Understanding a Mortgage Loan

Todays Blog Post is written by guest writer Nick VanVorst, a Senior Mortgage Loan Originator for Private Mortgage Wholesale out of Grand Rapids, Michigan.  

When a bank loans you money for a house they want to make sure they will get their money back.  The process of getting a mortgage can be long and intidimating, but understanding the following factors will help you navigate the mortgage process.  

There are many components to a mortgage loan, but it all comes down to the basic criteria that Underwriters are looking for when deciding whether your loan is a good risk to the bank.  

It’s important to understand the 3 C’s of mortgage underwriting and how critical they are to each and every mortgage approval.   Different mortgage lenders work with different rules, so it's important to talk to different lenders during the home buying process. 

The 3 C's of mortgage lending are: Credit reputation, capacity and collateral. If one of these components is not acceptable or if there is excessive amount of risk across components, the mortgage may not be acceptable for sale to Freddie Mac, meaning you will have a harder time getting a home loan.

Credit Reputation Factors: 

Banks want to know about your history repaying debts before they give you a loan for a house.  So, they look at your debt and repayment history using indicators in your credit history like: 

·         Credit Score

·         Foreclosures, bankruptcies, liens and/or judgments

·         Mortgage delinquencies

·         Credit delinquencies, repossessions, collections, or charge-offs

·         Credit accounts: type, age, limits, usage and status of revolving accounts

·         Borrower's request for new credit in last 12 months

Capacity Considerations: 

Can you pay for the house you are trying to buy?  Banks try to find out by looking at: 

· Debt ratios: What percent of your monthly income will your mortgage payment be?  Banks want to know that buying this house won't stretch your budget to the point that it may become impossible to afford.  

·Salaried versus self-employed borrower: Because self-employed or contract work can be less stable than knowing exactly what your salary amount will be every month banks look at people who are self employed a little more carefully.  

·Cash Reserves: How much money you have in the bank and could put toward a downpayment or will be able to use for repairs.  

· Number of Borrowers: If something happens to you, such as a lost job, is there another person responsible for the loan that could still work to make payments?  

· Loan Characteristics:  The type of loan you are considering is a factor in determining whether or not the bank thinks you will be able to pay the loan back.  For example, banks consider the following characteristics of the loan: 

  •  Product: a 15-, 20-, and 30-year fixed rate, an adjustable rate mortgage
  •  Purpose of Loan: purchase or refinance (cash-out or no cash-out)

Collateral Considerations: 

Do you have the money available to buy this house and pay for any repairs it may need?  Is this a home you plan to live in or one you will be renting out?  When determining your collateral needs banks consider the following: 

· Total equity or down payment

·Property Type: a 1-unit or 2- to 4- unit detached property, Condominium Unit or                          Manufactured Home

· Property Use: Primary Residence, Second Home or Investment Property

 

Nick VanVosrt

About the Author

About the Author

Nick VanVorst is a Senior Mortgage Loan Originator for Private Mortgage Wholesale out of Grand Rapids, Michigan. Nick started his career in the Mortgage Industry in 2004.  To learn more about Nick, visit his website.