Thomas Nelson asked:




Do You Pass The Mortgage Lender Analysis? When a mortgage lender reviews a real estate loan application, the primary concern for both home loan applicant, the buyer, and the mortgage lender is to approve loan requests that show high probability of being repaid in full and on time, and to disapprove requests that are likely to result in default and eventual foreclose. How is the mortgage lenders decision made?

The mortgage lender begins the loan analysis procedure by looking at the property and the proposed financing. Using the property address and legal description, an appraiser is assigned to prepare an appraisal of the property and a title search is ordered. These steps are taken to determine the fair market value of the property and the condition of title. In the event of default, this is the collateral the lender must fall back upon to recover the loan. If the loan request is in connection with a purchase, rather than the refinancing of an existing property, the mortgage lender will know the purchase price. As a rule, home loans are made on the basis of the appraised value or purchase price, whichever is lower. If the appraised value is lower than the purchase price, the usual procedure is to require the buyer to make a larger cash down payment. The mortgage lender does not want to over-loan simply because the buyer overpaid for the property.

The year the home was built is useful in setting the loan’s maturity date. The idea is that the length of the home loan should not outlast the remaining economic life of the structure serving as collateral. Note however, chronological age is only part of this decision because age must be considered in light of the upkeep and repair of the structure and its construction quality.

Loan-to-Value Ratios

The mortgage lender next looks at the amount of down payment the borrower proposes to make, the size of the loan being requested and the amount of other financing the borrower plans to use. This information is then converted into loan-to-value ratios. As a rule, the more money the borrower places into the deal, the safer the loan is for the mortgage lender. On an uninsured home loan, the ideal loan-to-value ratio for a lender on owner-occupied residential property is 70% or less. This means the value of the property would have to fall more than 30% before the debt owed would exceed the property’s value, thus encouraging the borrower to stop making mortgage loan payments. Because of the nearly constant inflation in housing prices since the 40s, very few residential properties have fallen 30% or more in value.

Loan-to-value ratios from 70% through 80% are considered acceptable but do expose the mortgage lender to more risk. Lenders sometimes compensate by charging slightly higher interest rates. Loan-to-value ratios above 80% present even more risk of default to the lender, and the lender will either increase the interest rate charged on these home loans or require that an outside insurer, such as FHA or a private mortgage insurer, be supplied by the borrower.

Mortgage Closing Settlement Funds

The lender then wants to know if the borrower has adequate funds for settlement (the closing). Are these funds presently in a checking or savings account, or are they coming from the sale of the borrower’s present real estate property? In the latter case, the mortgage lender knows the present loan is contingent on another closing. If the down payment and settlement funds are to be borrowed, then the lender will want to be extra cautious as experience has shown that the less of his own money a borrower puts into a purchase, the higher the probability of default and foreclosure.

Purpose Of Mortgage Loan

The lender is also interested in the proposed use of the property. Mortgage lenders feel most comfortable when a home loan is for the purchase or improvement of a property the loan applicant will actually occupy. This is because owner-occupants usually have pride-of-ownership in maintaining their property and even during bad economic conditions will continue to make the monthly payments. An owner-occupant also realizes that if he/she stops paying, they will have to vacate and pay for shelter elsewhere.

If the home loan applicant intends to purchase a dwelling to rent out as an investment, the lender will be more cautious. This is because during periods of high vacancy, the property may not generate enough income to meet the loan payments. At that point, a strapped-for-cash borrower is likely to default. Note too, that lenders generally avoid loans secured by purely speculative real estate. If the value of the property drops below the amount owed, the borrower may see no further logic in making the loan payments.

Lastly the mortgage lender assesses the borrower’s attitude toward the proposed loan. A casual attitude, such as “I’m buying because real estate always goes up,” or an applicant who does not appear to understand the obligation he is undertaking would bring low rating here. Much more welcome is the home loan applicant who shows a mature attitude and understanding of the mortgage loan obligation and who exhibits a strong and logical desire for ownership.

