Chapter 9: Loan Qualifying
Stable monthly income
A lender is concerned with the quantity, quality, and durability of a loan applicant's income. Income that meets the tests of quality and durability is counted as stable monthly income.
Lock-ins
A lender may guarantee a loan applicant that a specific interest rate will be charged on the loan even if market interest rates go up during the period between the loan application and closing. The lender will customarily charge a fee to "lock in" the interest rate.
Calculating monthly income
A lender will always look at a mortgage loan applicant's income in terms of monthly income. Income received on any other basis will be converted to monthly income. Hourly: x173.333 Every other month: x2 Every other week: x 26, ÷ 12
Net Worth
Assets - Liabilities
Preapproval
Preapproval is a formal process in which a buyer fills out a lender's loan application before beginning the search for a house. The lender will issue a preapproval letter that commits the lender to loaning the buyer up to a specified maximum once the buyer has selected a house.
Predatory lending
Predatory lending refers to certain lending practices used to take advantage of unsophisticated borrowers. Examples of predatory lending practices include predatory steering, fee packing, loan flipping, disregarding the borrower's ability to pay, balloon payment abuses, and fraud.
Subprime lending
Subprime lending involves making riskier loans to riskier borrowers. Subprime lenders offset the increased risk by charging higher interest rates and fees.
Truth in Lending Act
The Truth in Lending Act is a federal law that makes it easier for consumers to compare loans and shop around for the best possible rates. TILA requires a lender to give a loan applicant a disclosure statement with a good faith estimate of all finance charges within three business days after receiving the loan application.
Credit report
The lender uses a personal credit report to check a loan applicant's credit reputation. A credit report reflects the applicant's credit history for the past seven years and any bankruptcies within the past ten years.
Annual percentage rate
The most important disclosure under the Truth in Lending Act is of the loan's annual percentage rate, or APR. The APR expresses the relationship of the total finance charges to the total loan amount as a percentage.
Unacceptable income
Unemployment benefits, income from a temporary job, and income from persons who will not be co-signing the loan are all considered unacceptable income.
Acceptable income
Wages or a salary from permanent employment are usually a loan applicant's main sources of income. As a general rule, the applicant should have at least two years of continuous employment in the same field. Secondary sources of income may include commissions or bonuses, alimony or child support, public assistance, investment income, and rental income, if the income has been received reliably and can be expected to continue.
Income Ratio
monthly income x ratio = max monthly payment
