| There are 3 main qualifying factors used to | | | | borrower takes a new job for less money? What |
| qualify a borrower for a mortgage loan: | | | | if they become unemployed? |
| EQUITY, INCOME and CREDIT. | | | | |
| | | | * Low disposable income: This ties in to the |
| Everyone seems to be so concerned with the | | | | DTI%. Disposable income is what the borrower |
| interest rate on their loan and how to get | | | | has left after all the reported monthly |
| the lowest one possible. The answer is | | | | obligations are paid. Remember, this has to |
| simple. Interest rate is directly related to | | | | cover utilities, automobile, taxes, |
| ….RISK. If you want to lower interest | | | | groceries, etc. None of those expenses are |
| rate, eliminate the risk of the loan to the | | | | figured into the DTI%. Low disposable income |
| lender. Lenders look at risk based on the | | | | indicates the borrower is probably |
| same three qualifying factors: Equity, income | | | | over-extended and thus presents a riskier |
| and credit. | | | | lending scenario. |
| | | | |
| Equity Risk Factors: | | | | * Unemployed/ laid off borrower: Obviously, |
| | | | if the borrower doesn't have a job or a way |
| * Limited or no equity = High LTV %: the | | | | to pay back the loan, it presents a high |
| mortgage loan is secured by the equity in the | | | | level of risk for the lender. |
| property. If the property has little or no | | | | |
| equity, it is a riskier loan for the lender. | | | | Credit Risk Factors: |
| | | | |
| * Poor marketability: If you are financing a | | | | * Late payments on the current or past |
| unique property such as a log cabin or a home | | | | mortgage accounts: The mortgage lender is |
| bigger or smaller than the homes in the area | | | | most concerned with how the borrower has paid |
| it affects the marketability of the home. In | | | | the mortgage loans in the past. If they have |
| addition, mobile homes or manufactured homes | | | | late payments in the past on mortgage |
| have marketability issues as well. | | | | accounts, it is a good indication that it may |
| | | | happen again in the future- showing a level |
| * Short residential history: If you have not | | | | of risk to the lender. |
| lived in the property very long, you have | | | | |
| very little vested in it. You haven't paid | | | | * Late payments on other accounts: After the |
| down the loan much, and now you are trying to | | | | mortgage accounts, lenders look at the other |
| finance it again. This could be adding debt | | | | debt obligations to see how the borrower has |
| on top of debt and is looked at as risky by | | | | paid those. Although not often weighted as |
| the lender. | | | | heavily as the mortgages, late payments on |
| | | | other account still affect the level of risk |
| * Lack of comparable sales supporting value: | | | | inherent with issuing a mortgage to that |
| If homes are not selling in the area, it is a | | | | borrower. |
| risky loan to do. If the borrower defaults on | | | | |
| the mortgage loan, the lender may have | | | | * Derogatory Accounts: Derogatory accounts |
| trouble recouping the costs and investment | | | | include foreclosures, bankruptcies, charge |
| they made into the loan. | | | | offs and collections. If the borrower has had |
| | | | these issues in the past, the lender must |
| Income Risk Factors: | | | | weigh the level of risk and the probability |
| | | | that it could happen again in the future. |
| * Low Income = High DTI%: If the borrower | | | | |
| doesn't make much money or has bills that | | | | * Low Credit Scores: This is an indicator |
| account for too much of the income that is | | | | that the borrower has had some overall credit |
| received, it is a risky loan for the lender. | | | | problems in the past. The lender will only |
| The borrower may have to begin making choices | | | | lend certain amounts based on the various |
| of which bill to pay. | | | | credit scores. |
| | | | |
| * Difficult to verify: There are many cases | | | | * Lack of credit history: Lenders like to see |
| where a borrower may make plenty of money, | | | | a pattern of good payment history on the |
| but it is difficult to actually verify the | | | | credit report. If the borrower has little or |
| money they bring in. Such is the case with | | | | no credit, the lender may want the borrower |
| many self-employed borrowers. To take | | | | to establish a good payment history on other |
| advantage of tax laws, self-employed | | | | accounts before taking the risk in issuing a |
| borrowers write off as much income by way of | | | | mortgage loan. |
| expenses as they can. This helps them avoid | | | | |
| overpaying taxes. It hurts them, however, | | | | * High balances compared to limits: This |
| when trying to qualify for a mortgage loan. | | | | typically shows that the borrower is |
| | | | over-extended and living on credit. For |
| * Short employment history or gaps in | | | | obvious reasons, this is risky for the |
| employment: The lender wants to know with | | | | lender. Usually, it is only a matter of time |
| reasonable surety that the employment the | | | | before the borrower will start getting behind |
| borrower has now while qualifying for the | | | | on those payments, especially if they do not |
| loan will remain in place. Job hoppers or | | | | change the lifestyle to live within their |
| borrowers who show periods of unemployment | | | | means. |
| present more risk to the lender. What if the | | | | |