….People were able to make their payments, loan default was kept at a minimum and housing markets were stable.
The principals used to underwrite and approve a loan are based on 3 tried and true principals of lending:
This is nothing new in the banking world. It’s when lenders begin to get away from these basics that cause havoc in real estate that we have seen in the past. Lets quickly review each of these principals and how it effects your ability to get a loan.
An individual’s credit history allows the bank to assess their creditability. The key question this answers is: Does this borrower make their payments on time, manage finances accordingly, and eventually pay off those debts? A credit score does this for the bank by calculating and analyzing credit history by utilizing credit data and algorithms to give someone a score. Regardless of any controversy of whether this is an effective method for assessing creditworthiness in today’s world, it’s the vehicle being used by all lenders.
Someone’s capacity to repay the loan is assessed through the review of income and assets. The key question answered here is: Does this person have the ability to pay this loan back based on their current income, down payment amount, and debt ratios? The review of income vs debts allows the bank to assess if the monthly payment for this home is too much or will fit within the debts you currently carry.
Collateral review gives the bank piece of mind that even if this loan goes south in the future, the bank/lender will get their money back. Therefore, an appraisal is completed to verify the value of the property leveraged as the collateral for the loan. This value is what the bank uses to underwrite and approve the loan. The bank wants to make sure that the property is marketable in the event they do take possession of the home.
The 3 C’s of Credit, Capacity, and Collateral are the foundation of mortgage lending. Traditional and local banks across the country have been lending on these principals for years. It’s very likely that when your grandparents bought their first home they too were evaluated on the 3 C’s.
Call me to find out how you fit into each category.