Understanding the Home Loan Application in addition to Mortgage Approval – The Mortgage Lender Analysis
- February 26, 2017
- Posted by: marlenedubois
- Category: CPR Training
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, in addition to the mortgage lender is usually to approve loan requests of which show high probability of being repaid in full in addition to on time, in addition to to disapprove requests of which are likely to result in default in addition to eventual foreclose. How is usually the mortgage lenders decision made?
The mortgage lender begins the loan analysis procedure by looking at the property in addition to the proposed financing. Using the property address in addition to legal description, an appraiser is usually assigned to prepare an appraisal of the property in addition to a title search is usually ordered. These steps are taken to determine the fair market value of the property in addition to the condition of title. from the event of default, This kind of is usually the collateral the lender must fall back upon to recover the loan. If the loan request is usually in connection that has a purchase, rather than the refinancing of an existing property, the mortgage lender will know the purchase cost. As a rule, home loans are made on the basis of the appraised value or purchase cost, whichever is usually lower. If the appraised value is usually lower than the purchase cost, the usual procedure is usually 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 usually useful in setting the loan’s maturity date. The idea is usually of which the length of the home loan should not outlast the remaining economic life of the structure serving as collateral. Note however, chronological age is usually only part of This kind of decision because age must be considered in light of the upkeep in addition to repair of the structure in addition to its construction quality.
The mortgage lender next looks at the amount of down payment the borrower proposes to make, the size of the loan being requested in addition to the amount of different financing the borrower plans to use. This kind of information is usually then converted into loan-to-value ratios. As a rule, the more money the borrower places into the deal, the safer the loan is usually for the mortgage lender. On an uninsured home loan, the ideal loan-to-value ratio for a lender on owner-occupied residential property is usually 70% or less. This kind of means the value of the property would certainly have to fall more than 30% before the debt owed would certainly exceed the property’s value, thus encouraging the borrower to stop doing 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 via 70% through 80% are considered acceptable yet 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, in addition to the lender will either increase the interest rate charged on these home loans or require of which 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 via the sale of the borrower’s present real estate property? from the latter case, the mortgage lender knows the present loan is usually contingent on another closing. If the down payment in addition to settlement funds are to be borrowed, then the lender will want to be extra cautious as experience has shown of which the less of his own money a borrower puts into a purchase, the higher the probability of default in addition to foreclosure.
Purpose Of Mortgage Loan
The lender is usually also interested from the proposed use of the property. Mortgage lenders feel most comfortable when a home loan is usually for the purchase or improvement of a property the loan applicant will actually occupy. This kind of is usually because owner-occupants usually have pride-of-ownership in maintaining their property in addition to even during bad economic conditions will continue to make the monthly payments. An owner-occupant also realizes of which if he/she stops paying, they will have to vacate in addition to 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 kind of is usually because during periods of high vacancy, the property may not generate enough income to meet the loan payments. At of which point, a strapped-for-cash borrower is usually likely to default. Note too, of which 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 doing 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 usually undertaking would certainly bring low rating here. Much more welcome is usually the home loan applicant who shows a mature attitude in addition to understanding of the mortgage loan obligation in addition to who exhibits a strong in addition to logical desire for ownership.
The Borrower Analysis
The next step is usually the mortgage lender to begin an analysis of the borrower, in addition to if there is usually one, the co-borrower. At one time, age, sex in addition to marital status played an important role from the lender’s decision to lend or not to lend. Often the young in addition to the old had trouble getting home loans, as did women in addition to persons who were single, divorced, or widowed. Today, the Federal Equal Credit Opportunity Act prohibits discrimination based on age, sex, race in addition to marital status. Mortgage lenders are no longer permitted to discount income earned by women even if the idea is usually via part-time jobs or because the woman is usually of child-bearing age. Of the home applicant chooses to disclose the idea, alimony, separate maintenance, in addition to child support must be counted in full. Young adults in addition to 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 in addition to collateral is usually adequate. In different words, the emphasis in borrower analysis is usually today focused on job stability, income adequacy, net worth in addition to credit rating.
Mortgage lenders will ask questions directed at how long the applicants have held their present jobs in addition to the stability of those jobs themselves. The lender recognizes of which loan repayment will be a regular monthly requirement in addition to 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 different living expenses. Thus, an applicant who possesses marketable job skills in addition to has been regularly employed that has a stable employer is usually considered the ideal risk. Persons whose income can rise in addition to 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 kind of 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 in addition to sources of the applicants’ income. Sheer quantity alone is usually not enough for home loan approval; the income sources must be stable too. Thus a lender will look carefully at overtime, bonus in addition to commission income in order to estimate the levels at which these may reasonably be likely to continue. Interest, dividend in addition to rental income would certainly be considered in light of the stability of their sources also. Under the “different income” category, income via alimony, child support, social security, retirement pensions, public assistance, etc. is usually entered in addition to 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 usually approved. Included from the proposed housing expense total are principal, interest, taxes in addition to 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 kind of list.
A proposed monthly housing expense is usually compared to gross monthly income. A general rule of thumb is usually of which monthly housing expense (PITI) should not exceed 25% to 30% of gross monthly income. A second guideline is usually of which total fixed monthly expenses should not exceed 33% to 38% of income. This kind of includes housing payments plus automobile payments, installment loan payments, alimony, child support, in addition to investments with negative cash flows. These are general guidelines, yet mortgage lenders recognize of which food, health care, clothing, transportation, entertainment in addition to income taxes must also come via the applicants’ income.
Liabilities in addition to Assets
The lender is usually interested from the applicants’ sources of funds for closing in addition to whether, once the loan is usually granted, the applicants have assets to fall back upon from the event of an income decrease (a job lay-off) or unexpected expenses such as hospital bills. Of particular interest is usually the portion of those assets of which 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 in addition to mortgage loan payments than assets of which may require months to sell in addition to convert to cash; of which is usually, assets which are illiquid.
A mortgage lender also considers two values for life insurance holders. Cash value is usually the amount of money the policyholder would certainly receive if he surrendered his/her policy or, alternatively, the amount he/she could borrow against the policy. Face amount is usually the amount of which would certainly be paid from 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 usually not anticipated before the loan is usually repaid, yet lenders recognize of which its possibility increases the probability of default. The likelihood of foreclosure is usually lessened considerably if the survivors receive life insurance benefits.
A lender is usually interested from the applicants’ existing debts in addition to liabilities For just 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 of which the applicants will be able to repay. The presence of monthly liabilities is usually not all negative: the idea can also show the mortgage lender of which the applicants are capable of repaying their debts. Second, the mortgage applicants’ total debts are subtracted via their total assets to obtain their net worth. If the result is usually 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 from 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 of which shows no derogatory information is usually most desirable. Applicants with no previous credit experience will have more weight placed on income in addition to employment history. Applicants that has a history of collections, adverse judgments or bankruptcy within the past three years will have to convince the lender of which This kind of 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 from the event of major medical expenses or a disability of which 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.