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.

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 Does the New ECOA Valuations Rule Impact Lenders?

On January 18, 2014 ,the new ECOA Rules regarding appraisals went into effect. The new rules will apply to all loan applications which are seeking a first lien home loan. This will apply to all new purchases and first lien refinances from 1 to 4 units. In other words, it will include all single family homes, duplexes, triplexes and quads. It will not apply to the majority of commercial real estate deals. The rules also extend to townhomes, condominiums, and manufactured homes purchased by individuals.

There is no differentiation between owner occupied units and investments units, with regard to the new appraisal rules. Credit unions are also no longer exempt.

Basics of the New Valuation Rule

At the heart of the new ECOA Valuation Rule is with regard to providing the applicant with a copy of the valuation or appraisal of a property. When a buyer makes an offer, during the lending process the appraisal is completed, and until now, generally the buyer never saw a copy of the appraisal even though they were charged a fee for it. The buyer generally has no say in the selection of the appraiser, which lenders generally choose at random from a list of approved vendors. This measure is said to provide a more objective appraisal and reduces fraud.

The new ruling requires lenders and creditors to provide the buyer (or refinancer) with a copy of the appraisal “promptly upon completion,” or within 3 days prior to consummation or account opening. If the lender chooses to email the appraisal to the buyer, they must comply with existing eSign requirements.

Banks or lenders may charge a fee for the actual appraisal, as most already do. However, they cannot charge an additional fee for the copy or mailing of the appraisal to the applicant. If the application is withdrawn, cancelled, denied or incomplete, the lender still must provide a copy of the appraisal to the borrower. They have no more than 30 days in the event of a decline to provide the borrower a copy.

The only condition that would allow the lender to not provide a copy of the appraisal is if the borrower waives their right to the copy. This may be done orally or in writing.

Impact on Lenders

Part of the concern for lenders in providing an appraisal to borrowers is that they will take it to another lender to complete the transaction. Processing a loan has certain costs associated with the loan. By the time the appraisal is ordered, many hours have been put into approving a loan. This puts the lender at a disadvantage.

In the event that a buyer chooses to switch lenders at the last minute this will impact and delay the closing. If this becomes a frequent scenario then it will impact both lenders and realtors. Overall it may be seen that the concerns are not justified. The lending process is an arduous one and it is hard to imagine a borrower volunteering to go through the process again over a slight change in interest rates, once the process is nearly complete.

Overall this should be a good regulation change as borrowers could become more educated about the appraisal process, providing more cooperation and understanding when it comes to appraisal values.

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Changes to the Dodd Frank Act are Impacting Buyers

The Dodd Frank Act was signed into law back in 2010, but many of the changes that were implemented in January of 2014. This act has the potential to change a lot about the lending process. The idea behind the act was to prevent predatory lending and to hold lenders accountable for their loans, making them liable and subject to lawsuits, if they were not offering qualified mortgages. While this sounds like great legislation, the result is stricter lending practices that will keep many buyers out of the home buying market.

A few key pieces of the legislation that went into effect in January 2014 include the following:

The FHA loan maximum was decreased to $625,500. This is significant because borrowers who qualify for an FHA loan are only required to put down 3.5%. If borrowers do not qualify for an FHA loan they will be required to get a jumbo loan which requires at least 20% down. While some markets may not be greatly impacted by this decrease, markets with high property values like Washington DC and California, will be significantly impacted for a large number of buyers.

Rules for a Qualified Mortgage will need to meet new “Ability to Pay” rules. This includes stricter requirements around verifying income, credit, employment, and assets. The maximum for the debt to income ratio is set at 43%. This will hurt self-employed borrowers, who do not have a w-2 to prove income. It will hurt borrowers with less than perfect credit and with assets that are hard to verify and establish a value for. All these factors will impact lending.

Higher fees will arise. The new regulation has placed a cap on origination fees, where there was no cap prior to 2014. The 3% limit has generally not been met because of the competitive lending market. The other fees that may have a greater impact on mortgage costs is the increase in guarantee fees charged by Fannie Mae and Freddie Mac. These servicing fees will almost definitely be passed onto the customer. Add higher fees, with the anticipated increase in interest rates, and the costs could price millions of borrowers out of the market, or into lower priced homes.

The foreclosure process cannot be started until after 120 days from the last payment made by the borrower. This is very important to note. This will make it more difficult for the banks to foreclose on borrowers, but could be very expensive for the lender or loan servicing company.

These changes are bringing about a new lending environment. Banks have spent the last few years preparing for these changes, but most borrowers are unaware of the changes. There will certainly be a period of consumer education that will be required. The concern is that the stricter lending policies will turn more buyers away. This legislation has the potential to slow down the housing recovery.

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Jumbo Loans are Becoming Easier to Get

Jumbo loan rates have dropped to level at or below those of conventional mortgages for the first time in more than 20 years. Typically, a jumbo rate will generally run about one quarter to one half of a point higher than the current rate for a conventional loan. Lenders are changing their way of thinking however, as they begin searching for business from the nation’s wealthier customers.

