Blue Ridge Real Estate

Qualifying for a loan is not just about determining if a potential mortgagee has enough resources and / or income to pay back the loan. In the larger picture, the mortgagor wants to know if this individual is likely to pay back this loan according to the string of payments agreed upon, and whether or not he is likely to adhere to other terms and conditions of the loan. Or, in other words, will he be a problem client. There are of course plenty of instances where a mortgagee could adequately demonstrate that he had at time of application the perfect ability or resources to pay his monthly obligations plus this new one, but it turned out he either had not the will or the discipline to do so. He might live above his means and drive himself into financial difficulties, or he might lack discipline on the job and be in jeopardy of losing it even as he is applying for the loan, or he might have propensities in his life that will finally bring him down and this loan with him. Of course many of these matters are above the possibility of predetermination by the loan company or by any means of investigation. But they do question into the credit history of their customers and have questions designed to act as red flags in matters like this.

Then of course the criteria by which one is qualified for loans is different according not just to the mortgagee, but also according to the real estate he is trying to purchase. On a commercial mortgage, lenders are primarily concerned with this property and its suitability for the proposed business, but in residential real estate, they are rather most concerned about the mortgagee, his history and income. The reason for that is historically, demographically, analysts know which piece of real estate is more likely to be left in default. For instance, when people buy secondary homes or vacation residences, and then they hit hard times, these are the ones they will probably choose to default on first. Or when people buy a house as an investment property and it just doesn?t seem to be working out right ? maybe their tenants tear the place up; they?re more than likely simply to let it go. Specialized real estate (property which has been designed and adapted for one primary and highly specialized usage, when it falls back to the mortgage company it becomes a tremendous liability. As an example, it sometimes proves to be very difficult to dispose of church property and recover even fifty cents on the dollar for these mortgage companies. In addition, the federal government, desiring to make housing stock more affordable and home ownership more prolific, underwrites certain types of loans more than others. Federal insuring agencies help to secure these loans and raise the profit margin for these lending companies.

Raw land is the most difficult real estate to qualify for and to receive a loan on, except in the case of a sub-divider who is platting this property out and selling the parcels one at a time. It is most advantageous to his enterprise that he take back loans on these tracts and insure them himself, for otherwise he?ll find few people indeed who are prepared to buy. The bank finds such loans particular difficult and foreclosure rates are so high because first, the mortgagee is not occupying the property and second, this unimproved land is generally unable to produce income in its present state. However, in the case of raw land that is able to produce, as farmland or ranch land, these properties are very much fundable. And if there is an urban piece of unimproved real estate that you wanted to purchase and was able to demonstrate that in you business it would return capital just the way it is, that would qualify as well.

Now as to investment real estate or income producing property, the potential mortgagees for these have a more difficult time qualifying again because of the historical demographics of such property and because the government provides less incentives for purchase. Federal programs by the Small Business Administration are helpful, providing new start-ups with backing so they are better able to qualify for business real estate loans. But otherwise, potential lenders for these properties qualify the properties on the basis of their ability to generate an income used to repay the debt service. If a business applies for a mortgage at a new location, the history of the business at its original location will be scrutinized and then the old location will be compared to this new one to determine its potentiality there. This formula used to derive a safe loan amount by way of the income stream is the debt coverage ratio:

The debt service number (denominator) is a qualification factor determining how much the institution will loan based on the NOI. The higher the Debt Service Figure, the lower will be the amount they will loan. In the above example, the Net Operating Income has been found to be $100,000. if the mortgage company feels this particular mortgage is risky they might assume a Debt Service Figure of 1.3, or if a small risk, then 1.1, or if moderate risk a 1.2. in the first case, the one with a high risk, the maximum debt service the lender could allow on this property would be $76,900 or there about, for the small risk, $90,900, and for the moderate risk, $83,300.

Now when it comes to qualifying a customer for a residential loan, an entirely different calculation is used: Mortgagors verify the applicant?s income and then utilize the ?front ratio?. Front ratio is the proportion of the proposed loan payment (principle and interest together with taxes and insurance for monthly escrow - PITI) to the individual?s gross income.

For most conventional loans this ratio cannot exceed 28%. FHA and VA loans can be somewhat higher. The mortgage company will also qualify the prospect in relation to his total monthly obligations and make a ratio out of this figure in a similar manner. It cannot exceed 36%.