Chapter 14: Mortgage Lending Practices

Residential Underwriting (Mortgage Qualification) - application focuses both on property and applicant. 

Pre-Approval - set out max amount that can be borrowed, interest rate and monthly payments. Subject on an appraisal of the property to be mortgaged. 

Mortgage Application - the lender views it based on 5C's of credit, applies GDS / TDS and completes a credit report through a credit bureau.

Credit Bureau - provides credit info that is updated on a 60-day basis. Credit report. Credit score - # between 300 - 900.

The Property - the lender may refuse to finance specific property or seek a larger downpayment. 

Lender Holdback - not advanced funds until spec conditions are met by the borrower. A time limit is set. 

Mortgage Commitment - the lender, once the underwriting is done, preps a mortgage commitment setting out terms and conditions for acceptance.

Fixed vs. Variable - variable rate fluctuate with the bank prime rate with limits on rate increases/decreases.

 

Commercial Underwriting 

Mortgage Documentation Package - site description / improvements / financial profile / mortgage financing request.

Loan-to-Value Ratio - property = $750k, lender considers a mortgage based on 75% of value: 750000 x .75 = 562500 (loan amount) .

Debt Coverage Ratio - comparing net operating income to total debt service. Usually used to establish business or rental property. 

ex. The Net Operating Income (NOI) = 28373. The borrower is seeking a loan with monthly payments = 1670 per month: 28373 / (12 x 1670) = 1.42.

Safety Margin - when lending based on operating income. 

Risk and Capitalization Rate - lenders may reduce risk by increasing the capitalization rate. 

 

Specialized Products 

Bridge Loan - form of financing when a buyer has to close 1 sale prior to receiving funds from another sale.

Development Loan - loan for servicing and improving land prior to building construction. 

Gap Loan - provides funding between construction advances and the placement of the permanent financing. 

Interim Financing - short-term financing used to address immediate needs as distinguished from long-term debt structure. 

Letter of Commitment - written commitment by a lender setting out terms under which a loan will be granted.

Letter of Credit - authorize the person named to withdraw a spec. amount of money based on prearranged terms and conditions.  

Letter of Intent - agreement between the parties and is not a formal contract. 

Standby Loan - pre-construction loan commitment between developer and lender.