Fundamentals of the Uniform Residential Loan Application
The Uniform Residential Loan Application prepared by the buyer with the assistance of their agent, known as the transaction agent (TA) in this context, provides the lender with necessary information about:
- the buyer taking out the mortgage; and
- the property which will function as security for the mortgage.
It also gives the lender authorization to start the mortgage packaging process. [See first tuesday Form 202 (FNMA 1003)]
Generally, a mortgage is sought in a home sales transaction which is contingent on the buyer obtaining a mortgage to fund the purchase of the property, known as purchase-assist financing. However, a mortgage may also be needed by:
- an owner of vacant land to construct a dwelling, known as a construction loan;
- a property owner to improve or renovate a property they currently own;
- a property owner to refinance an existing mortgage; or
- a tenant on a long-term lease who has agreed to make tenant improvements (TIs) to the property they rent.
As implied by its title, the Uniform Residential Loan Application is intended primarily for use on loans secured by residential properties, such as:
- a one-to-four unit residential property;
- condominiums (attached or detached); or
- rental property of any size which is exclusively residential.
However, as a generic mortgage application, it is used by mortgage loan brokers as an application for a mortgage funding any purpose, consumer or business/investment/agriculture and secured by any type of property. The Uniform Residential Loan Application contains all the information required for arranging all types of real estate mortgages. In practice, the type of property intended to be purchased by use of the mortgage funds is provided by the description of the property in the mortgage application.
Components of the Uniform Residential Loan Application
Once the TA has reviewed the mortgage process with the buyer as part of their counseling activities, the application needs to be completed and submitted to the lender. While the application is designed to be completed with the lender, it is crucial the TA also be present during this critical step. The TA’s involvement is crucial as completing and submitting the mortgage application is the primary activity remaining for the buyer to acquire the property after entering into a purchase agreement with the seller.
The first section of the Uniform Residential Loan Application calls for the type of mortgage sought, such as conventional, VA or FHA-insured. The buyer also indicates:
- the total dollar amount of the mortgage requested;
- the anticipated interest rate, and whether it is to be fixed or adjustable;
- the periodic payment schedule (constant or graduated); and
- the amortization period (positive or negative). [See first tuesday Form 202 (FNMA 1003)]
The property purchased which will secure the mortgage is identified and its intended use entered in Section Two. Section Two also states the use of the mortgage funds, such as:
- refinance; or
Also disclosed is the source of down payment funds and closing costs. [See first tuesday Form 202 (FNMA 1003)]
Information identifying the buyer, such as their name and social security number, is entered in Section Three. Space is left to insert any co-borrower information if the income, assets and liabilities of a co-borrower are to be considered for mortgage qualification purposes.
A separate form is used to disclose to the lender the applicant’s assets and liabilities if:
- the assets and liabilities result from separate property owned by a co-borrower;
- the co-borrower is a necessary party to the transaction as the property encumbered is considered community property; or
- the co-borrower is a co-signer of the note as a primary borrower.
The buyer and co-borrower need to prepare a balance sheet if their assets and liabilities are sufficiently joined to make one combined statement viable. If not, each co-borrower is to prepare a separate asset and liabilities balance sheet for individual consideration by the lender. [See first tuesday Form 209-3]
At some point, the buyer completes a statement of information. The statement of information discloses confidential information used by the title company to search the general index (GI) for conditions affecting title when held in the name of the buyer. Title companies search for information on the buyer and any co-borrower regarding judgments and other legal conditions that interfere with the property’s title. [See first tuesday Form 401-4]
The buyer’s (and co-borrower’s) employment information necessary to identify their source of income is entered in Section Four of the Uniform Residential Loan Application.
