Home Loan Market

By: EconomyWatch Content   Date: 28 December 2009

About The Author

EconomyWatch Content

Follow The Money

EconomyWatch, Content Team

 

  • Dot Div
  •      

When the housing market crashes, it not only results in increased foreclosures but also impacts the home loan market. Here are certain guidelines to follow when the market is not doing well.

Home Loan Market: Lender Guidelines

A lender is an institution where decisions pertaining to home loan validity are taken by underwriters. This job is performed by mechanical devices that are preprogrammed to accept or reject a loan application on the basis of traditional lending standards. The applications that buyers submit to prove their ability to pay back the loan are compared with these standards. Lender guidelines also have certain percentage formulas, according to which housing costs should not be more or less than 31% of income. Housing costs are made up of principal, interest, homeowner insurance and property taxes. The total amount of debt cannot be more or less than around 41% of income if the lender counts credit cards and installment loans in the mortgage payment. Insurance (life, health or automobile), utilities and entertainment expenses are not included in this ratio.

Home Loan Market: Front End and Back End

Income-to-debt ratio is calculated using two formulas. In the front-end ratio the gross income is divided by PITI payment (PITI - Principal, Interest, Taxes and Insurance). The PITI payment should not be more or less than around 29% of borrower’s income. The back-end ratio, however, comprises debts with obligatory minimum monthly payments. Such debts may be personal loans, car loans, credit cards, federal tax liens, alimony and child support.

Home Loan Market: Understanding Financial Terminology

It is crucial for buyers to understand the various terms used in home loan market. Some of the basic terms include:

  • Loan pre-qualification

  • Mortgage pre-approval

  • Loan qualification

  • Mortgage approval 

Once your documents are verified, they are examined by a mortgage underwriter. You may be required to submit more documents for the approval of your application. Once satisfied, the underwriter will send the borrower an "approval" with a "clear to close." 

Flexibility of Home Loan Market

Certain federal government approved agencies also provide insurance to borrowers. However, the loans they provide should adhere to the guidelines outlined by these agencies. Such agencies are: 

  • The Federal Housing Administration (FHA)

  • The Department of Veteran's Affairs (VA)

  • Fannie Mae

  • Freddie Mac

 

Lenders associated with these agencies offer no down payments or low down payments loan options. For instance, military service veterans can take advantage of complete or partial home loan insurance on the basis of details of their service.

 

These guidelines, when followed as rules, enable the market to stabilize, which eventually benefits everyone.

 


  • Dot Div
  •      

Most Popular in Home Loans

Related Links
blog comments powered by Disqus