The scope of Loan Approval
Property purchased with any type of mortgage first must be qualified by the lender. After the property has been appraised, surveyed, and the title searched, the loan underwriter will make a decision about the property. The purchaser also must be qualified. Lenders generally use five major qualifying guidelines in borrower qualification and risk analysis:
1. The quantity and the quality of the borrower's income ( does the borrower have the ability to repay the debit?
2. Other assets of Value ( What is the proposed Mortgagor's net worth, and what is the ratio of the total liabilities to the tool asset'?
3. Past Credit History ( is the borrower willing to repay the debit? )
4. Loan -to- Value Ratio ( How much equity is the borrower investing? )
5. The borrower's credit score ( In today's marketplace, an applicant's credit score is an important component of all loan decisions. The strength of the credit score determines the interest rate offered to the applicant and also dictates the amount of supporting documentation required for the loan application.
Loan Underwriting - ( borrower qualification and property qualification ) should not be confused with Buyer Qualification, which has to do with what the buyer wants and can afford. The loan underwriting process begins with the FNMA FHlMC Uniform residential Loan Application for all one- Family to four Family homes.
Quantity and quality of income ( ability to pay debit)
Prospective borrowers must provide information to lenders about their present employment, financial history, and present obligations. In addition, federal regulations require lenders to obtain documented proof, such as tax returns and finical statements. Lenders use this information to make a decision about loan approval or rejection. The lender is interested in the borrower's debt - paying ability and the risk involved. The quantity of the borrower's income is the amount earned. However, amount alone is not sufficient because the probable duration of the income is also important when the debt obligation may extend up to 30 years. So the quality of the income is also evaluated - the length of time of the applicant's present employment and probable continuation of that employment. Lenders also evaluate demands on a prospective borrower's income, that is, income taxes, installment credit amounts, proposed mortgage payments, and property taxes.
OTHER ASSETS OF VALUE
The second area of concern in analyzing a loan application is the total value of the mortgaged property plus other assets belonging to the applicant. Other real estate, savings accounts, stocks, bonds, and equity in personal property are examples of assets that could act as sources of funds for mortgage payments if the applicant's income is interrupted.
Credit History (Willingness to repay Debit) The third area of concern is the applicant's willingness to repay debit's based on credit history, obtainable from a local credit bureau. The existing national network or credit bureaus permits a comparatively rapid check of buyers, even of new residents from other states.
LTV Loan to Value
A home was purchased with a down payment f $36,000 and a loan of$20,000 at 6.5% for 30 years. Monthly payments are $1,264.14 What is the LTV
Example: 200,000 / $236,000 = .84745 or 85% LTV
Discount Points are based on the loan amount, not on the selling price. When calculating the actual cost in dollars added by the discount points, each point is equal to 1 percent of the loan amount ( 1 point = 1 % )
Example: On a $40,000 dollar loan for which the lender is charging 6 points, find the dollar cost of the points. Take 6 percent of $40,000
$40,000 x .06 = $2,400
When the lender receives the $2,400 only $37,600 is needed from the lender's funds to make up the total $40,000 that is loaned to the borrower. However, the lender will receive interest based on the entire $40,000 during the full term of the loan. The real yield to a lender includes not only this interest but also the $2,400 paid as a mortgage.
Lenders use computers or prepared tables to determine the number of discount points that must be paid. However, as a general rule of thumb, each discount point paid to the lender will increase the lender's yeild ( return ) by approximately 1/8 of 1 percent
( .00125 ) In using the rule of thumb, for each discount point charged by a lender add 1/8 percent to the stated ( contract 0 mortgage interest rate to estimate the lender's yield 9 and cost to the borrower ) from the loan
Example: A buyer wants to obtain a mortgage of $180,000 and a lender agrees to make the loan at 5 1/2 percent interest plus 6 points up front. What will the approximate yield be to the lender?
To the quoted interest rate of 5 1/2 percent, add 1/8 of 1 percent for each point, or 6.8 which reduces to 3/4:
1/8 x 6 = 6/8 = 3/4
Add the 3/4 to the mortgage interest rate of 5 1/2 percent, and the lender's real yield is approximately 6 1/4 percent on the money actually loaned.
3/4 % 5 1/2% = 61/4%
A borrower is getting a loan for $225,000 at 5 Percent interest, and a lender is charging 2 Points. Remember 1 point is equal to 1/8 or percent. What is the approximate return to the lender.
2/8 5% = 5 2/8 0r 5 1/4 percent or 5.25%
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