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Lenders review and adjustment of various factors in an effort to control and / or reduce the risk for each loan. Loans, the risk comes from two main sources, the homeowner (borrower) risk and market risk.
Market risk includes factors such as the formation rate, and associated potential increase / decrease in the months ahead with a variable interest rate on an index. For example, if a rate of 6% blocked for a period of several months and may be borrowed during theRate-lock, 8%, the bank is losing 2%. Another factor to consider is the value of real property (loan guarantee). We are doing much of the lender, borrowers can still for that matter, predict or influence property values. If the property value goes up, the credit guarantee always seems better. However, if the value drops, ranging from credit guarantee.
Other factors include both the local and national economy. For example, loans made in the rust beltOhio during the peak of the automobile industry looked very secure. When the plants began to lay off workers and people had to move out of the neighborhoods, the value on the security for the loans went down.
There are real risks associated with borrowers. The bank has a definite interest in the financial success of their borrowers. Banks try to limit their exposure. However, at the end of the day (or month!), the borrower must make their payments on time, in order for the bank to remain profitable. Borrowers that do not, or cannot, make their payments force the bank to take a hard look at late payments, collection models, foreclosure litigation, attorney's fees, and eventual REO.
Lenders can seek to mitigate any potential risk or loss in various areas. The most obvious variable is the interest rate. Riskier borrowers pay a higher interest rate. Less risky borrowers pay a higher interest rate. Believe it or not, different types of property are defined as more (investment) or less (condominiums) risky. I always thought that lenders usually have a higher interest rate to calculate and less qualified borrowers Nadler. This could explain how the interests of more than 20% read credit card debt are calculated.
Another use of funds for risk control is the down payment. In the early 1980, a borrower, subject to obtaining an FHA loan, a minimum of 10% of the purchase price was to give as a deposit. And if a debtor had to share only the minimum of 10% belowThe payment principal mortgage insurance (PMI) was mandatory. The only way for the creditor is required to remove PMI, the deposit was increased to a minimum of 20%. PMI Mortgage insurance payable by the borrower that protects the lender in case of loss.
"Creative financing" was alive and well between 2002 and 2005. Many lenders came with the programs, borrowers, houses with little money or not approved for sale. The risk of these loans was made andthe real estate market, the lenders and the borrowers are all in the soup. The fall out will be felt for many years to come.
Lenders also seek to mitigate or control risk by adjusting the borrower's term, preferring to loan the money with an adjustable rate mortgage, and inserting a prepayment penalty for early payoffs.
The interest rate and the terms of repayment are the most telling differences when analyzing existing loans. These two factors are derived by the originating Mortgagee to assess the risk. We, as buyers, mortgage risk measure essentially the same as those that originate loans. We consider both the originators and purchasers the object in his capacity "as-is" condition, since both large-value for money in the short and long rates affect the price. Local real estate market conditions must be considered. If short of money, what the spread on the floor of the county foreclosure auction, theproperty is located? Will the investors on the floor of the sale take short money or will a lack of competition require us to take possession in order to realize a profit? Will substantial rehab be necessary?
Is there a bankruptcy of record that would reduce or eliminate the ability to collect or perhaps undermine the security of this loan? How much of the total payoff amount can be recovered? Unlike the originating lender, we do not need to consider the borrowers credit score or debt to income ratio with regard to the original loan terms (does the borrower make enough money to repay the loan?). Institutional lenders do not own real estate, because they do not wish to. They are in the business of loaning money for a profit. Their primary goal is to loan money safely and to get repaid in a timely manner, while collecting the interest spread for their trouble.
The "loan to value" is another consideration that allows the bank to control or mitigate risk. If a loan appears to be somewhat risky, and the underwriter can't put their finger on the reason, they have the option of making a counteroffer. Rather than turn a loan down flat, a lender may counteroffer requesting a change in loan to value. For instance, instead of lending 90% of the purchase price, they may approve the loan providing the buyer add to the down payment resulting in an 80% or 85% loan to value. This increases security for the loan, minimizes risk a little more, and puts the lender in a better Comfort Zone.
During the "financing" creative period from 2002 to 2005, there were loan programs offered (and accepted) with maturities of interest that were negative or deleted. A typical 30 years fixed rate mortgage is amortized over a period of 30 years, more than 30 years, and results in a zero. In other words, if a debtor makes all their payments on time, the result is' a total payment out of the original debt. When a loan is not amortized or negativeamortizing, it means the debt will not be repaid because none of the payment amount is going towards reducing the principal. With negative amortization loans the principal amount actually increases each month. Some of these loans were offered with teaser rates such as one half percent or 2% interest for the first two years. This enabled borrowers to obtain a higher mortgage than they were actually qualified to obtain.
In an effort to entice even more borrowers to the market, lenders programs created, the "no-doc" loans, or "stated" loans. What is meant by the methods used to ensure the financial stability of the application of the debtor, employment history, verification of income, verification of savings not achieved, etc.. As the borrower, "he said" believes that being true. Other programs have been, that was a hybrid between a river and not a complete document. This type of loan is known in the industry as Alt A loans. Remember, the more risky than a position of loan, the higherinterest rates and stricter repayment conditions.
In this sense, the dates they went stated income loans and zero down payment mortgage the way of the dinosaurs. The creditors will be forced in future to investigate more fully their borrowers as the era of cheap credit to all ends abruptly just begun. But, remember that you have read here on the first for borrowers with less than perfect credit still an important force in the market. The new gold is used tothe lender that's the first to introduce a safe (to the investor) mortgage instrument that can reach those potential buyers firmly situated at the outer edges of mortgage approval.
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