Apply for a Home Loan: The Ideal Mortgage Loan Profile

When applying for a home loan, you ideally want to get the lowest rate and best terms possible.  When the bank or a mortgage broker is taking your application, there are 4 main areas that are points of interest:

1. FICO Credit Score: Your credit score is indicative of your current liabilities, past payment performance, and public record (including bankruptcies).  The higher the score, the better you qualify as it demonstrates trustworthiness to the lender.  Ideally, you want a score of 740 or higher.

2. Income: The amount you make on a monthly basis is a baseline for how big of a loan you qualify for.  Ideally, your PITI (principal-income-taxes-insurance) mortgage payment should be no larger than 30% of your pre-tax income.  Additionally, your total liabilities (credit card minimum payments, car payments, etc) and your mortgage payment should not exceed 50% of your pre-tax income.  This is known as the Debt to Income (DTI) ratio.  The lower your DTI, the better.

3. Assets: Lenders want to see that you have at least 3 months of mortgage payments in the bank in case of an emergency.  Ideally, you want to have at least 6 months of reserves.  The more cash you have, the better.  Other properties, retirement funds, stock portfolios, etc. contribute to your assets. 

4. Loan to Value (LTV) Ratio: The lower your LTV, the better.  Your loan to value ratio is the ratio of the size of the loan compared to the appraised value of the home.  For example, if your loan is for $400k, and the home is worth $500k, the LTV ratio is 80%.  Ideally, you want at most 80% LTV; you can achieve this by putting a down payment on the home.  The lower the LTV, the less risk the lender has when loaning you the money. 

If you are strong in these 4 areas, you should have no problem qualifying for a mortgage with low rates and excellent terms.

Debt Consolidation

If you have credit cards, you may see debt consolidation offers right and left.  These debt consolidation offers usually involve you moving all of your credit card debt to a new or existing credit card so that you have one balance.  Additionally, doing this debt consolidation may qualify you for an introductory low APR, which is designed to be lower than the APR's of your other cards.

Be careful if you are considering this.  Many times, these low introductory APR's have strict conditions and small windows of benefit.  It's common for the introductory APR to be around 2% and then jump up to 20% without any advance notice.  If you're going to do a debt consolidation on a credit card, be wary of the potential consequences if you don't watch your account closely enough.

Unsecured Loans

Contrary to secured loans, unsecured loans do not have collateral to secure the loan amount.  Unsecured loans are considered higher risk because of the borrower defaults on the loan, the lender can only send the account to collections and not be able to seize any property to recoup the losses.

The credit card is the most common example of the unsecured loan.  Unsecured loans are primarily underwritten with credit score, credit history, and income level as criteria to qualify.  Unsecured loans are different from secured loans because the higher risk in an unsecured loan usually means a high interest rate, usually 20% and up.

Secured Loans

A secured loan is a type of loan in which the borrower puts up some form of collateral, such as a car or house, or secure the loan.  In case of a default, the lender can retrieve his/her losses by taking possession of the asset and selling it off.  Examples of secured loans include mortgage loans and car loans.

Secured loans are associated with lower risks for the lender and a lower interest rate to the borrower.  From the lender's perspective, a default on the borrower's part will still lead to some sort of recouping of the original loan amount.  This is why a lender must underwrite these loans as a "no lose" situation for them.  From the borrower's perspective, the lower rates compared to an unsecured loan are better because that means lower payments.

Mortgage Loans

With mortgages in the USA being a hot topic over the last few years, I wanted to know if any of you have a mortgage?  When did you get it, and are you happy with your rate and terms?  Did you get your mortgage through a mortgage broker, direct lender, or your bank?

There are still a lot of people getting mortgage loans today, and I think this information would be interesting to display in the comments section.  If you do have a bad loan, perhaps others could share their experiences to help everyone out.

Payday Loan Scams

It's a trap!

Recently, more and more people have been turning to Payday Loans to get quick cash for an emergency.  As a result, more scams are popping up, and borrowers are experiencing the consequences.  If you do need to get payday loan, make sure you read all of the fine print so that you don't end up with a judgment or bad credit.

