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For those skeptics who still think that whether or not they get a mortgage depends on the twinkle in the mortgage underwriters eye, the Federal Home Loan Mortgage Corporation (Freddie Mac) has come out with Publication 19 entitled, "Guidelines for Underwriting Home Mortgages." It is a best seller in the mortgage industry.

Since almost all residential mortgage loans today are purchased by institutional investors (the secondary market), mortgages must be investment quality. This means the loan must be made to a borrower from whom timely repayment of the debt can be expected, and the debt must be secured by real property of sufficient value to recover the lenders investment if the borrower defaults.

In other words, the lender must ask what is the verifiable current income, anticipated earning ability and credit history of the borrower and what is the nature and market value of the real property being used as the security?

Remembering that underwriting mortgages is an art, not a science and realizing that it can only summarize a 67 page pamphlet, what follows are the highlights and is in no way to be considered exhaustive.

As to the first question, the underwriter must evaluate the probable stability of the borrowers income by determining occupation, employment history, future opportunities, education and training for the position occupied.

Job changes alone, provided there is sufficient reason for them, will not result in an unfavorable report and education and training increase job opportunities and enhance earning capacity.

Income from houses, commissions or overtime are considered if they are typical for the occupation and their continuation is probable based on foreseeable economic circumstances. This income, as well as income by self-employed persons, must be verified by at least two years of income tax forms.

Rental income is considered only after a cash flow analysis of the rental property is done, that is, income less expenses, vacancies, maintenance, etc. The underwriter must also consider the rental demand, but not use depreciation and other tax write-offs -- only actual income.

Other income -- alimony, child support, public assistance payments and retirements benefits -- will be considered, if paid pursuant to a written agreement or court decree, have been received regularly for some time, and if procedures are available to compel payment of that type income if it should stop.

Generally, the combined monthly housing expenses -- principal and interest on the mortgage, fire insurance premiums, and real estate taxes -- should not exceed 25 to 28 percent of monthly income and additional long term debt (more than ten remaining payments) including the monthly housing expenses should not exceed 33 to 36 percent of monthly income. Note that utility charges are not included in the monthly housing expense.

Finally, the borrower must show sufficient liquid assets to show funds for the down payment and closing costs. If the borrower can demonstrate an ability to meet payments and manage financial affairs, the fact he has no credit history (rent receipts, utility payments, cash receipts are often after all a form of credit) should not be used against him.

As to the second question, the appraiser must be hired by the lender; he may have no interest direct or indirect in the appraisal. He must be qualified by his or her work and not by whether or not he or she belongs to a particular association.

The appraiser's job is to find market value which is defined as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale. The buyer and seller -- each acting prudently and knowledgeably -- assume that the price is not affected by undue stimulus.

In other words, the sale price represents normal consideration for the property sold, unaffected by special or creative financing or sales concessions (no hanky-panky by anyone associated with the sale). The appraisal cannot be dated longer than 120 days before the closing or 180 days for new construction.

The appraisal report must contain all three standard approaches to market value -- cost (estimate of the current reproduction cost of exact improvements), sales comparison and income.

It is interesting to note that environmental concerns must be considered as affecting value -- presence of asbestos, signs of toxic substances like discolored soil, dead ground vegetation, seeping liquids and proximity to industrial sites, waste dumps, and the like.

Finally, remember that the secondary market does not purchase mortgages on primarily commercial, industrial, agricultural or developmental land, so the property must be in a residential area, zoned as such.

Franklin Pack, senior partner of Pack, Hartman, Ball & Huckabone, P.C., is a real estate practitioner, lecturer and columnist.

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