How Can a Lender Determine the Eligibility of the Borrower?

Lenders want to attract high quality borrowers because that is crucial to growing their business. But who is a good borrower? What are the factors that a lender needs to consider while determining the eligibility of the borrower?

 

Credit history

 

This is of utmost importance. Before making a loan, the lender has to verify the personal credit history of the borrower. Lenders should see how well the borrower has handled their personal and business debts in the past.

 

If the borrower hasn't obtained loans in the past, assessing their credit history may not be easy. Then the lender should rely on the person's work history, job security and personal references. If these are satisfactory, the lender should consider making a loan.

 

Credit score

 

The lender should use a reliable credit-rating agency to analyze the borrower's payment history to their business obligations. The lender should also ensure that the borrower is up-to-date with payments on their existing loans.

 

Repayment capacity

 

The lender should consider unforeseeable events. For example, the company may suffer an unexpected downturn after obtaining the loan. This will affect its repayment capacity. The lender has to verify that the borrower has the capacity to turn other assets into cash should profits dip. Assets can be investment certificates, real estate holdings, machinery or equipment.

 

Cash flow

 

A cash-flow based lender should look at the income of the company. Cash flow is the company's net profits. Generally speaking, in order to obtain a loan worth $100, the borrower / company should have $150 in cash flow.

 

Collateral

 

Most lenders offer both secured and non-secured loans. When the lender makes a secured loan, it asks the borrower to pledge an asset as collateral. This can be real estate, machinery, inventory, and equipment etc.

 

Before applying for a business loan, the borrower has to consider quite a few factors:

 

·         Ideally, the loan applicant should be the chief decision maker in the company.

·         The company should be operating in the sector for at least 3 years.

·         The company or its owner must not have filed for bankruptcy in the last ten years.

·         The loan applicant should have paid his / her bills on time.

 

Factors that might affect your chances of obtaining the loan

 

If there is a lawsuit or a tax lien against the loan applicant or the company, the lender may reject the loan application. Having multiple sources of credit may also reduce the borrower’s eligibility for a loan.

 

What to expect after applying for a loan

 

The loan application should be filed by the owner of the company. If the company has several owners, at least two of them should sign the application. Companies that have been around for three or more years are more likely to receive funding.

 

If the owner or the company has declared bankruptcy in the last ten years, the lender will probably not entertain the loan application. However, a company can improve its chances of getting a loan by repaying its creditors. If there a lien or a judgment against the company, it should release all of them before applying for credit.

 

Profitability

 

The lender will typically look at the company’s tax returns to see if it had made profits during the past few years. If it hasn’t reported profits, the company will probably find it difficult to make loan repayments. In this case, the loan application is more likely to be rejected.

30-Year Mortgage Rates Drop Once Again

U.S. mortgage rates dropped once again for the second week in a row. Two weeks ago, the rates had increased. According to Freddie Mac, a 30-year loan’s average dropped to 4.19 %. This was up from 4.20% the week before. However, the average rate for a 15-year mortgage remained the same at 3.36%.

According to the National Association of Realtors, sales for existing homes fell in the month of August. Plus, the number of people who actually signed on the dotted line to buy new houses was lower in August. Also, the number of first-time homebuyers was also low. This could mean that slow home sales could still be the case for the next few weeks. On the plus side, newly built houses were sold at a face pace in August.

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What Makes a Good Lender?

Have you ever wondered how you could do your job better as a lender? Do you know what brokers are looking for in lenders? If you’re looking for an honest assessment of what makes a good lender, read on.

It’s easy for lenders to appear like they know what they’re doing when they have the most recent technology at their disposal and a wide range of products to promote. While each lender has a niche to build on, what brokers look for in lenders may not be so expected. Mortgage Professional America conducted a survey which consisted of no-holds-barred feedback from loan originators.

Here’s a look at what brokers are concerned about when it comes to working with lenders:

Service

Even more important than price is the level of service that a lender can provide. Brokers agree that service is the first aspect that they consider when choosing a lender to work with. They know what good client service is because they provide it themselves, so it makes sense that they look for professionalism.

Communication

There’s nothing worse than a broker and their clients being left in the dark about the status of a loan that is processing. Communication is vital for lenders so that timelines can be set. When these timelines cannot be met, they need to communicate this ahead of time to avoid any issues.

Thorough underwriting

Lenders should have an underwriting standard so that it is accurate every single time. You don’t want to find a mistake later on down the line that will result in the denial of the loan. It’s best to understand the underwriting rules from the beginning.

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All About Subprime Mortgages

Do you know what you need to be aware of regarding subprime mortgages? As a lender, it is your responsibility to learn about the current mortgage trends as well as the different types of mortgages.

So what exactly is a subprime mortgage?

A subprime mortgage is a mortgage that is made available to people who have lower credit ratings. Due to their low credit ratings, these clients cannot be offered the conventional mortgage because they are considered to have a higher default rate on the loan. In addition, they are charged a higher interest rate compared to the conventional borrowers in order for the lender to compensate them as a result of harboring a higher risk load.