Some payday loan shops have been asking people to secure their loan with more than their paycheck; some have asked to use a car title or even a home's title as collateral.  If the borrower defaults on this loan (sometimes in as little as 2 weeks), the collateral becomes that of the lender.  Using your $10,000 car as collateral for a $500 loan is blasphemous.

The best way to avoid these scams is to just not use payday loans.  Have an emergency/savings fund for these circumstances as getting a payday loan just isn't worth it.

Your Credit Score and Credit History

For those of you reading this, are you aware of your credit score?  When was the last time you checked it?  And if you know your credit score, does it rate well?  For your age, do you think you have enough debt and credit history to establish a strong score?

I'd love to hear the responses of my readers so that I can cater my content to you.

Your Credit Score and How It Affects the Loan Process

A credit score is a numerical figure that represents a person's creditworthiness.  This numerical figure is computed via a statistical analysis and takes into account a person's past and present debts, payment history, public records (bankruptcy), and collection accounts.

In the United States, FICO Credit score takes into account the Experian, TransUnion, and Equifax.  Your FICO score is the median number between the scores of those 3 credit scores, and the range is between 300-850, with the higher number being a better score.  The median FICO score of Americans is 723, and anything under 670 is considered a below average credit score.

Since your credit score determines your creditworthiness, it affects your ability to obtain a loan.  Other factors such as income, assets, and debt obligations also factor into your ability to qualify.  Ideally, you put yourself in the best situation (lowest rates, best terms) for a loan by having a high credit score, significant assets, and little to no debt obligations as you would pose the least amount of risk of defaulting.  The lower the risk of defaulting, the cheaper the loan will be for you.

Mortgage Loans

A mortgage loan is a type of loan that is secured by real property via a mortgage note.  This mortgage note documents the existence of the loan and the encumbrance of the property through the granting of the mortgage that secures the loan.

In the United States, since the prices of homes and properties are very high, it is typical for a prospective buyer to secure a mortgage in order to purchase the property.  These mortgages can be secure from a bank or a mortgage broker.  (In a future post, I will talk more about the differences between obtaining mortgage loans from these two).

When obtaining a mortgage, you can either get a fixed rate or variable rate.  You can also get interest free for a specific time period and/or have a balloon payment clause.  In the last decade, lenders created many different loan programs to get prospective buyers to bite on low initial rates (without necessarily being able to afford the real interest and principal payments), and this caused many defaults and foreclosures.

When applying for a mortgage, your assets and credit profile will qualify you for a specific rate.  It is up to you to decide if your rate and payment fit within your income and lifestyle.

Payday Loans (aka Paycheck Advances)

A payday loan (or paycheck advance) is a short term loan that's designed to cover the borrower's expenses until the next payday.  Sometimes, this type of loan is also referred to as cash advances.  (Cash advances can also be taken against an existing line of credit like a credit card.)

Payday loans don't fall under as strict legislation like conventional secured loans (homes, cars) and unsecured loans.  It is common to have a payday loan have an APR of over 50%.  Therefore, it is imperative that the individual who takes out the payday loan pays it back as soon as possible to avoid extreme interest charges.

Paycheck garnishments are never fun.

If necessary, only use payday loans as a short term solution to a cash shortage problem.  People who run payday loan shops know that the business is very profitable.  Since you use your paycheck in the application process, a default on the payday loan can easily be taken to court, and a judgment will result in a garnishment of your wages.  A $200 loan could eventually turn into a couple thousand dollars if the process is dragged out long enough.  Also, your credit score will dip due to the default.

Welcome to About Loans and Credit!

Welcome to my page!  Here, I'll be talking about different types of loans and how credit works.  Over the last few years, the global economy has suffered a credit crisis that was triggered by defaulting loans, especially in the real estate industry in the United States.

The latest economic downturn has caused a firestorm of defaulted loans, bad credit, and bankruptcy.  Hopefully, we all can share information and experiences so that everyone is aware of different types of loans and how they can affect your credit.

I hope to keep you all interested :)