The Borrower Analysis

The next step is the mortgage lender to begin an analysis of the borrower, and if there is one, the co-borrower. At one time, age, sex and marital status played an important role in the lender’s decision to lend or not to lend. Often the young and the old had trouble getting home loans, as did women and persons who were single, divorced, or widowed. Today, the Federal Equal Credit Opportunity Act prohibits discrimination based on age, sex, race and marital status. Mortgage lenders are no longer permitted to discount income earned by women even if it is from part-time jobs or because the woman is of child-bearing age. Of the home applicant chooses to disclose it, alimony, separate maintenance, and child support must be counted in full. Young adults and single persons cannot be turned down because the lender feels they have not “put down roots.” Seniors cannot be turned down as long as life expectancy exceeds the early risk period of the loan and collateral is adequate. In other words, the emphasis in borrower analysis is now focused on job stability, income adequacy, net worth and credit rating.

Mortgage lenders will ask questions directed at how long the applicants have held their present jobs and the stability of those jobs themselves. The lender recognizes that loan repayment will be a regular monthly requirement and wishes to make certain the applicants have a regular monthly inflow of cash in a large enough quantity to meet the mortgage loan payment as well as their other living expenses. Thus, an applicant who possesses marketable job skills and has been regularly employed with a stable employer is considered the ideal risk. Persons whose income can rise and fall erratically, such as commissioned salespersons, present greater risk. Persons whose skills (or lack of skills) or lack of job seniority result in frequent unemployment are more likely to have difficulty repaying a home loan. The mortgage lender also inquires as to the number of dependents the applicant must support out of his or her income. This information provides some insight as to how much will be left for monthly house payments.

Home Loan Applicants’ Monthly Income

The lender looks at the amount and sources of the applicants’ income. Sheer quantity alone is not enough for home loan approval; the income sources must be stable too. Thus a lender will look carefully at overtime, bonus and commission income in order to estimate the levels at which these may reasonably be expected to continue. Interest, dividend and rental income would be considered in light of the stability of their sources also. Under the “other income” category, income from alimony, child support, social security, retirement pensions, public assistance, etc. is entered and added to the totals for the applicants.

The lender then compares what the applicants have been paying for housing with what they will be paying if the loan is approved. Included in the proposed housing expense total are principal, interest, taxes and insurance along with any assessments or homeowner association dues (such as in a condominium or townhomes). Some mortgage lenders add the monthly cost of utilities to this list.

A proposed monthly housing expense is compared to gross monthly income. A general rule of thumb is that monthly housing expense (PITI) should not exceed 25% to 30% of gross monthly income. A second guideline is that total fixed monthly expenses should not exceed 33% to 38% of income. This includes housing payments plus automobile payments, installment loan payments, alimony, child support, and investments with negative cash flows. These are general guidelines, but mortgage lenders recognize that food, health care, clothing, transportation, entertainment and income taxes must also come from the applicants’ income.

Liabilities and Assets

The lender is interested in the applicants’ sources of funds for closing and whether, once the loan is granted, the applicants have assets to fall back upon in the event of an income decrease (a job lay-off) or unexpected expenses such as hospital bills. Of particular interest is the portion of those assets that are in cash or are readily convertible into cash in a few days. These are called liquid assets. If income drops, they are much more useful in meeting living expenses and mortgage loan payments than assets that may require months to sell and convert to cash; that is, assets which are illiquid.

A mortgage lender also considers two values for life insurance holders. Cash value is the amount of money the policyholder would receive if he surrendered his/her policy or, alternatively, the amount he/she could borrow against the policy. Face amount is the amount that would be paid in the event of the insured’s death. Mortgage lenders feel most comfortable if the face amount of the policy equals or exceeds the amount of the proposed home loan. Less satisfactory are amounts less than the proposed loan or none at all. Obviously a borrower’s death is not anticipated before the loan is repaid, but lenders recognize that its possibility increases the probability of default. The likelihood of foreclosure is lessened considerably if the survivors receive life insurance benefits.

A lender is interested in the applicants’ existing debts and liabilities for two reasons. First, these items will compete each month against housing expenses for available monthly income. Thus high monthly payments may reduce the size of the loan the lender calculates that the applicants will be able to repay. The presence of monthly liabilities is not all negative: it can also show the mortgage lender that the applicants are capable of repaying their debts. Second, the mortgage applicants’ total debts are subtracted from their total assets to obtain their net worth. If the result is negative (more owed than owned), the mortgage loan request will probably be turned down as too risky. In contrast, a substantial net worth can often offset weaknesses elsewhere in the application, such as too little monthly income in relation to monthly housing expense.

