U.S. Residential Real Estate Market


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).


Conventional Mortgage

This is a fixed interest rate loan (during the entire term of the mortgage) with a 30-year term and 30-year amortization schedule. It is also sometimes referred to as a conforming loan.


Adjustable Rate Mortgage / ARM

An Adjustable Rate Mortgage (ARM) is a fixed interest rate loan for a specific time, less than the complete term of the loan, and then the interest rate adjusts on a previously specified anniversary date of the origination of the loan.



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):

Initial Payment Year
Mortgage Amount
Interest Rate %
Mortgage Term Length Years
Payment Frequency
Calculated Monthly Payment Amount
Calculated Total Term Interest
 


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; do not enter commas):

Loan Balance ($):  
Interest Rate (%):  
Period:    
Origination Points (%):  
Discount Points (%):  
Closing Costs ($):  
Mortgage Ins ($):  
   
APR (%):  


Property Ownership (Title, Deed, Mortgage, Deed of Trust & Mortgage Note)

In the United States, the Title, or Title Deed, or Deed, is the document that indicates the owner of the real property. If one purchases a property then one takes title to the property by a transfer of Title or a transfer of the Deed. The Title / Deed is recorded with the county records department where the property is located. A Title Company will do a title search, which is the search of county records for any previous ownership / transfer of the property or any entity that has placed a lien / claim against the property, which would be the claim of a lender, municipal tax department, contractor (mechanics lien), or perhaps an estate attorney. A lien is a defect on the title and needs to be settled before transfer of ownership. The Title Company will issue a Title Report, which is the written report of the results of the title search. The Title Company will also issue Title Insurance (usually purchased by the party that is purchasing a property), which is an insurance policy that indicates that the Title Company is certain that it has uncovered any liens / claims against the property, determined that they have been properly paid off, satisfied and released, and the the Seller selling the property can convey the property to the Purchaser without any future problems, and if there should be any problem then the Title Company will compensate the Purchaser for any loss.

A Mortgage or Deed of Trust, is the pledge of the real property as secured collateral for a loan to either purchase or refinance the property. In the United States, some states use a Mortgage and some states use a Deed of Trust (in the Deed of Trust, a Trustee such as a title company is appointed to hold the claim on the property until the loan is paid off). The Mortgage / Deed of Trust is a lien against the property and is recorded (along with the discharges of the prior mortgage holder) as a lien on the Title / Deed in the county records department where the property is located (and would be located in a title search) in order to secure the property as collateral for the Mortgage Note (the property can not be sold or transferred without the satisfaction of the mortgage, which means that the Note has to be paid in full, known as a due-on-sale clause). The mortgage will also indicate that the lender has the right to foreclose on the real property if the loan obligation has not been repaid as indicated in the Mortgage Note. An Assumable Mortgage clause does allow a third party to take over the mortgage with the approval of the grantor of the mortgage (in most cases a financial institution). A mortgage is canceled when the loan has been repaid in full, and the property is re-conveyed to the borrower (Reconveyance).

A Mortgage Note, or Note, is the written and signed acknowledgment by the borrower that a loan / debt has been entered into, and the promise by the borrower to repay the loan in full (either through scheduled monthly payments or upon sale of the real property) and to abide by the terms of the loan. The Mortgage Note, which is also secured by the Mortgage, is recorded with the county records department where the property is located. Most Mortgage Notes include a clause that indicates that the Note (loan) can be sold / transferred to another party without the prior approval from the borrower.



Mortgage Loan Underwriter

Mortgage Underwriters are credit analysts. They determine the credit worthiness of the applicant / borrower, and the value of the collateral. The actual underwriting is done on a computer with an installed software application (proprietary application or accessed through the Internet by a web browser) automated underwriting system (AUS). By utilizing a underwriting application, lenders can process a mortgage loan applications in approximately 15 minutes. Initially, the human judgement is eliminated and the application is approved based on the criteria of a program (Fannie Mae, Freddie Mac). The object becomes making the loan fit the program, in which the loan will be sold rather than retained in portfolio and serviced, rather than rendering a judgement on the credit, capital and collateral attributes of the borrower. Initial underwriting is more of a data entry function and the human judgement comes into play only if the loan is initially rejected: what components of the applicant's information / profile should be revised so that the loan can be resubmitted and approved.

