Tag Archives: lenders

How Lenders Examine Assets of the Potential Home Buyer

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Quite often, first time home buyers share their savings accounts or money market accounts with their parents. Even if the name of the potential home buyer is on the statement, it does not necessarily mean that he or she has full access to or possession of the account. The lender will split the asset between the home buyer and the parent who shares the account. So, if there is $12,000 in the account, the lender will only account credit for $6,000 of that. A quick fix is to have the parent write a note stating that the account will be turned over to the potential home buyer. Any assets that are listed must be in full possession of the home buyer.

Another concern is that some home buyers do not pay attention to how liquid their assets are. This means that even though an account is present, such as a retirement account, the home buyer may not have access to it. A retirement account will have no value until one is retired. For the purpose of financing, the home buyer may cash that account. Another option is to allow the lender to use a partial amount that can be included in the assets.

Although some types of accounts will let the owner cash in, it is for a penalty. For example, the home buyer has $50,000 in his or her retirement account and wishes to cash in. The lender will consider the penalty of this action; let’s say, 10%, and deduct that from the account. So in actuality, the account is only worth $45,000. It is suggested that the home buyer talk to a financial planner about this decision. If the home buyer does not decide to cash in their account then that asset can still be used to qualify them for a home loan. The lender will most likely use 70% of the home buyer’s vested balance. The vested balance is the portion of the 401k that one is currently entitled to.

The very last asset requirement for loans is called reserves. The reserves are the funds that are there when the home buyer closes his or her purchase. It is usually in multiples of the house payment. Retirement accounts by itself can be used as reserve assets.

Debt Ratio

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Debt Ratios is more than likely, the most significant and important aspect of lending to date. A Debt Ratio is defined as the percentage of debt compared to you gross income. In order to have a Debt Ratio of 20, your bills and required spending for a month must be equal to 20% of your gross income for that month. Every lender will have a varied debt ratio, depending on different factors.

Lenders have a hard task to face when calculating and basing a loan on your debt ratio. Lenders of course, would like to give you the biggest loan they can because the interest will be larger. The interest coming back on an $80,000 loan will be larger than a $40,000 loan, and even though it would profit them, there is still the chance that the borrowers won’t be able to pay back the loan. If the lender gave a higher loan, the monthly payment for the loan may be too great for the home owners and due to non payments; they may have to foreclose the home.

The task of the lender is to find a common ground in between these two. While making sure they give a loan sufficient enough to help the borrowers, they need to make sure that it’s a safe investment and that they will be able to pay back the loans. So overall, it’s the largest loan possible within the parameters of the loan being paid back in a timely manner. Once again, it’s also dependant on what the lender is comfortable with, if they believe that the borrowers will be able to pay back a higher loan, then they may take the risk, every lender is different. Lenders have to use the debt ratios and determine which loans go along with which debt ratios in order to make sure the loan payments can be realistically met, while helping the borrowers.