment information.
      - Assets and liabilities.
      - Property owned by the borrower.
      - Purpose of the loan and property information.
      - Borrower and co-borrower declarations regarding the property, funding, and financial history.
      - Acknowledgment of legal obligations.
      - Military service.
      - Demographic information.
  • Lenders assist clients in completing the form.

Disclosure in Loan Origination

  • Key rules and regulations impact the loan origination process.
      - Understanding these rules is vital for a career in real estate.
RESPA (Real Estate Settlement Procedures Act)
  • RESPA was established in 1974, becoming effective in 1975.
      - Regulates the lending process for federally related loans.
      - It is a foundational legislative effort addressing mortgage lending.
Dodd-Frank Wall Street Reform and Consumer Protection Act
  • Passed in 2010, resulting in the creation of the Consumer Financial Protection Bureau (CFPB).
      - Centralized accountability for enforcing consumer financial laws.
      - Aims to simplify and bring transparency to the lending process.
  • The TILA-RESPA Integrated Disclosure (TRID) rule led to the introduction of:
      - Loan Estimate Form: Informs borrowers of key loan details such as the estimated interest rate, monthly payment, and total closing costs.
        - Lenders must provide the loan estimate within three business days of receiving an application.
      - Closing Disclosure Form: Provides final details about the mortgage loan including:
        - Loan terms
        - Projected monthly payments
        - Total paid in fees and other closing costs
        - Must be delivered at least three business days before closing.

Loan Estimate and Closing Disclosure Forms

  • The integrated forms are designed to facilitate easy comparisons and help consumers understand their loans.
Loan Estimate Form
  • Replaces the Good Faith Estimate and initial Truth in Lending statement.
  • Summarizes key transaction elements, allowing for easy comparison among lenders.
  • Loan Estimate Key Features:
      - Estimated Total Monthly Payment:
        - Shows on the first page of both the Loan Estimate and Closing Disclosure.
        - Additional fees (not included in total payments) are highlighted (e.g., HOA fees).
      - Estimated Cash to Close:
        - Includes closing costs and down payment.

Disclosure Deadlines

  • The TRID rule established vital deadlines for both forms.
Loan Estimate Deadlines
  • Must be delivered within three business days after receiving the application.
      - If hand-delivered, it should reach the borrower within this timeframe.
      - Mail delivery allows for an additional wait time until deemed received three business days after mailing.
      - Definition of a business day varies by lender.
Closing Disclosure Deadlines
  • Borrower must receive the closing disclosure three business days before closing.
      - A business day is any day other than Sunday or a federal holiday.
  • Failure to meet the disclosure deadline may delay closing.

Tour of the Loan Estimate Form

  • Loan Estimate Characteristics:
      - Three-page form
    after applying for a mortgage.
      - Provides crucial information regarding loan terms before approval.
General Information Section
  • Check for errors in borrower names and addresses and loan information.
  • Information on rate locks may be included.
Loan Terms Section
  • Verifies loan amount, interest rate (fixed or adjustable), and existence of prepayment penalties.
  • The buyer should understand the risks associated with balloon payments.
Projected Payments Section
  • Addresses if the estimated monthly payment aligns with buyer expectations.
  • Discuss any non-escrowed costs (e.g., property taxes).
Costs at Closing Section
  • Provides overview of money required at closing.
      - Buyer should prove the source of funds.
Closing Costs Details Section
  • Provides a breakdown of costs into subsections:
      - Loan costs (e.g., origination charges).
        - Origination charges are upfront fees.
        - Includes application fees, underwriting fees, and rate lock fees.
      - Services you cannot shop for versus services you can shop for.
  • The total loan costs calculation summarizes all associated costs.
Other Costs Section
  • Addresses taxes and fees, prepaids, and initial escrow payments.
  • Verify property taxes and homeowner's insurance premiums.

Calculating Cash to Close

  • Total amount a buyer needs to bring to closing is detailed.
  • A scenario (Gabby buying a home) illustrates the breakdown of costs, including:
      - Closing costs
      - Down payment
      - Seller credits
  • Final calculation of estimated cash to close amounts to $32,382.

Conclusion

  • Understanding loan origination processes enhances the ability to support clients and be seen as an expert in real estate transactions.
  • Awareness of lender regulations and disclosure deadlines is crucial.

Discount Points and Lender Credits

  • Discount Points:
      - One point equals 1% of the loan principal.
      - Purchasing points can lower the mortgage rate at a cost, beneficial for long-term loan holders.
  • Lender Credits:
      - Reduces upfront costs in exchange for a higher interest rate.
  • Impact of points and credits significantly affect total mortgage costs and payment structures.
  • Example calculations illustrate the trade-offs between discount points and lender credits, underscoring the importance of understanding these trade-offs in loan decisions.

Important Key Terms

  • Discount Points: Upfront fees paid to lower the interest rate.
  • Lender Credits: Lower closing costs by accepting a higher interest rate.
  • Cash to Close: Total amount a buyer is expected to bring to closing, including all closing costs minus any credits.

This detailed outline provides a comprehensive understanding of creating a mortgage, covering essential legal disclosures, application processes, financial documentation, and the implications of various loan structures. Each section is crucial for real estate professionals in supporting clients through home financing decisions, ensuring informed choices and adherence to regulatory standards.