© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 1 1 CHAPTER EIGHT UNDERWRITING AND FINANCING RESIDENTIAL PROPERTIES

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 2 2 Underwriting Default Risk Underwriting Is the process of evaluating a borrower’s loan request in terms of potential profitability and risk. Two methods are used namely: Payment-to-income ratio (MPs on the loan amount plus other housing expenses divided by borrower’s income) Loan-to-value ratio (amount of loan requested divided by property’s value).

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 3 3 Affordability Ratios Payment to income PITI/ gross income equals or is less than 28% Total obligations to income PITI plus other obligations/ gross income equals or is less than 36% Percentages vary with kind of loan program

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 4 4 The Underwriting Process- Income Employment Working spouse Rentals Child support Commissions Self employment Bonuses Dividends or interest Retirement annuity Social security Public assistance Borrower assets Credit history Estimated housing expense Other obligations and debt

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 5 5 Closing Costs- Financing Costs are one-time costs associated with buying a property or obtaining a loan Costs incurred include as below: Next slide

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 6 6 Closing Costs- Financing Loan application Credit report fee Loan origination Attorney fees Appraisal fees Fees for survey Loan documentation fees Discount points Prepaid interest

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 7 7 Closing Costs- other Property taxes, proration and escrow accounts Mortgage insurance (default) Hazard insurance Title insurance Pest inspection Real estate commissions Statutory costs

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved McGraw-Hill/Irwin Slide 8 8 Chapter Ends here!!