Home Loan Funding

By: EconomyWatch Content   Date: 31 December 2009

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Not every individual is born with a silver spoon and that is one reason why many individuals and families opt for a mortgage scheme to secure home loan funding. With considerable liquidity in the economy, the home loan market is filled with so many lenders. However, with the amount of money and risks involved, these lenders require a potential borrower to meet certain standards. These standards form obstacles in order to meet or adhere to a home loan funding process. 

Home Loan Funding: Major Obstacles

The home loan funding process poses following major obstacles for a potential seeker:

Down with down payment: The first obstacle is to arrange for down payment. It is a part of the total loan amount. It is the initial upfront amount which a borrower has to pay to the lender, usually in cash. A down payment can be anywhere between 5% and 20% of the total loan amount. Loans with down payment as low as 3% are also available but they have other restrictions imposed. FHA-approved loans require low down payments. However, only VA loans for veterans have no down payment ghost associated with them.

Favorable credit score: Lenders treat the credit history of an individual as the certificate of honesty. They seek potential borrower's credit report from the local credit bureau to examine the risk of a loan payment default. In the US, the FICO (Fair Isaac Corporation) score is considered as the benchmark number to determine probability of default. The higher the number, the lesser are the chances of a default.

Mostly, the lenders require a magical number of 720 for standard home loans and 620 for FHA loans. An individual can obtain his/her FICO score online. However, it would be better if the borrower asks lender to obtain it. Lenders obtain a FICO score from three different agencies and take the median as the final number.

Limits on loan amount: Mostly, lenders require a favorable loan to income ratio. It means that the aggregate of monthly installments, taxes and insurance should not exceed 33% the borrower's monthly income.

Legal traps: Meeting the legal requirements for a mortgage is equally difficult. One has to provide a bulk of documents to prove the identity, residence address, source of income, age and a good credit record.

The best way to increase the odds of a loan approval is to provide all the required details precisely. Hiring a loan officer or a mortgage broker may also help.


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