At first glance the subject of lending may seem more appropriate for buyers than sellers. Yet sellers who are not familiar with lending process limit their negotiating position while leaving themselves open to large expenses at settlement.
Lenders are in business to rent money under the best conditions possible. A look at almost any daily newspaper will show saving and loan associations, commercial banks, mortgage bankers, and others offering mortgage money at competitive rates. The lending policies of these institutions are guided by two factors: risk and yield.
All lenders seek situations with least possible risk. This is done by lending against a portion of the worth of a property, using mortgage insurance, and evaluating the credibility of the buyers.
If a home is appraised at $70,000 a conventional loan may require a cash down payment of 20 per cent. This means the buyer will need $14,000 in cash to acquire a $56,000 loan. In the event the buyer defaults the lender is protected by the cash equity in the property. Even if the house is sold at auction for $60,000 the lender's investment is still protected.Moreover, with time the lender's risk is continually reduced through monthly mortgage payments which lower the principal balance.
With FHA, VA, other federal insurance programs, or private mortgage insurance plans the lender will require less down. The occurs because the insurance will cover some portion of the lender's risk. If a $70,000 home is sold with VA backing, the lender will put up 100 per cent of the value of the home because the VA, under its current formula, will insure $17,500 of the mortgage. He the lender has effectively exposed only $52,500 against a property with a $70,000 market value.
While the relationship of a property to the extent of a lender's exposure defines one form of risk, the nature of the buyers who meet certain standards of income and stability.
At one time there were general rules that described the approximate type of buyer with which lenders would deal. Such guidelines may have included a requirement that the buyer's income should be equal to one-half the value of the home or that payments for principal, interest, and taxes should not exceed 25 per cent of the buyer's gross monthly income.
To some extent these guidelines have been a victim of inflation and changing times. Today most lenders still descrine general standards for buyers but emphasize that such guideliness are clearly approximate.
Factors other than income effect risk. Suppose a young couple wants a $60,000 home yet has a combined income of $25,000 annualy. Superficially the couple would seem unqualified. Yet a parent may offer to co-sign the loan, the buyers may be attorneys or doctors just entering practice with good prospects for future income, or the couple may have an inheritance that would reduce the size of the mortgage.
It is also worth observing that some lenders are approving loans that effectively create "house poor" buyers; that is, a situation where monthly mortgage payments are so large that other purchases must be denied.
Given equal offers by tow buyers, a seller should consider the level of risk each will present to a lender. Also, for reasons of risk, the "highest" offer my not be best. If a buyer with an exceptionally high offer cannot obtain financing, a seller may find that a house has been needlessly removed from the market while other potential buyers have lost - all at great expense.