Employment information includes:
- the employment currently held by the buyer;
- the buyer’s job title; and
- years spent at that specific job and within that profession. [See first tuesday Form 202 (FNMA 1003)]
If the buyer is self-employed, they indicate this by checking the self-employed box. [See Figure 1, first tuesday Form 202 (FNMA 1003)]
Income/expenses and assets/liabilities
Next, the buyer reports their monthly income and housing expenses in Section Five. [See first tuesday Form 202 (FNMA 1003)]
The buyer’s assets and liabilities are entered into Section Six. This discloses the buyer’s net worth. The information is pertinent since the buyer’s liabilities affect their ability to repay the mortgage. However, the buyer may not want to disclose all their assets. Thus, a balance needs to be struck between maintaining financial privacy and disclosing enough assets to get creditworthiness clearance so the mortgage will be funded on the advantageous terms sought by the buyer. [See first tuesday Form 202 (FNMA 1003)]
Since the mortgage funds the acquisition of property, the buyer enters pricing details about the transaction in Section Seven, including the cost of:
- raw land, if acquired separately;
- estimates prepaid items and closing costs; and
- improvements made to the property. [See first tuesday Form 202 (FNMA 1003)]
Additional components of the application
The buyer (and any co-borrower) declares any relevant miscellaneous creditworthiness issues in Section Eight of the mortgage application. This includes debt enforcement or debt avoidance the buyer has experienced. [See first tuesday Form 202 (FNMA 1003)]
The buyer signs the application (with any co-borrower) to acknowledge and agree to the numerous conditions, some of which are:
- the property will be occupied as represented in the application;
- the buyer will amend the application and resubmit it to the lender if the facts originally stated change substantially after first submitting the application;
- the lender may sell/assign the mortgage to others, though the buyer will not be able to sell the property and delegate the mortgage responsibility to another person who acquires the property; and
- the lender is authorized to verify all aspects of the mortgage application as represented by the buyer. [See first tuesday Form 202 (FNMA 1003)]
RESPA and TILA disclosures
The Real Estate Settlement Procedures Act (RESPA) mandates lenders and mortgage holders active in the secondary mortgage market disclose all mortgage related charges on mortgages used to purchase, refinance or improve one-to-four unit residential properties.
Mortgage related charges include:
- origination fees;
- credit report fees;
- insurance costs; and
- prepaid interest.
RESPA is now administered and enforced by the Consumer Financial Protection Bureau (CFPB), a marked improvement in consumer protection than previously provided by the Department of Housing and Urban Development (HUD).
When the buyer takes out an ARMcontaining an interest rate that changes periodically, the lender informs the buyer not only of the interest rate, but also the:
- index the rate changes are tied to;
- the lender’s margin; and
- any payment and interest rate adjustment floors and caps. [See first tuesday Form 320-1]
Until August 1, 2015, the RESPA lender provides the buyer with:
- a good faith estimate (GFE) of all mortgage related rates and charges within three business days after the lender’s receipt of the buyer’s mortgage application [See first tuesday Form 204, 204-1, 204-2 (BRE 882, 883 and 885) and 204-5; [12 Code of Federal Regulations §1024.7]
- a copy of the HUD-published special information booklet, titled Buying Your Home – Settlement Costs and Helpful Information, within three business days after the lender’s receipt of the buyer’s application; [12 CFR §1024.6]
- a HUD-1 or HUD-1A Closing Statement detailing all charges actually incurred [See first tuesday Form 402]; [12 CFR §1024.10(b)] and
- a list of homeownership counseling organizations. [12 CFR §1024.20]
Editor’s note: A list of homeownership counseling organizations approved by HUD can be found at the CFPB’s website.
Beginning August 1, 2015, the RESPA lender provides the buyer with:
- a Loan Estimate of all mortgage terms quoted by the lender within three business days of the lender’s receipt of the buyer’s mortgage application; [12 CFR §1026.37]
- a special information booklet published by the CFPB to help the buyer understand the nature and scope of real estate settlement costs within three business days after the lender’s receipt of the buyer’s application; [12 CFR §1026.19(g)]
- a Closing Disclosure, which summarizes the “final” mortgage terms and details, provided by the lender at least three days before the consumer closes on the mortgage; [12 CFR §1026.19(f)(ii)] and
- a list of homeownership counseling organizations.
Editor’s note — first tuesday will make the new Loan Estimate and Closing Disclosure available at journal.firsttuesday.us/forms-download-2/ once they are made available by the CFPB.
If the buyer is arranging financing through a mortgage broker, the broker, not the lender, provides a copy of the special information booklet to the buyer. [12 CFR §1024.6(a)(1)]
However, the booklet does not need to be given to the buyer if the mortgage funds:
- the refinance of an existing mortgage;
- a closed-end mortgage in which the lender takes a subordinate lien;
- a reverse mortgage; and
- any federally related mortgage used to fund the purchase of other than a one-to-four unit residential property. [12 CFR §1024.6(a)(3)]
Federal TILA disclosures
Federal Truth-in-Lending Act (TILA) disclosures are also given to the buyer by the lender. Like the GFE, the TILA disclosures are to be delivered within three business days of receipt of the buyer’s mortgage application. The TILA disclosures are designed to give the buyer standardized mortgage information for easy comparison of terms between mortgages offered by different lenders. [See first tuesday Form 221]
Beginning August 1, 2015, mortgage applicants are to receive a Loan Estimate Form in lieu of the GFE. The Loan Estimate is a consolidated version of the GFE and the Initial Disclosure Form required by TILA.
