Loan Prequalification – Collateral

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blog-author-clayjeffreys3

In the month of June, The Mortgage Blog focused on each aspect of the prequalification process. We started with credit, moved to down payments, touched on income, and will finish today with the collateral that secures the loan – the home being purchased.

Whether it is a single family home, town home, condo, etc. the condition of the home itself is important in the loan process. FHA loans have much stricter standards when it comes to the condition of the property, so this post will focus on conventional loans.

When looking to purchase a home with a conventional loan, the home must be “livable” in its current condition. “Livable” can be defined using the following descriptions:

  • The home is not missing any flooring.
  • The home is not missing any light fixtures, light switches, outlets, etc.
  • There are no repairs needed to would impact the integrity of the home such as a leaky roof (can damage interior of home and cause mold), missing siding (that can lead to rotting the side walls of the home and cause mold), water standing in the basement/crawl space (again, can cause mold).

If these problems do exist, repairs could be required prior to closing. While borrowers may view some of these as items that can be fixed once they own the home, that is looking at the problem from a different view than the lender. When underwriting a loan, the lender’s perspective on the collateral (the home) is this… the borrower will never make a payment, how do we get our money back? The last thing a lender wants is to finance a home in need of repairs and then be stuck with those repairs if the home goes into foreclosures. Thus the emphasis on the condition of the home.

There are loan programs designed to renovate homes that are missing lights or flooring OR even updating a home. The FHA 203k is a great example, and a loan program that will get its own blog post in July.

Planning ahead is key to ensure that each aspect of the prequalification process is met in order to successfully purchase a home. There are borrowers out there looking to get into a new home in the coming months. Even if the plan is mid to late Fall, it is still a good idea to make sure one’s credit, down payment, and income are in line with the amounts needed for the purchase. The last thing you want to do is assume everything will be OK. We all know what happens when you assume… you can wind up homeless. If you are buying in Georgia, contact me today and I will help get you into your new home before the end of the year!

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