Real Estate Finance and Valuation: Loans, Underwriting, Appraisal, and Fraud
Real Estate Finance and Valuation tests mortgage instruments, loan programs, underwriting and qualification, appraisal approaches, market analysis versus appraisal, and loan fraud.
Mortgage instruments
Florida uses a promissory note plus a mortgage; a deed of trust is not the Florida norm. The note is the promise to pay; the mortgage pledges the property as security. Key terms include principal, interest, amortization, escrow impounds, due-on-sale, and prepayment.
Loan programs
Conventional loans are not government insured and often require 3-20% down, with private mortgage insurance above 80% LTV. FHA loans allow 3.5% down with mortgage insurance premiums and property standards. VA loans offer 0% down to eligible veterans with a funding fee and certificate of eligibility. USDA loans target rural areas with income limits.
Underwriting and qualification
Underwriters review credit, income stability, assets, property value, and debt-to-income ratios. Front-end ratio is housing expense divided by gross monthly income; back-end ratio adds all recurring debt. LTV is loan amount divided by appraised value or purchase price, whichever is lower.
Valuation
Appraisers use the sales comparison approach for residences, the cost approach for unique or new construction, and the income approach for investment property. A comparative market analysis is a broker price opinion for marketing, not a USPAP appraisal.
Loan fraud
Common fraud includes occupancy misrepresentation, falsified income or assets, undisclosed debt, and inflated appraisals. Licensees should not help a buyer qualify by misstating facts.
Worked example
Purchase price is $400,000 and the loan is $320,000, so LTV is 80%. Monthly housing expense is $2,200 and other debt is $600, for total debt of $2,800. With gross monthly income of $8,000, the back-end ratio is 35%. If the lender's limit is 43%, the borrower qualifies on this measure, subject to credit and assets.
Traps
Using purchase price instead of the lower of price or appraisal; confusing prequalification with preapproval; treating a CMA as an appraisal; and ignoring mortgage insurance in the housing expense.