Three Essential Parts of a Loan
by Barbara Jennings, CRS/CSS
Whether you're looking for a business loan for your home staging or interior redesign business or a home loan to purchase a home, condo or building, there are
some common denominators that banks and lenders use to determine your credit worthiness and their risk factors.
Every loan you might apply for is based upon some calculation of risk. The degree of risk that the lender determines you have will play a part in determining
what kind of return they can expect to get. In every asset based loan, there are three major categories in determining the risk.
- Cash Flow
When these three factors are combined, a lender will determine what rate and terms to offer you. Here, briefly, is a discussion of what each of them mean.
Cash flow is the amount of money you are regularly generating and how you can document it. If you are a salaried employee, you can document your income with your
W-2 or a pay stub or copies of actual paychecks. Lenders use the gross wages to determine your income, not your net earnings. Using pay stubs or a W-2 to document
your earnings is referred to as "Full-Doc" (Full Income Documentation). If you don't use these documents to prove income it is said to be a "stated income" loan.
After you establish your gross income, you have to itemize your monthly fixed expenditures, like rent or mortgage payment, credit card bills, utilities, car
payments and the like. Once you have this total, your income and expenditures totals will be used to calculate how much of a loan you "qualify" to get.
Depending on who your lender is, there are two ratios to be considered. The front end ratio is the amount of your new monthly mortgage payment divided by the
monthly income. If you are an "A" lendee (someone whose credit score is above 700), the lender will use a front ratio of 33%. If you earn $9,000 per month, for
example, you could qualify for a total payment of $2,970 (including property taxes and insurance).
The "back end" calculation uses the amount of your new mortgage along with the total amount of your fixed expenditures or obligations. On the "back end" ratio,
you need to have a ratio of no more than 40%. On this formula, the borrower could have no more than $630 per month as fixed payments to be compliant. Naturally,
if you are not an "A" borrower, the qualifications are tougher and any terms offered will be tougher as well.
Mortgage Loans (continued)
Barbara Jennings, is a leading home staging and interior redesign trainer. Author of 9 books on decorating, she is one of America's leading experts on
how to start, manage and grow a home staging or interior redesign business.
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