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Mortgage: The Money Lenders |
| What is a mortgage? A mortgage is a financial instrument, an asset that can be bought and sold like a bond or a T-Bill. Just like every other investment, there are certain terms you should be familiar with. If you invest in shares you learn about P/E ratios, yields, beta, book value per share etc. There are at least 2 parts to every mortgage, the note (or promissory note), which is the promise to pay and the mortgage itself, which provides the real estate security for the promissory note. There can also be an assignment of rents agreement that says that if the borrower stops paying, the lender can collect the rent and set it against the money owed. Most Lenders consider 4 vital facts before giving you a residential mortgage Real estate collateral or Loan to Value ratio Your mortgage will typically be a proportion of the value of the real estate. For example: the home has a market value of $100,000 and you want to borrow $80,000 as a first mortgage. This would be a Loan to Value ratio of 80%. Let us assume for the moment that you are buying the house for full market value, that is $100,000. Where does the rest of the money come from, $20,000 plus the closing costs, pre-paids etc? It could come from your savings, it could come from a second mortgage, either a seller held second mortgage or another lender, it could come from a gift, perhaps from your parents. Or it could be a combination of these. Lenders LIKE you to have your own money in the deal. If the other 20% is your money, this gives them a strong feeling of security. How about if you are actually buying this $100,000 house for $70,000? Conventional lenders like banks will only lend you 80% of the market value or purchase price, whichever is LOWER. In this case they would lend you 80% of $70,000, or $56,000 Why is this? It makes the loan safer for them, they don't really believe that you have got a great deal and they still want you to have your money in the deal. But there are mortgage lenders, typically those that work with investors who will not be bound by a percentage of the purchase price. However they will usually lend you less than 80% of the appraisal value. These lenders are often called hard money lenders. Why is the Loan to Value ratio important? Simple. If the lender has to foreclose on the loan because the borrower hasn't paid, they will not only want to recover the principal outstanding, but also their legal fees and unpaid interest. Obviously this can only happen if the house is worth more than the principal, legal fees and accrued interest. If they lent $100,000 against a home worth $100,000 this is not likely to be the case! Credit If you have a proven history of not paying other people on time, it is highly likely you won't pay the lender on time. Let's be blunt here. When someone has bad credit, what it really means is they just don't pay their bills. Now there can be a good reason for this, and these are often taken into account. For example medical bills when someone has no health insurance. Or perhaps you went through a nasty divorce and your bank account was cleaned out. Maybe you started a business that failed and have now got a regular job. But if there is a track record of car repossessions, credit card write-offs, unpaid utility bills etc. you come across as someone who is financially irresponsible. Unless the property is worth a lot more than the loan you want, you probably won't get it. Capacity The lender wants to sure that you can afford to pay your mortgage and still pay your other bills. In fact, it is LAW in some states that lenders avoid loans that the borrower clearly can't afford. They will consider your job history and your time on job. How much other debt do you have? Are you over extended? Conventional lenders use certain ratios to calculate your capacity to pay back the loan. The mortgage debt ratio. This is the percentage of the new mortgage payment to your income. 28% is a typical maximum ratio on a conventional mortgage. The total debt ratio. This is the percentage of your total monthly payments, including the new mortgage, to your income. 33% is a typical maximum ratio on a conventional mortgage. Commitment Commitment is usually shown by having your own money at risk. If you are buying a $100,000 home and put down an investment yourself of $20,000 you have made a big commitment and will not lightly walk away from your obligations. On the other hand, if you have none or little of your own money invested, you are much more likely to just shrug your shoulders if things get tough and walk away from your obligations. Consistently, year after year, low down payment FHA mortgages loans have a higher default rate than conventional mortgage loans. Article Provided Courtesy Of mortgage-investments.com web site |
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