The subprime mortgage industry has been faced by a number of constrains which almost led to its foreclosure and financial meltdown a few years ago. The two major issues include high unemployment rate and drastic increase in defaults. However these were overcome through proper advice to borrowers and guiding them through available options.

Who qualifies for subprime mortgages?

A credit rating of below 600 points will only qualify one for a subprime mortgage. Two major factors that make a candidate qualify for this mortgage are a declaration of bankruptcy and filing a late bill payment. They would need time to raise their credit points to qualify for a conventional mortgage. Other than the credit ratings, a person may be deemed to fall into the class of subprime if they do not bear proof of their assets or income like they would do with a conventional home loan.

Subprime mortgages are usually balloon mortgages or they are ARMs, or even both. They are usually more pronounced during when the demand for housing is high because at that point they attract a lower interest rate in the initial 2-3 years. However, after this period the rates are reviewed upwards after semiannual or annual periods. Subprime mortgages loan also may involve a balloon payment and a prepayment charge.

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Condo Market is on the Rebound

New condo developments are being built all over the United States as the condo housing market booms for the first time since the housing crash. From L.A. to New York to Boston, condos are sprouting up at a fast rate. And according to developers and lenders, condos are selling. Soon, they will be selling like hotcakes.

So what’s the reason for the sudden boom in the condo market? After all, condominiums are notoriously known for being risky bets in real estate for developers. The condo boom is actually in the early stages of a long recovery process for condominium sales. Financial experts predict that today’s renters will soon be tomorrow’s condo buyers.

The current scramble to build developments is an attempt to keep up with the growing demand for condos. Some brokers claim that there is a big lack of inventory in the market so far.

Condos are highly sought after by young, first-time homebuyers and empty nesters that are looking to live in denser areas like Miami, Seattle, and San Francisco. A few years ago, high-end condominium sales began to rise when rich international buyers wanted to buy them. As the demand for condos goes up, smaller markets are now beginning to catch up.
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Mortgage Company Creates Marketing Niche as Lending Rules Tighten

 

There is hope for many borrowers who cannot quality for a typcial mortgage due to the new lending rules. WJ Bradley Mortgage Capital, a Colorado home loan originator, considers those who are left in the dust by the new rules to be the perfect opportunity.

According to an article on Reuters, WJ Bradley will welcome borrowers who have debt-to-income ratios and FICO scores that are outside levels required for typical agency home loans. They will begin lending around the US in the next month or so. WJ Bradley plans to offer one type of loan to begin with a 5/1 ARM, an adjustable-rate mortgage that has a five-year introductory fixed-rate period before it adjusts once a year thereafter.

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How to Get a Workaround for the Non-Qualified Mortgages

Many lenders are concerned about the advent of Qualified Mortgages (QM), with the federal government implementing standards and compliances for mortgage loans. The concerns are for the potential litigations rising in future due to, when and if, the borrowers default on payments. But there are industry experts discussing opportunities which exist beyond the barriers of QM. These opportunities are for lenders to make profits and deal with mortgages having extremely low liabilities.

Identify the borrowers with minimum risk potentials from the ‘unqualified’ mortgages

One of the data firms has mentioned in their reports that around 60% of mortgages will not qualify as QMs. Within this percentage of mortgages, there are loan programs which have the debt-to-income (DIT) ratio exceeding 43%; completely unacceptable under QM norms. The mindset – all DTIs surpassing 43% will be defective – with which the norm was drafted is wrong. In this list of defective DTIs, there are borrowers who have excellent credit history, have made 25% to 30% down payment for a house, can provide paperwork showing their assets and income, and can also prove their employment under professional occupations for a term of more than five to six years. With these kinds of borrowers the loans are incredibly safe; ideal for non-QM programs.

What should good non-QM programs carry?

A well-thought and well-structured non-QM program will always have credit standards which brilliantly handle the concept of compensation factors. The criteria should extensively lower the chances of payment defaults and any other triggers/factors making the borrowers opt for legal challenges. Also, the program should be encouraging buyers to go for at least a 20% down. The interest of the borrowers to make the down payment can be gauged from their credit scores. The higher the score, higher are the chances of borrowers willingly going for the expected downs. The programs can also benefit if they are developed focusing on certain occupations, such as government employees.

Keeping these ideas in mind, imagine what kind of programs the credit unions can work on if they tap into their vast and exclusive databases filled with customer information.

Amortization and ‘interest-only’

How about pitching programs with features like negative amortization and interest-only periods to high-income earning consumers? To financially decent borrowers, these kind of flexible programs are often quite appealing. Of course, risks with these programs are high. But one of the precautionary measures while marketing such programs is to avoid doing it on a big scale. The filtering and screening process for identifying the right type of clients needs extreme supervision, which falters if the numbers go drastically higher. 

This could very well affect the availability of mega (or jumbo) loans because they do not conform to the Fannie/Freddie loan limits. This means that they will not be deemed qualified if the debt/income ratio of the borrower exceeds 43%.

Every situation carries opportunities; sometimes its windows are smaller and sometimes bigger. Same goes with the advent of QM. While there are some fears, there is also some hope floating around. So give a thought to these workarounds.

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