English
Mortgage Finance: Qualification, Affordability, and Disclosure.
1. Pre-Approval: Assessing Creditworthiness and Loan Capacity
1.1. Credit Scoring Models
- FICO Score: A credit scoring model based on payment history❓❓ (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). The FICO score ranges from 300-850.
- VantageScore: A credit scoring model utilizing similar factors to FICO.
- Credit Score = w₁ * PaymentHistory + w₂ * AmountsOwed + w₃ * CreditHistoryLength + w₄ * NewCredit + w₅ * CreditMix, where wᵢ represents the weight assigned to each factor.
1.2. Debt-to-Income Ratio (DTI)
- Calculation: DTI = (Total Monthly Debt Payments) / (Gross Monthly Income)
- Acceptable Ranges: Lenders typically prefer a DTI below 43%.
1.3. Loan-to-Value Ratio (LTV)
- Calculation: LTV = (Loan Amount) / (Appraised Value or Purchase Price)
- Risk Assessment: A higher LTV indicates a higher risk for the lender, often requiring Private Mortgage Insurance (PMI).
1.4. Credit Report Analysis
- Data Sources: Credit reports are generated by credit bureaus (Experian, Equifax, TransUnion).
- Key Components: Includes payment history, outstanding balances, credit limits, public records (bankruptcies, liens), and credit inquiries.
2. Affordability: Determining Sustainable Housing Costs
2.1. The 28/36 Rule
- Housing Costs ≤ 0.28 * Gross Monthly Income
- Total Debt ≤ 0.36 * Gross Monthly Income
2.2. Residual Income Analysis
- Definition: Assessing the income remaining after all essential expenses are paid.
- Formula: Residual Income = Gross Monthly Income - Total Monthly Expenses
2.3. Present Value Analysis
- Formula: PV = Σ [CFₜ / (1 + r)ᵗ] (t=1 to n), where PV = Present Value, CFₜ = Cash Flow at time t (mortgage payment), r = discount rate (interest rate), n = number of periods (loan term).
2.4. Sensitivity Analysis
- Definition: Evaluating the impact of changing variables (interest rates, property taxes, income) on affordability.
3. Disclosure: Ensuring Transparency and Compliance
3.1. Real Estate Settlement Procedures Act (RESPA)
- Purpose: RESPA aims to protect consumers by requiring lenders to disclose all costs associated with mortgage transactions.
- Key Provisions: Requires lenders to provide a Loan Estimate and Closing Disclosure, and prohibits kickbacks and unearned fees.
3.2. Truth in Lending Act (TILA)
- Purpose: TILA mandates disclosure of credit terms, including the Annual Percentage Rate (APR).
- Key Requirements: Disclosure of APR and right of rescission for certain loans.
3.3. Affiliated Business Arrangement (AfBA) Disclosure
- Definition: Disclosure of any business relationship between a real estate agent and a mortgage provider.
- Requirement: RESPA requires written disclosure of AfBAs.
3.4. Fair Housing Act
- Purpose: Prohibits discrimination in housing based on race, color, religion, sex, familial status, national origin, or disability.
- Lending Practices: Lenders must not discriminate in loan terms.
Chapter Summary
Pre-Approval:
- Definition: A lender’s conditional commitment to provide a mortgage, based on verified financial information❓ (income, assets, credit history).
- Significance: Quantifies borrowing capacity, providing a data-backed understanding of purchasing power. It strengthens offer competitiveness by signaling financial readiness to sellers.
Affordability:
- Definition: The buyer’s subjective comfort level with mortgage payments, property taxes, insurance, and other homeownership costs.
- Significance: Buyers may be pre-approved for a higher❓ loan amount than they are comfortable repaying. Understanding a buyer’s affordability range allows for targeted property searches and avoids showcasing properties beyond their financial comfort.
Disclosure (Affiliated Business Arrangements):
- Definition: Transparency regarding financial relationships between the real estate agent and mortgage providers.
- Significance: Minimizes information asymmetry and potential conflicts of interest. Regulatory compliance (RESPA) mandates written disclosure of affiliated business arrangements at the point of recommendation. Failure to disclose violates ethical and legal standards.