Past Credit Record

Lenders examine the applicants’ past record of debt repayment as an indicator of the future. A credit report that shows no derogatory information is most desirable. Applicants with no previous credit experience will have more weight placed on income and employment history. Applicants with a history of collections, adverse judgments or bankruptcy within the past three years will have to convince the lender that this mortgage loan will be repaid on time. Additionally, the applicants may be considered poorer risks if they have guaranteed the repayment of someone else’s debt by acting as a co-maker or endorser. Lastly, the lender may take into consideration whether the applicants have adequate insurance protection in the event of major medical expenses or a disability that prevents returning to work.

When a mortgage lender will not provide a loan on a property, one must seek alternative sources of financing or lose the right to purchase the home.

Carolyn

Gary Gresham asked:




Is an interest only home mortgage loan a good or bad idea for financing a home? These loans have become very popular and are one of the many different kinds of financing available for property.

Opinions vary as to whether an interest only home mortgage loan is a good idea for the average home owner, with valid points being made on both sides. If you are in the market for a home you need to consider all the finance options available to you, together with your ability to repay them.

Here are some interest only mortgage loan pro and cons to look at both sides of this kind of financing.

If you are employed full time, single and making a good salary then an interest only home mortgage loan may not be the best financing for you. That’s because you could pay off your loan at a lower rate of interest and in less time with a different kind of loan program.

On the other hand, you could save a lot of money by only paying the interest. It is possible that if you invested this in a safe investment you would not only have enough to pay off the principle on the mortgage, but would also gain a little capital for yourself at the same time.

This of course is a gamble, because how many people will actually invest the savings? However, if you have no other financial responsibilities, it’s one you might find attractive.

If you work in seasonal employment, like in the tourist industry, you may find that paying an interest only monthly mortgage payment allows you the freedom to pay a minimum amount when you are in “off season”.

But during the time you are working, you can make accelerated payments off the principle in addition to the interest.

The risk of paying an interest only mortgage loan repayment is that the principle is not being repaid. Unless the price of homes in your area rises, you don’t build up any equity in your home.

Paying the monthly mortgage payment on an interest only mortgage can become like paying rent. You don’t have the safety net of being able to sell your home to raise cash if you are faced with some emergency in your life.

As a young professional just starting out on your own, this might not be an issue you need to consider. But if you are married and have a family, you should seriously consider the implications of not having the kind of mortgage that allows you to build a financial safety net.

Home equity gives you a form of financial security that can come in handy if you really need to use it. This should be a consideration when deciding which home loan to choose.

A lower monthly mortgage payment will always look attractive on paper, but consider all the implications carefully before taking the option of an interest only mortgage loan as a way of financing your home.

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Jared Lee asked:




Several types of mortgage loans are being floated in the market by multiple financial institutions. However, it is advisable to have information regarding various criteria that are taken into consideration by mortgage lending firms while determining the eligibility of a borrower for a mortgage home loan. As these criteria determine the interest rate on the loan, knowledge about them is even more vital.

The most important criterion that lenders usually go for is about the repayment capability of the borrower. Credit history and FICO scores of the borrower provide ample information regarding financial status and the repayment history of the borrower. Lenders usually give prime importance to borrowers having a reasonable credit history with credit scores of more than 600. Credit reports of the borrower can be obtained from any of the three leading credit bureaus in the U.S.. Credit reports contain details such as the income of the borrower, his credits, and any late payments made towards rent, mortgages and credit card bills.

Another important criterion is the debt-to-income ratio of the borrower that determines the eligibility and interest rate on the loan. Borrowers having a debt-to-income ratio of 28/36 are considered ideal for a mortgage loan. However, certain lenders entertain customers with a poor debt-to-income ratio. But, loans to these customers are provided at a higher interest rate and require a high down payment.

Apart from these, the customer is expected to have a steady income and a satisfactory employment record so as to multiply his chances of getting a mortgage loan approved. The customer must be employed with a single employer for a minimum period of 2 years in order to be eligible for a loan.

Interest rates on the loan also vary if the loans are federally insured or assured by any private mortgage insurance companies.

Mary