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Mortgage Answers for Consumers:
  • Divorce Buyout: What You Need To Know
    As a twelve-year veteran of the mortgage industry I’ve helped clients with hundreds of divorce home buyouts. During that time I’ve learned that this often complicated process can be treated overly casually by judges, mediators and attorneys. (May 2007).
  • Changes in Bankruptcy Laws
    With the new bankruptcy law in force this fall and credit card companies virtually doubling their minimum payments within the next few months, a major shift in American personal finance has arrived. (January 2006).
  • Which Loan is Best For Me?
    With the dizzying array of loans available to choose from consumers are faced with a difficult choice when selecting which mortgage loan is right for them. (October 2005).
  • Should Borrowers Pay Points?
    Many borrowers ask the question: Is it in our best interests to pay upfront points when buying or refinancing a home? Short answer: it depends. There is no hard and fast rule. (July 2005).
  • A Realtor's Most Valuable Alliance
    Realtors are faced with a complex sale, and sometimes get so involved in selling that a very important fact gets overlooked: nearly every sale requires a mortgage. (April 2005).
  • What is a "bi-saver"?
    A bi-saver takes an existing loan and essentially forces the borrower to pre-pay principal toward a loan in order to shorten the term. (March 2005).
  • The Qualifying Process
    In the case of a loan the qualifications and history of the borrower, the amount of investment by the borrower and even property type and occupancy status of the property being collateralized are weighed to determine a unique risk profile for each loan. Every aspect of the transaction is carefully considered before a bank makes any solid offer for interest rate or closing fees. (February 2005).
  • How to Avoid PMI (Private Mortgage Insurance)
    PMI insurance can cost hundreds of dollars per month. Fortunately, there's a less known and, in my opinion, an underutilized method to accomplish the same objective that costs far less. (January 2005).
February, 2005 - Purchase and Construction Loans

Purchase and Construction Loans - The Qualification Process

What the bank needs to know to price your loan

by Matthew Killikelly

Borrowing money is different than other financial transactions in that the risk to the lender is ongoing so long as the loan exists. This means that the bank's profit margin is not calculated solely on cost to provide the borrower with the service less the cost of the product as in other purchases.

In the case of a loan the qualifications and history of the borrower, the amount of investment by the borrower and even property type and occupancy status of the property being collateralized are weighed to determine a unique risk profile for each loan. Every aspect of the transaction is carefully considered before a bank makes any solid offer for interest rate or closing fees.

Here are the factors considered by the lender in pricing your loan:

Transaction type - What are the customers needs?
  1. Purchase of existing property that has been built recently.
  2. Purchase of property currently being built by a builder or about to be built.
  3. Land Loan i.e. Buying undeveloped land for later development
  4. Construction on land borrower already owns
Income type - How is the customer showing income?
  1. Employed with verifiable income - Works for same corporation more than two years. Showing two years W-2’s, last two pay stubs and tax returns if necessary.
  2. Self employed verifiable income - Owns a corporation, partnership or sole proprietorship. Has filed business tax return for at least two years. Can show other evidence of self-employment such as business license or CPA letter.
  3. Stated Self Employed - Can prove self-employment for at least two years, but is unable to show adequate income on tax return to make debt to income ratio parameters. (Increased risk for lenders)
  4. Stated Wage Earner - Works for company and may have other undocumented income but is unable to verify enough income for debt to income ratio parameters. (Additionally increased risk for lenders)
  5. Stated, Stated - Unable to provide any employment or income information of any kind. (Significant risk for lenders)
Credit grading - What credit history can the borrower present to the lender?
  1. Lender considers scores of borrower 450-850
  2. Lender looks at all mortgage histories for lateness and defaults on past and present loans.
  3. Lender reviews catastrophic credit events, if any, such as Bankruptcies, judgments, charge offs, collection accounts, state and federal tax liens, child support etc. All outstanding balances on past catastrophic credit events are weighed based upon recency and severity. Any unpaid balances are usually required to be paid off prior to closing on additional loans.
  4. All other non-catastrophic adverse credit events are considered also based upon recency and severity.
Down payment - What percentage of the purchase price is being put down towards the new transaction?
  1. Lenders consider 20% of the purchase price a normal down payment for any transaction. All lower down payment transactions will effect pricing in some way.
  2. Lenders mitigate risk on low down payment loans by requiring a borrower to pay PMI insurance or breaking loan into two parts called piggybacking.
Property type - What type of risk is associated with the property type being bought or constructed?
  1. Property is residential single-family dwelling and freestanding.
  2. Property is residential single-family dwelling and attached to another. Sometimes a townhouse or row-home.
  3. Property is residential two-family dwelling or mother-daughter and freestanding.
  4. Property is residential two-family dwelling or mother-daughter and attached.
  5. Property is a low or hi-rise Condominium.
  6. Property is a low or hi-rise Co-Op.
  7. Property is 3-4 unit multi-family dwelling. *
  8. Property is a 5 or more unit multi family dwelling. *
  9. Property is a mixed residential/commercial use. *
  10. Property is undeveloped land.
  11. Property is commercial office space. *
  12. Property is commercial light industrial use. *
  13. Property is commercial heavy industrial use. Environmental concerns may play a role. *
* If multi-unit complex or building is being constructed, are units pre-sold or pre-rented? Is the transaction speculative?
Occupancy status - What will the occupancy status of the property be?
  1. Owner occupied
  2. Vacation home
  3. Non-owner occupied rental investment
Assets for down payment - How much in verifiable sourced and seasoned liquid asset is available at the time the contract is signed?
  1. Need copies of bank statements from checking or savings
  2. Need copies of 401k, 403B or other deferred compensation account being used.
  3. Need copies of Annuity, IRA, mutual fund or other investment account.
PITI assets - How many payments of Mortgage Taxes and Insurance will remain in liquid asset after the transaction is complete?
  1. Need copies of bank statements from checking or savings
  2. Need copies of 401k, 403B or other deferred compensation account being used.
  3. Need copies of Annuity, IRA, mutual fund or other investment account.
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Mortgage Articles - Long Island, New York Mortgage Broker