CASE STUDY
Dave has been a licensed MLO
working for a lender called Liberty Loans for about a year now. And, over that
time, Dave has been steadily locking down his own methods for closing loans.
Let’s look at one of his latest transactions as
an example.
A borrower named Martha comes to Dave for a
mortgage loan. She was referred to him by her real estate agent Patricia — whom
Dave has worked with quite a few times.
Like many others in the world today, Martha is
trying to get back on her feet financially, and she is succeeding. She went
back to school and got a degree in graphic design, and has already amassed a
steady stream of freelance clients. She sets her own hours, and can take
vacations when she wants to, all while pulling down around $70,000 per year
after taxes.
Martha’s credit rating is still in a bit of a
shambles, though, because of her spendthrift ex-husband, who tended to
perpetually outpace their income with his huge purchases. Now, the divorce is
final, but the shadow of his bad decisions still looms large over her credit
score.
Nevertheless, Martha thinks it’s time to start
a new life. She has downsized from the extravagances that her husband indulged
in. She has money coming in, and has saved a small down payment. She wants to
jump while the real estate market still somewhat favors buyers.
Dave takes her information and they fill out
the application. Martha needs a loan that will conform to her income stream,
which tends to be at its strongest from January through May, and then again
from late September through the end of the year. Dave understands and says they
have loan products that will fit the bill.
After talking over her whole situation for a
while, Dave tells Martha that, in all likelihood, she will have to settle for a
high-cost home loan, given her financial woes. And, although he has not had
much experience with high-cost home loans, Dave assures Martha that such loans
are very manageable and that they will find a way to help her get the loan she
needs.
Sure enough, when the paperwork comes back,
Dave finds that Martha has qualified for a loan with a twelve percent (12%)
interest rate, which is nearly nine (9) percentage points above the going rate
of five and a quarter percent (5.25%).
At first, Martha is a little worried about the
loan. But when Dave goes over the numbers with her, she sees that she can make
the payments if she skimps on a few luxuries like dining out and entertainment.
In fact, it looks like the mortgage payment will come in right at fifty percent
(50%) of her total income after other obligations – and that’s even with the
triple-sized payments in her peak months!
Plus, Martha feels like she might be coming out
of this financial funk within the next year or two, and Dave tells her they can
always revisit the loan then to see if a refinance will work for her. It seems
like a good leap for Martha to take, so she does.
Martha is finally approved then for a two
hundred thirty-seven thousand dollar ($237,500) loan, with a twelve thousand
five hundred dollar ($12,500) down payment – which is right at five percent
(5%) of the two hundred fifty thousand dollar ($250,000) purchase price of her
new home.
Dave has talked to Martha enough to know that
her down payment has taken a chunk out of her savings. So, he decides to save
her some upfront money by financing the points and fees on the loan – which
come to fourteen thousand two hundred fifty dollars ($14,250).
Three years later, seeing that the typical
interest rate has dropped to about three and a half percent (3.5%), Dave
contacts Martha about possibly refinancing her mortgage.
Dave likes to keep in contact with borrowers,
just to keep his name in their minds if they or any of their friends or family
members ever need his services. So, he knows that Martha’s financial situation
has improved dramatically since she originally came to him looking for a
mortgage loan.
She now has her own small firm and is making a
significantly better income that she was back then. But, everybody wants to
save a few bucks on their mortgage payment, right?
After two weeks of phone tag, in which Dave
lets Martha know that the rate could swing back up, she finally decides to come
in and talk about a refinance.
Sure enough, by the time
Martha gets in to Dave’s office, the rate isn’t quite as good as it was when he
originally contacted her – three point seven five percent (3.75%). Even so,
after running the numbers, Dave finds that Martha will still save $85 per month
on her mortgage payment with the refi! So, Martha applies to refinance her
mortgage and is approved.
In the comments section below please answer the following multiple choice questions:
1.
Why does Martha’s loan qualify as a high-cost home loan?
A.
Martha’s
loan does not qualify as a high-cost home loan
B.
The loan
satisfies the rate threshold for a high-cost home loan because it is more than
8% higher than the normal rate
C.
The loan
satisfies the points and fees threshold for a high-cost home loan because it is
more than 10% higher than the normal rate
D.
The loan
satisfies the rate threshold for a high-cost home loan because it is more than
10% higher than the normal rate
2.
Which of
the following did Dave forget to do regarding Martha’s high-cost home loan?
A.
Dave did
not forget anything
B.
Dave
forgot to warn Martha about the possibility of prepayment fees
C.
Dave
forgot to warn Martha that the interest rate on her loan would increase if she
defaulted
D.
Dave
forgot to send martha for mandatory third-party Hud-approved credit counseling
3.
Is it a
problem that Martha’s debt-to-income ratio is right at 50%?
A.
No,
since Martha’s debt-to-income ratio is 50 %, she falls within the rebuttable
presumption that a borrower will able to make the scheduled payments and repay
the obligation if the borrower’s total monthly debts do not exceed 50%
B.
No,
Rhode Island does not have any debt-to-income requirements for high-cost home
loans
C.
Yes,
Martha’s debt-to-income ratio is 2% higher than the required 48%
D.
Yes,
Martha’s debt-to-income ratio is 2% lower than the required 52%
4.
Could
Dave be considered guilty of “flipping” Martha’s home?
A.
Yes,
because he offered the refinance before 60 months had passed
B.
No,
because there are no rules on “flipping” in Rhode Island
C.
No,
because he lowered her payment by $85 a month, which would be a tangible net
benefit to Martha
D.
Yes, $85
is not enough to constitute a tangible net benefit to Dave
Students should post directly to the Blog! If you have any problems posting your assignment to the Blog (due to firewall issues etc.), you may send your answer directly to the instructor via email at oil@mymortgagetrainer.com
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