FINANCIAL FREEDOM

There are 3 main qualifying factors used to qualify a borrower for a mortgage loan: EQUITY, INCOME and CREDIT.

Everyone seems to be so concerned with the interest rate on their loan and how to get the lowest one possible. The answer is simple. Interest rate is directly related to ….RISK.
If you want to lower interest rate, eliminate the risk of the loan to the lender. Lenders look at risk based on the same three qualifying factors: Equity, income and credit.

Equity Risk Factors:

* Limited or no equity = High LTV %: the mortgage loan is secured by the equity in the property. If the property has little or no equity, it is a riskier loan for the lender.

* Poor marketability: If you are financing a unique property such as a log cabin or a home bigger or smaller than the homes in the area it affects the marketability of the home. In addition, mobile homes or manufactured homes have marketability issues as well.

* Short residential history: If you have not lived in the property very long, you have very little vested in it. You haven’t paid down the loan much, and now you are trying to finance it again. This could be adding debt on top of debt and is looked at as risky by the lender.

* Lack of comparable sales supporting value: If homes are not selling in the area, it is a risky loan to do. If the borrower defaults on the mortgage loan, the lender may have trouble recouping the costs and investment they made into the loan.


Income Risk Factors:

* Low Income = High DTI%: If the borrower doesn’t make much money or has bills that account for too much of the income that is received, it is a risky loan for the lender. The borrower may have to begin making choices of which bill to pay.

* Difficult to verify: There are many cases where a borrower may make plenty of money, but it is difficult to actually verify the money they bring in. Such is the case with many self-employed borrowers. To take advantage of tax laws, self-employed borrowers write off as much income by way of expenses as they can. This helps them avoid overpaying taxes. It hurts them, however, when trying to qualify for a mortgage loan.

* Short employment history or gaps in employment: The lender wants to know with reasonable surety that the employment the borrower has now while qualifying for the loan will remain in place. Job hoppers or borrowers who show periods of unemployment present more risk to the lender. What if the borrower takes a new job for less money? What if they become unemployed?

* Low disposable income: This ties in to the DTI%. Disposable income is what the borrower has left after all the reported monthly obligations are paid. Remember, this has to cover utilities, automobile, taxes, groceries, etc. None of those expenses are figured into the DTI%. Low disposable income indicates the borrower is probably over-extended and thus presents a riskier lending scenario.

* Unemployed/ laid off borrower: Obviously, if the borrower doesn’t have a job or a way to pay back the loan, it presents a high level of risk for the lender.


Credit Risk Factors:

* Late payments on the current or past mortgage accounts: The mortgage lender is most concerned with how the borrower has paid the mortgage loans in the past. If they have late payments in the past on mortgage accounts, it is a good indication that it may happen again in the future- showing a level of risk to the lender.

* Late payments on other accounts: After the mortgage accounts, lenders look at the other debt obligations to see how the borrower has paid those. Although not often weighted as heavily as the mortgages, late payments on other account still affect the level of risk inherent with issuing a mortgage to that borrower.

* Derogatory Accounts: Derogatory accounts include foreclosures, bankruptcies, charge offs and collections. If the borrower has had these issues in the past, the lender must weigh the level of risk and the probability that it could happen again in the future.

* Low Credit Scores: This is an indicator that the borrower has had some overall credit problems in the past. The lender will only lend certain amounts based on the various credit scores.

* Lack of credit history: Lenders like to see a pattern of good payment history on the credit report. If the borrower has little or no credit, the lender may want the borrower to establish a good payment history on other accounts before taking the risk in issuing a mortgage loan.

* High balances compared to limits: This typically shows that the borrower is over-extended and living on credit. For obvious reasons, this is risky for the lender. Usually, it is only a matter of time before the borrower will start getting behind on those payments, especially if they do not change the lifestyle to live within their means.