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