Watch Out for These Risks in a Home Mortgage Application
Many would-be borrowers fail to recognize that risks exist on both sides of the borrowing deal.
It's true that you, as a borrower and home buyer, face a number of risks.
You might not have enough insurance; your income could stop suddenly, because of layoff or disability; the bank could stop suddenly, because of layoff or disability; the bank could foreclose for nonpayment, ruining your credit and putting your family on the street; the neighborhood might deteriorate and property values could quickly follow.
Most of these possibilities are remote, but they can happen.
You also need to be aware of the bank's point of view concerning risk.
It's naive to say that, because a loan is secured by real estate, the lending bank has no risks.
On the contrary, lender's risks could be substantial.
When a bank grants a loan with a fixed rate for 30 years, it makes a very long-term commitment.
If interest rates rise far above the fixed rate level, the bank stands to lose money on its portfolio.
This has occurred before and it could occur again.
In addition, what if the bank were forced to foreclosure on a number of houses? Chances are, those homes could not be quickly resold, either because of their condition or location, or because of a slow market.
The bank might find itself unavoidably stuck in the real estate business, but without the cash flow it needs to stay in business.
Another risk is that the local economy might go sour.
Real estate prices could fall at the same time that one or two major employers lay off thousands of workers.
A lot of people who are suddenly out of work might just walk away from their limited equity and relatively high debt.
Risk exists on both sides.
If you approach a lender with an awareness of the lender's risks as well as your own, you will have a better chance of addressing risk and reducing it.
The lender-to-borrower equation is not as one-sided as it might appear.
You need to convince the lender that you are dependable, solvent, responsible, and willing to put up the equity that will prevent you from walking away from the obligation.
This invariably means committing yourself to the down payment the bank requires.
Most lenders would like to see borrowers approach the deal with 20 percent down.
Some will allow you to enter into the agreement with only 10 percent down; and you can get a house for less, (nothing down, in some cases), if your loan is guaranteed or insured by the FHA or the VA.
It's true that you, as a borrower and home buyer, face a number of risks.
You might not have enough insurance; your income could stop suddenly, because of layoff or disability; the bank could stop suddenly, because of layoff or disability; the bank could foreclose for nonpayment, ruining your credit and putting your family on the street; the neighborhood might deteriorate and property values could quickly follow.
Most of these possibilities are remote, but they can happen.
You also need to be aware of the bank's point of view concerning risk.
It's naive to say that, because a loan is secured by real estate, the lending bank has no risks.
On the contrary, lender's risks could be substantial.
When a bank grants a loan with a fixed rate for 30 years, it makes a very long-term commitment.
If interest rates rise far above the fixed rate level, the bank stands to lose money on its portfolio.
This has occurred before and it could occur again.
In addition, what if the bank were forced to foreclosure on a number of houses? Chances are, those homes could not be quickly resold, either because of their condition or location, or because of a slow market.
The bank might find itself unavoidably stuck in the real estate business, but without the cash flow it needs to stay in business.
Another risk is that the local economy might go sour.
Real estate prices could fall at the same time that one or two major employers lay off thousands of workers.
A lot of people who are suddenly out of work might just walk away from their limited equity and relatively high debt.
Risk exists on both sides.
If you approach a lender with an awareness of the lender's risks as well as your own, you will have a better chance of addressing risk and reducing it.
The lender-to-borrower equation is not as one-sided as it might appear.
You need to convince the lender that you are dependable, solvent, responsible, and willing to put up the equity that will prevent you from walking away from the obligation.
This invariably means committing yourself to the down payment the bank requires.
Most lenders would like to see borrowers approach the deal with 20 percent down.
Some will allow you to enter into the agreement with only 10 percent down; and you can get a house for less, (nothing down, in some cases), if your loan is guaranteed or insured by the FHA or the VA.
Source...