A home loan can put a prospective homebuyer on the fast track to owning their own home by giving them the resources they need to move into a new home, and lenders will commonly offer up to $500,00 in financing to qualified applicants.
However, not everyone is eligible to receive the same amount of funding from lenders based on their individual circumstances. There are a range of considerations that go into the borrowing power of a given applicant when seeking out a home loan such as amount desired and credit score, but there are a few less obvious factors that can make or break a person’s ability to secure funding for the home of their dreams.
Income and Resources
The income and resources of an applicant are perhaps the most important aspect of their eligibility for financing, as they give a good indication of a person’s ability to repay the loan when it comes due. Direct salary as well as investments, inheritances and other income types are all commonly considered, and good ratings in this area can often offset lackluster evaluations in other facets.
Banking History
An established history with a lender can give a prospective home buyer a fighting chance of securing the necessary funding. Banking institutions see each borrower as a risk of lost investment to a certain degree, but an existing banking relationship gives a lender familiarity with an individual and their financial habits, and so it can be a good idea to seek out a home loan at an institution at which there is an active bank account in good standing already in place.
Down Payment
The amount of an applicant’s down payment can give them tremendous flexibility where securing a home loan from a bank is concerned. Lenders will commonly finance up to 95 percent of a home transaction, and so virtually any applicant should have at least 5 percent of the desired loan amount available at the time of application.
Of course, any amount significantly above this figure bolsters the borrower’s leverage, and a larger down payment now can mean smaller monthly payments and a lower interest rate later.
While it is possible for prospective homebuyers to obtain a home loan even if these critical factors are not necessarily in their favor, the available options for these individuals are often unattractive, as they can include high interest rates, uncommonly extensive repayment periods, exorbitant penalties and other undesirable terms. The amount a person can borrow from a lender is effectively unlimited in theory, but in practice, the borrower can only receive what the bank is comfortable lending.
Disclaimer: I received a copy of this book from Miranda. My policy on books I receive free copies of is that I don’t review them unless I like them.
When we left 2013 behind, my NAR on my Lending Club account was sitting at 13.16%. A full year of lending has passed, and, as I’ll explain in just a bit, there’s been some changes to the account. At the end of 2014, my NAR is now showing at 9.61%. Down from 2013’s EOY number, but still a very healthy return on my investment. For comparison’s sake, the S&P 500 returned about 11% for 2014. So, ultimately, I could be getting more of a return on my money in an S&P 500 index fund. The biggest difference for me is that each of the loans I’ve invested in on Lending Club has a set rate of return. The only thing that changes that rate of return is a default. I’ll talk about defaults in a minute, but the rate of default is pretty low. Try and get a set rate of return on an index fund. Your brokerage will laugh you out of the office.