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.

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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How Technology Helps Lenders Comply with New Mortgage Rules

The rules of lending have changed and both lenders and borrowers are aware of that. Less than a few years ago, lenders were mainly concerned about getting good deals that they would ultimately sell in the secondary market. This is no longer possible.

The Consumer Financial Protection Bureau (CFPB) has rewritten the mortgage lending rules. Consequently, mortgage executives have been asking themselves if their processes, systems and people have also changed with the times.

The new rules put a special emphasis on customer satisfaction. The government now wants lenders to listen to and respond to their consumers. CFPB relies heavily on new technology to engage customers. In addition, the bureau has made it easy for borrowers to express their dissatisfaction with the lender by reporting their experiences on the CFPB portal. The bureau's Consumer Complaint Database will store and manage this information.

Consumers are showing great interest in providing feedback. More than half of the 139,000 complaints registered with the bureau by the end of the 3rd quarter of 2013 are related to the home loan industry.

When lenders are flooded with consumer complaints they will definitely need to rely on technology to resolve the issues. 

Here are some reasons why lenders need to invest in automation to serve the borrower better:

The new rules demand it

The CFPB doesn't ask lenders to employ new technology, but lenders have no other choice because the new rules are very complex. The lender can't comply with the new guidelines without the help of technology. The legacy systems that they use at the moment are not designed to meet the specific needs of the borrowers. These systems mainly helped lenders to process home loans for secondary markets.

Executives are also interested in investing in technologies that will provide a better buying experience to their borrowers.

Emphasis on consumer satisfaction

The federal government now insists that lenders provide a better buying experience to their borrowers. Lenders have never employed people to provide customer service. Since the profit per loan is low, they will probably not be able to afford it either. In this case, automation is the only available solution.

The key is investing in technology which will help the lender use their smaller staff to deliver a better buying experience to their borrowers.

New technology helps it possible for lenders to serve more customers faster.

When profit per loan is falling and the cost of compliance is rising, having happy customers alone will not help the lender to operate profitably. Lenders also need to use technology which will help them serve more borrowers in less time. The lender will receive applications from both qualified and non-qualified borrowers. It is crucial to eliminate those applications that are unlikely to qualify early in the loan approval process. This will save time for you.

Technology also allows the lender to decide how the application should be processed.  This allows the lender to immediately alert the borrower. When the borrower knows the outcome early enough, it will increase their overall satisfaction. This is true even when the lender's decision isn't good for the borrower. Technology also helps the lender provide timely status updates.

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A Quick Overview of the New Mortgage Rules

The new mortgage rules require lenders to tighten their underwriting norms. They are designed with the objective of reducing the risks of loan defaults and foreclosures. The new rules apparently promise 'no surprises, no debt traps and no runarounds'.

Lenders now have to comply with 2 new requirements: The Qualified Mortgages and Ability to Repay. Here is how these two new requirements will affect the borrower.

Ability to Repay

Lending institutions are required to verify that the borrower has the assets and income required to afford the monthly payments throughout the entire life of the mortgage. In order to determine this, the lender may assess the borrower's debt-to-income ratio.

To calculate the debt-to-income ratio, you just need to add up your monthly expenses and divide that figure by your monthly income.

Low-Doc loans

Earlier lenders used to offer low-doc or no-doc loans without verifying the financial credentials of the borrower. However, the new mortgage rules require the lender to verify and document the borrower's income, debt, assets and credit history. This will involve more paperwork. It may also prolong the processing times. However, the new rules will ultimately benefit both the borrower and the lender.

Underwriters are also required to approve mortgages on the basis of the maximum monthly payments the borrower will have to make. They are not supposed to approve loans based on the lower teaser interest rates which last only a couple of months or years.

Qualified Mortgages

This rule ensures that the borrower will not buy a bigger home than s/he can afford. The new mortgage rules insist that a borrower's debt-to-income ratio should be less than 43%. There are exceptions to this rule and banks can issue mortgages to people with higher debt-to-income ratio if they are convinced that the borrower has assets that justify the higher loan amount.

The term of a qualified mortgage cannot be longer than thirty years. They also cannot have risky features like interest-only payments and minimum payments that do not cover the whole of the interest cost. If your monthly payments fall short of your interest cost, your mortgage balance will grow. This is called negative amortization.

In addition, the upfront fees that banks charge cannot be more than 3 percentage of the loan balance. That includes origination fees, title insurance and any points paid to reduce mortgage interest rates.

There are also rules that discourage lenders from offering financial incentives to mortgage brokers and loan officers for pushing borrowers into higher-interest mortgages they can't afford. The new rules will offer borrower protection without limiting their access to credit.

Lenders also seem to be happy about the new mortgage rules. The only concern they have is that the new rules might slow loan processing.

Interestingly, the new mortgage rules do not specify a minimum credit score or down payment requirement.

The fact that there is no minimum down payment requirement will benefit most first time homebuyers who might find it difficult to raise that much money. The lack of credit score requirements might enable banks to loosen their underwriting practices sometime in the future. That said, loans still need to be supported by Freddie Mac and Fannie Mae. Since these organizations are unlikely to approve applicants with credit scores below 620, most borrowers need to have a credit score of at least 620 to qualify for a mortgage.

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How Do Lenders Determine the Loan Eligibility of a Real Estate Company?

When a lender receives a business loan application from a real estate company, they will consider several factors before sanctioning the loan. What are these factors?

It is true that lenders do not use a single criterion for approving a loan. In fact, they use several criteria to determine the eligibility of the borrower. For example, as a lender, you may review your business relationship with the firm requesting the loan. You will also get the financial statements of the company scrutinized by a credit analyst. In addition, you may gather reports from third party credit agencies. You do all this to ensure that the borrower has the financial capacity to repay the loan.

After analyzing the financial statements of the company, if you feel that the loan applicant meets your credit standards, you will approve the loan request.

Credit Rating

Before approving the loan application, you need to try and obtain a credit report on the real estate company from a credit rating agency. These credit reports include information about public filings, credit scores and payment histories. Any negative information (e.g. past-due payments or outstanding tax liens) that appears on these reports should act as a red flag. In that case, you may contact the company and ask for an explanation. If the loan applicant fails to provide a satisfactory answer, it’s best to reject the loan application.

It is true that these credit reports are not always up to date; however, they provide useful information about the credit history of the company seeking the loan.

Financial standing

You need to ask the real estate company to show its annual statement for the last two years. You may also request an interim financial statement for the month before. By analyzing these statements, you can get a better idea about the company's financial standing. In particular, what you want to know is the financial status of the company – whether they can repay the loan or not. You may insist that the company should get its annual statements prepared by a reputed public accounting firm.

Collateral

Most lenders require collateral for the bank loan. If the loan is secured with collateral, you can seize the collateral and sell it if the borrower fails to repay the loan. If a real estate company is requesting a loan for buying land, it can pledge the title to the land as the collateral. Some assets do not make good collateral. For example, you might not want to accept the assets that are not readily salable to a third party.

Personal guarantees

You may also require each owner of the firm to offer personal guarantees. Each owner will have to submit personal financial statements. These personal guarantees provide additional security. You can verify these personal financial statements and after approving the loan, ask the owners to execute a guarantee.

Relationship between the lender and the loan applicant

While processing a business customer's loan application, you will have to verify its past and current relationship with the customer. The loan committee is more likely to approve a loan application if the applicant has been a valuable depositor for years before requesting a loan. Community bank officers are more likely to approve loan applications submitted by companies that are actively involved in civic affairs.

Buy and work leads smarter, contact only the customers you want to engage, and enable your employees to be productive. Connect with your target audience with Live Connect today!