The creditworthiness, Reserve situation, Household Income and physical properties of a real estate transaction or asset will determine the basic approval rating of an individuals’ loan. These Four Components of a loan will let a lending institution look at your financial situation and give you the cost of money available to you according to the amount of risk that the lender has to assume to give you a loan. However, there are recent economic variables that work in the favor of the borrower in recent history.
The mortgage lending community has developed several more accommodating programs in recent history that have increased the ability to qualify for mortgages. This is brought on by two factors: 1) There are more lending banks available which increases competition, and 2) the economy has thrived on the home lending industry.
The fact that there are more banks in the marketplace means that there are ‘more mouths to feed’. The banks are hungry for loans and they are will to accept loans that in previous years would not have been accepted. The underwriting process has loosened the criteria to have a loan ‘Approved’ under the lenders’ guidelines. The enormous size of the Lending Institutions’ portfolios are moved to Wall Street. All of the loans that share a common credit rating bundle these loans and sell the ‘Assets under management’ on Wall Street as an investment vehicle. This is not to say that the servicing of the loan is being sold off- which is a common situation, this is capitalism at it’s finest. Not only is the bank making money on the closing and funding of a loan, but then the loans in a portfolio are leveraged according to total dollar amounts as loans to Wall Street Portfolios. The slices of the pie, called ‘Tranches’ are typically in the $10,000,000.00 range for each slice and they total in the billions for each lender.
The American economy has been bolstered by the huge volume of loans in the past decade. There are many mortgage professionals and fewer loans available due to the fact that so many consumers took advantage of low interest rates. Rates are still at historic lows, so loans are cheaper, easier-to-get and less stringent from an underwriting perspective.
The goal of a loan from a lenders’ perspective is to never have a loan ‘Default’. The bank wants you to succeed. The bank is going into a business relationship with you and the success of the transaction is determined by the borrower continuing to pay the loan in a timely fashion.
The 4 Components of a loan will put your lending situation in a virtual box with other borrowers with common financial characteristics. The virtual boxes have expanded to include more borrowers recently and that works to your advantage in order to get approved for a mortgage loan once you have determined how much you can afford.
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