6 Steps to
Pre-Qualification
People wanting to take a home mortgage loan are mortally
afraid of being considered bankrupt barely a day or
so after their home loan has been approved. If borrowers
have a reputation of bankruptcy or foreclosure, it can
mean bad credit loans in the mortgage business. Therefore,
a borrower with such a history should not expect to
get the same kind of home mortgage loan as a borrower
with perfect credit.
Self Pre-Qualification
Credit Score: Before trying to get
a home mortgage loan, borrowers should first see realistically
just where they stand with their credit rating. Do they
belong to the A, B, C or D grades where A stands for
perfect credit; B for a bit of tarnished reputation;
C fairly bad credit; and D for very bad credit? Scoring
models also make a big difference to the borrower: Here,
a near perfect score is about 800 with scores getting
bad as you reach the 400 mark. Some of these go by names
such as FICO, Beacon or Empirica and belong to major
credit reporting agencies.
Loan-to-Value Ratio (LTV): Loan eligibility
also takes into consideration the ratio between the
amount of money borrowed on a home mortgage loan and
the real value of the property being placed as collateral.
To know the value of new purchases, as a borrower, you
would have to consider the lower purchase price of the
appraised value. If a home owner has lived on the property
for about six months or a year, coupled with refinance,
the appraised value can be used in the loan to value
calculation. But this distinction can also present problems
as when a home is bought a home worth $100,000 at an
auction for a mere $60,000.00. Credit needed over the
mortgage amount is usually made from a cash down payment.
When the loan available due to limited LTV does not
meet the requirements of the sale price of the house
in question, family support usually helps.
Debt-to-Income Ratio: You can calculate
the debt-to-income ratio by adding all the borrower’s
debt payments, including the home mortgage loan applied
for and any other such as car loans, consumer debt,
credit cards etc. Now, divide this number by the net
cash available each month for the borrower’s living
expenses and his debt. Lenders would not prefer this
figure to exceed 40%.
Affordability: Having all these calculations
at your fingertips, you should be able to judge your
borrower’s affordability and exactly where he
falls in the credit rating system for a home mortgage
loan.
Pointers for home mortgage loan borrowers
Points for good credit borrowers:
If a borrower has a history of bad credit, lenders will
charge him more points and higher rates of interest
since it is a risk for a lender to deal with such a
person. But borrowers on home mortgage loans with a
good credit history should not enter into a loan agreement
where they are forced to pay points based on a bad credit
loan. After all, if a borrower has worked hard to earn
good credit, he deserves the benefits.
Pricing for bad credit borrowers: To
have bad credit often means coughing up a higher rate
of interest and origination fees on a home mortgage
loan. Usually, points can come to the borrower in several
avatars—origination fees, discount fees, broker
fees or yield spread premium. Points on a loan refer
to a fee that is about one percent of the loan amount.
So, borrowers with good credit may often pay nothing
while those with bad credit will have to pay four or
five points. Sometimes, unwary customers have been asked
to pay up to 10 points—something highly unwarranted.
In fact, should this happen to you or anyone you know,
he should consider it a red flag that someone is trying
to cheat him. Of course, the mortgage broker will explain
this by saying he can provide a loan where no one else
will take the risk.
In such cases, finding a lender willing to help out
with credit may take a little longer for the borrower
but if he is diligent enough about his search, the home
mortgage loan will finally materialize the way he wants
it.
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