Wells Fargo began this trend in 2013 when they dropped the typical minimum down-payment from 20% to just 15. Competitors have begun to follow suit with some experts noting that it was a good time to e a jumbo loan borrower. The big banks are the ones who will have the best rates, and borrowers are going to need a minimum 720 credit score to qualify for the money.

Jumbo mortgage rates are averaging right around 4.25% as compared to the typical 4.35% being sought for the 30-year-fixed conventional loan. Those who are seeking a ARM loan can find rates around 2.875%, but borrowers should do so only if they expect to move from the property during the 5-year-fixed period.

Because of the rebound of the housing market, loan origination and approval rates are on the rise, and investors are starting to turn their eyes to the jumbo mortgage sector.

Jumbo Loans are Easier to Obtain

According to financial experts, people that had less than a 740 credit score could not get a jumbo loan, but that’s all changing now as opportunities for obtaining jumbo loans are starting to crop up for credit scores at the 720 level or in some cases, even lower. That doesn’t mean that jumbo loans are extremely easy to get these days, but rather the borrower must have a credit record that is fairly clean as well as a significant savings accounts that are perhaps larger than what would be required of the borrower looking for a conforming loan.

While a jumbo loan is considered one that is larger than $417,000 in most areas, they may start above $625,000 in areas where costs are high. To help entice borrowers to seek these loans, banks like Wells Fargo have lowered the 20% requirement to just 15%, and it doesn’t hurt of course that the interest rate is a bit lower than the typical conventional loan. Another plus for the borrower, is that while most loans with less than 20% down require mortgage insurance, those at 15% under the new terms do not.

Second homes are Easier to Buy

Let’s not forget about the terms surrounding the buying of second homes that have eased as well, so there is a lot of incentive for a borrower to look more closely at the jumbo loan packages that are available to them. Because of the expansion of the guidelines, loans that were once amounting to 70 or 75 percent loan-to-value are now being granted at the 80 percent level up to and including $2 million on second homes.

To put things into perspective, only 16 percent of the total number of borrowers who applied for a jumbo loan in 2012 have been denied access to that money according to LendingPatterns.com while previous to that the denial rate was as much as 30% or more. It seems that the reason behind the trend of more approvals in the jumbo sector is that lenders are now more confident about the values of homes. This is especially true for the houses at the upper-end of values.

It’s the stability of the real estate market that is now driving up the desire of borrowers to buy move-up homes. Because of that, lenders feel more comfortable in loosening up the purse strings.

 

Top 5 Reasons to Get an Adjustable Mortgage

Adjustable rate mortgages (ARMs) are riskier; still, there are quite a few reasons to select an ARM over a standard fixed rate mortgage.

When it comes to adjustable mortgages, the interest rate on the loan can increase or decrease. It depends on the market conditions. It is a bit like gambling and there is no way to predict what the rates will be like five or ten years from now. So why should anyone gamble when they can get a fixed-rate home loan with predictable EMIs?

While it is true that nobody can predict how the interest rate will move in the future, there are still several reasons to get an ARM. In fact, for some homebuyers, an adjustable mortgage is a much better option than a fixed-rate mortgage. Here are the top 5 reasons to get an adjustable mortgage.

Low initial monthly payments

When you choose an ARM, you monthly EMIs during the initial period will be much lower. All ARMs have an initial period during which the rate of interest is fixed. This initial period can last between three months to ten years. During the initial period, the interest rate on your adjustable mortgage will be lower than the interest rate on a standard fixed-rate mortgage. This is a huge draw for many borrowers.

More savings

Since the initial monthly payments on the mortgage will be relatively low, you will be able to save more money. You can either invest this money or use it to pay down the loan faster.

Enjoy the benefits of lower rates

It is impossible to predict whether the interest rates will go up or down in the future. But if the rates drop (that is very much a possibility), your monthly payments will drop as well. By contrast, people who have a fixed-rate home loan will have to get refinancing to enjoy the lower interest rates. Refinancing can be costly. In addition, it is a time-consuming process.

Ideal for short term investors

If you are a short term investor who plans to sell the home in the near future, an adjustable mortgage is the best option for you. You just need to ensure that you sell the property before the rate hike kicks in. This way, you can not only enjoy lower initial monthly payments, but also protect yourself from possible rate increases in the future. If you intend to sell the home before the initial period expires, you have every reason to get an ARM

Rate caps

Even if interest rates go up in the future, they can't go beyond a certain limit.  Adjustable mortgages have rate caps and the rate on your mortgage can never exceed that limit. Read the mortgage documentation and disclosures carefully to make sure that you will be able to live with the highest possible monthly payments.

But before arriving at the final decision, you should do the math. First, decide how long you will be staying in the house. If you are planning to live there for five or six years, you should get an ARM with an initial period of seven years. Now compare the initial rates on a standard fixed-rate and an adjustable rate home loan. It wouldn't be hard to see that the benefits of an ARM outweigh the risks, at least during the initial period.