The lender is also to provide buyers with a written list of homeownership counseling organizations within three business days of receiving the loan application. [12 CFR §1024.20(a)(1)]
Buyers are not required to take part in the counseling. Homeownership counseling is only compulsory if the mortgage is a Section 32 high-cost mortgage or allows for negative amortization. [78 Federal Register 6964-6966]
On the lender’s receipt of a mortgage application, the property is appraised. [See first tuesday Form 207]
The appraisal determines whether the property is of sufficient value to function as security for the mortgage and support the amount of financing the buyer requests. Essentially, the lender uses the appraisal to gauge whether the loan-to-value ratio (LTV) meets the lender’s standards.
Generally, an acceptable LTV for conventional mortgages is 80% of the property’s value. An LTV of 80 requires the buyer to make a minimum 20% down payment. A greater LTV compels the lender to require the buyer to obtain private mortgage insurance (PMI).
The value limitation is used to limit mortgage amounts during downturns in the market value of real estate, rather than during a rapidly rising market. Thus, swings in values throughout an economic cycle are exacerbated by the volatile conduct of lenders. Recent lender regulations are designed to narrow the cyclical swings brought on by unregulated lender conduct.
The mortgage application package
Once a lender approves property based on an appraisal, a mortgage package is assembled and sent to a mortgage underwriter for review.
The mortgage package prepared by the lender includes:
- the Uniform Residential Loan Application [See first tuesday Form 202 (FNMA 1003)]
- the property appraisal report [See first tuesday Form 200];
- a credit report on the buyer;
- the lender’s verifications of the information provided on the mortgage application [See first tuesday Form 210, 210-1, 211, 212, 212-1, 213 and 214];
- the purchase agreement, escrow instructions and condition of property disclosure statement handed to the buyer by the seller and seller’s broker [See first tuesday Form 150, 304 and 401]; and
- other documentation needed to support the buyer’s request, including operation balance sheets, tax returns, IRS Form 4506, title reports and bank statements.
TA duties after submission
Even after the mortgage application has been submitted to the lender, the TA’s duty to the buyer has not been fulfilled.
The TA uses a mortgage tracking form to set a schedule for when the mortgage processing activities are to occur. This form provides the TA with a clear picture of what events are to take place and when. Further, if scheduled events noted on the calendar are not timely handled by the lender, the TA has the opportunity to remedy the failure and get the process back on track. [See first tuesday Form 339]
After submission of the mortgage application, the TA keeps track of the lender’s processing activities and gets weekly updates to keep the transaction on schedule for closing. Since closing is contingent on the buyer obtaining a mortgage, the TA does not want the seller to become impatient and cancel the deal – which in turn jeopardizes the TA’s fee.
“Willing and able” to pay
A lender evaluating a mortgage package considers a buyer’s willingnessand capacity to pay. To comply, borrowers applying for a consumer mortgage are evaluated by the lender for their ability-to-repay (ATR), part of Regulation Z (Reg Z), which implements the Truth-in-Lending Act (TILA). [12 CFR 1026.43 et seq.]
Generally, the debt-to-income ratios (DTI) for conventional mortgages, also called the debt-to-income standards, limit the buyer’s:
- monthly payments for the maximum purchase-assist mortgage, including impounds for hazard insurance premiums and property taxes, to approximately 31% of the buyer’s monthly gross income; and
- monthly payments on long-term debt to a maximum of 43% of the buyer’s gross monthly income. [See first tuesday Form 229-1, 229-2 and 230]
Lenders use the DTI ratios to evaluate the buyer’s ability to make timely mortgage payments. This is referred to as buyer mortgage capacity. [See first tuesday Form 230]
The buyer’s willingness to make mortgage payments is evidenced by the credit report. The credit history demonstrates to the lender whether or not the buyer has sufficient propensity to pay, called creditworthiness.
The DTIs can be adjusted depending on one or more compensating factors, including whether the buyer has:
- ample cash reserves;
- a low LTV; and
- spent more than five years at the same place of employment.
A mortgage approval issued by a lender is often conditioned on a buyer providing more information or taking corrective actions. For example:
- the physical condition of the property may need correction;
- title may need to be cleared of defects;
- derogatory entries on the buyer’s credit report may need to be eliminated; or
- the buyer’s long- or short-term debt needs to be reduced.
Once conditions for funding are met and verified by the lender, the mortgage is classified as approved. Escrow calls for mortgage documents and funds, and on funding, the sales transaction is closed.
Agents need to remind themselves that the degree of risk each lender finds acceptable is different. More often than not, a lender in the market does exist who will make a mortgage of some amount and under some conditions to nearly any buyer. Remember: it is the business of lenders to lend.