Your Loan Application, Do You Know What Lenders Are Looking For? Part 2
Buying your first home can be a very exciting experience
. It can also be a frustrating one if you don't have all the information necessary to make the journey a smooth one.
Unless you're paying cash, you will be asking a mortgage company or bank to lend you a lot of money. It should be pretty obvious that the lender wants to make sure you will repay them so they are going to carefully examine your current financial situation to determine if you can and will pay them back.
The four areas lender's review are:
Credit History
Asset
Income
Reserves
In part two, we are going discuss the Asset or the property you will be buying.
Mortgage lending is all about "risk analysis":
What's the likelihood you will pay back the loan and if you don't what will the lender have when they get the property back?
In the last real estate cycle, lenders made a lot of decisions based on the false notion that property values wouldn't go down and that if the borrower didn't make their payments, they would get the property back and be able to resell it for at least what they were owed.
Well we know how that worked out and so do the lenders, as a result they are looking much closer at the property (the security).
Lenders have learned that certain types of properties are riskier investments and as a result make it more difficult for first time homebuyers to purchase these types of homes.
In a lender's eye the riskiest property types are Condos/Co-ops and manufactured homes.
If you've decided that a condo is the right first time home for you, the lender is going to require that the condo project be approved (most often by FHA and Fannie Mae). They will also, ask for detailed financial information from the Homeowner's Association.
If a project is in trouble, the warning signs are the number of homeowners who are delinquent on their homeowner's dues, the number of tenants in the project (if the tenants outnumber the owner occupants it's really just an apartment complex). Homeowner's associations are required to set aside reserves for future projects and maintenance, if they are tapping into the reserves it's a rob "Peter to pay Paul" situation and the financial health is definitely in question.
If the condo project is in trouble, chances are your lender won't lend in the project, so unless you can come up with a huge downpayment, it's time to move on.
The second type of property that really makes lenders nervous is manufactured homes. Manufactured homes, not to be confused with modular homes, must be a double wide on a permanent foundation, be taxed as real estate, and built in 1986 or newer. If it doesn't meet all those conditions, the lender is not going to take the risk.
There used to be a lot of lenders who specialized in manufactured homes but most are gone because the default rate is significantly higher than the market average and lenders today don't want to repeat the same mistakes.
Lenders will determine the value of your first home through the use of an appraisal which will determine the "market value" of the property.
I know some real estate purists will tell you the "market value" is what a ready willing and able buyer will pay and what a ready willing and able seller will accept. In Camelot perhaps, but if you need financing it's what the appraiser says it is.
Of course you can pay more if you want, but it will require a bigger down payment and you will be "upside down" the day you move in.
Lenders are also concerned with the condition of the home you are buying, not only for their protection but for yours as well. As part of the appraisal process, the lender will require that all "health and safety" items noted in the appraisal be fixed before they will allow a closing.
If your dream home is in shambles, but in in the perfect location, you might consider the FHA 203k rehab loan. This program allows you to purchase the home, include the cost of rehab in your new loan and then start the fix-up after closing. Simple in theory, a little more difficult in execution. Make sure you select a lender with extensive experience with this program before you travel down this path to homeownership.
Next article - Income or "how are you going to pay for this house?"
by: Greg Cook
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