When the lending business began, I suppose, it was a very simple proposition. You wanted a loan you needed collateral. If the collateral wasn't enough to get you the loan, you added some more collateral. When the lender felt good about the deal you got your loan. Simple, fair and relatively easy. What happened? The loan business expanded into a mortgage industry and that is when the problems began. In every industry there is a right way and a wrong way to do business, which is generally defined, and that is how business is conducted. Like everything else that is vibrant, the definition of right and wrong are changed or amended over time. In some cases the definitions become interchangeable and that can lead to a parcel of problems.
The previous paragraph sums up the mortgage industry from its inception through the present time. Now we are back at the beginning crossing every "t" and dotting every "i", and I feel there is probably a better way. So I invite you, the reader, to join me in developing a new and better mortgage loan formula for success. I will lay out the tools and you can lay out the parameters for their use. I bet you will find out it isn't as easy as it seems it should be.
The four main ingredients that every borrower has are a property with a value; a credit score; earnings and cash reserves. Which one is the most valuable? Which is the least valuable to you? To the lender? Additional information we have is the type of transaction: purchase, refinance or cash out. We have the usage of the property: primary residence, second home or investment. The type of property: single family residence, condo, high rise condo, duplex, tri-plex or four-plex. Should all of the above be treated the same or should there be different rules for different situations?
Let's start with the loan to value of the property. If it is a purchase do you use the purchase price, or the appraised value? What do you do if the appraised value is higher than the purchase price? Lower? The standard current rule is to use the one that is lower which means the borrower doesn't get any value for an under the market purchase and is forced to bring in additional monies if the purchase is deemed to be over the market. Would you keep this rule? On a refinance or cash out transaction would you review the appraisal or ask for a second one? Would you accept the appraisal as is? The current rule is to review every appraisal and if there is concern have a field review done by another appraiser or get a second appraisal. Does this seem to be the best way to operate to insure proper security?
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.
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