DU (Desktop Underwriter) is a software application for loan evaluation used by the Lender/Bank interested in selling closed, conventional loans to the Federal National Mortgage Association (FNMA / Fannie Mae). Fannie Mae regularly reviews DU and updates its credit risk assessment based on new data and loan performance information. Desktop Originator (DO) is the same as DU.

DU (Desktop Underwriter)   desktopunderwriter.fanniemae.com/

The Uniform Underwriting and Transmittal Summary Form (Fannie Mae Form 1008 / Freddie Mac Form 1077) used to summarize key information in the comprehensive risk assessment of the mortgage and the final underwriting decision, such as loan purpose, property type, proposed monthly payments, and debt ratio, and is used for manually-processed applications related to conventional first and second mortgages. Lenders processing applications through DU are not required to use this form.

Every loan application entered into DU receives a case file number. There is only case file number per loan transaction and corresponding property address.

When the underwriter has completed all of the sections of the 1003 that are required to obtain an underwriting recommendation, the loan casefile can then be submitted to DU. When the underwriting findings become available, the underwriting recommendation appears as a link under Underwriting Recommendation. DU will issue either an DU ?Approve/Eligible" or a "Refer" and a DU Findings Report. The DU Findings Report includes the underwriting analysis, the Approve/Eligible or Refer, and the conditions.

LP (Loan Prospector) is a software application for loan evaluation used by the Lender/Bank interested in selling closed loand to the Federal Home Loan Mortgage Corporation (FHLMC / Freddie Mac).

LP (Loan Prospector)   www.loanprospector.com/

LP will issue an "Accept" or "Caution" and an LP Feedback Certificate.

There are other underwriting programs / systems in the marketplace but most are really designed to access DU and LP, both of which are the primary AUS systems.

An FHA DE (Direct Endorsement) Underwriter is authorized by the FHA to underwrite, approve, certify mortgage origination documents for compliance with the requirements of the FHA?s mortgage insurance program and submit FHA insured mortgage loans. A DE Certified Underwriter (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) will be issued a CHUMS (Computerized Homes Underwriting Management System) identification number, and the ID number remains associated with the individual throughout his/her tenure as a DE Underwriter, no matter what lender is his/her employer. FHA loans are usually underwritten utilizing the DU (Desktop Underwriter) application. However, DU has been modified to utilize the FHA TOTAL (Technology Open to Approved Lenders) Mortgage Scorecard. To underwrite an FHA loan electronically, a lender/mortgagee must process the request through an automated underwriting system that can communicate with the FHA TOTAL Scorecard. The TOTAL Scorecard provides two risk classifications: "Accept/Approve" or "Refer." An "Accept/Approve" indicates that FHA will ensure the borrower's loan with reduced documentation. If the loan receives a "Refer" classification", the lender will be required to manually underwrite the loan. TOTAL Version 3.0 which was released on July 21, 2012.

Guaranteed Underwriting System (GUS) is a software application for loan evaluation used by the Lender/Bank to underwrite USDA Section 502, Single Family Housing Guaranteed loans eligible for the USDA Rural Development Single Family Housing Guaranteed Loan Program.

Two ratios regarding the applicant's debt obligations to income are computed in underwriting a residential mortgage. Different types of mortgages have their own guidelines on maximum ratios regarding the mortgage obligation (debt) and tota debt. The income and debt obligations are usually calculated on a monthly basis by the underwriter.
  • The Front-End Ratio is computed by the monthly PITI (Principal & Interest, real estate Tax, homeowner's Insurance) divided by the monthly gross income. It is also sometimes referred to as the Primary Housing Expense/Income ratio.
  • The Back-End Ratio is computed by the monthly PITI + all monthly obligations divided by the monthly gross income. It is also sometimes referred to as the Total Obligations/Income ratio.


  • 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.

    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:

  • The borrower pays an additional monthly payment (insurance premium) to the PMI company for the coverage.
  • The lender pays the monthly PMI premium and charges a slightly higher interest rate to the borrower.
  • The borrower makes a premium payment for mortgage insurance with a single payment at closing (single financed premium), which covers the full amount of the coverage and the PMI is financed as a portion of the loan amount.
  • 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.