“Qualifying Someone for a Mortgage”
I am always asked by prospective home buyers:
What price range home can I qualify for?
or
What mortgage payment can I qualify for?
Here is the first question that I ask: What is your comfort level for a mortgage payment? This is different than what do I qualify for.
I have seen too many folks get qualified for a mortgage and still get in trouble. Most of us know what our comfort level is for a mortgage payment, but when the payment that you qualify for is higher, there could be a false sense of being able to handle a payment that you may not really want.
I recently met with a couple that wanted to get prequalified to purchase a home. They told me that they already had a prequalification, but the realtor they were working with suggested they meet with me.
They told me they were prequalified to purchase a home up to $200,000. The rate they were quoted was fine, so what is the problem? They were interested in a home that was on the market for amount they were prequalified for, but the payment was much higher than they were comfortable spending.
Asking price $200,000, taxes $6,800, estimated homeowners insurance $700 and monthly mortgage insurance was $197. They were going to have a $1760 per month mortgage payment. The problem with this transaction was a nearly $600 monthly taxes payment. They told me their comfort level for a mortgage payment was $1,500, even though they would qualify for a higher payment.
Qualifying someone for their comfort level, has always made more sense to me. Tell me what you think?
The Three “C”s
By Theresa Furzland
CREDIT CAPACITY COLLATERAL:
When an underwriter is presented with a loan request package, their job is to determine whether the potential borrower will pay back the loan or not. There are many tools available to today’s underwriter and most of the determination is handled by complex computer programs that are designed to weigh the risk factors and make a decision based on impartial means.
The benefits of having this important decision making process is too fantastic to ignore, however as so often happens in our automated world, it is easy to forget the basics. These basics are not forgotten by the computers, they are the building blocks of every model designed. With credit scores and instant “pre approval” automated responses it is easy for us humans to lose track of these basics, so here is a short “Underwriting 101”
CREDIT:
This is a review of the customers past history in meeting their obligations. Not only have they paid their accounts on time, but how long have they had a history. This is one part of the automated system that has the highest potential for inaccuracy. With the emphasis on credit scores and the amount of incorrect information, fraud, and customer ignorance of their rights and responsibilities regarding their credit there is a large margin of errors in credit reports. Customers need to be educated to “watch dog” their credit and lenders need to allow customers the opportunity to “prove” themselves credit worthy when there are extenuating circumstances that can be documented.
CAPACITY:
Does the potential customer have the ability to repay the loan? This includes sources and likelihood of continuance of income, current level of debt load in comparison to new loan, amount of assets and equity in property.
COLLATERAL:
Is the property taken as security of sufficient value? The appraisal report is reviewed manually and generally the lender will also order an AVM (automated valuation model) report.
Each of these factors by themselves does not make or break the decision for a lender to make a loan. The balance between the factors will determine the overall decision. For example, a borrower with substantial equity in the home, excellent credit and large savings reserves may be able to qualify at a slightly higher payment than a customer lacking these other “compensating factors”.
This is the main reason that it is important to remember that no one situation can be summed up by a three digit number. The overall situation of the potential buyer must be diligently reviewed by an underwriter and the customer with the best balance of these three indicators will receive the best loan terms.
image: stuart miles/freedigitalphotos.net
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