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Real Estate Loan Underwriting

Chapter 10

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Underwriting

• Estimating the value of the property being pledged as collateral to guarantee repayment and determining the ability of a borrower to repay the loan

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Definition of Value

• Value in use • Value in exchange • Market value

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Appraisal

• Estimate of property’s value at a specific point in time

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The Appraisal Process

• Drive-by appraising• Defining the appraisal problem• Determining the purpose for the appraisal• Examining the neighborhood and property being appraised• Collecting the pertinent data• Applying approaches to estimate value• Reconciling values estimated• Preparing the report

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Appraisal Approaches

• Direct sales comparison approach• Cost approach

– Depreciation• Income capitalization approach• Gross rent multiplier (GRM)• Reconciliation of data and opinion of value

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Qualifying the Borrower

• Loan application • Financial statement

– Assets– Liabilities– Net worth

Qualifying the Borrower, cont.

• Data verification – Deposits– Employment– Credit report– Credit evaluation– Credit scoring– Loan qualifying income ratios

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