What happens is that loans of money, obviously, the recipient does not have the resources at hand to effectively address the issue at hand. That is why we have been approached about the personal loan. It is important that you have an understanding about the capacity of the recipient to pay the loan in a reasonable time. The payment schedule must be discussed in detail the terms of repayment should be very clear to both parties. This is done so that the operation can be done according to the perimeters that you and the recipient can have confidence must be met in a timely manner.

Although you may feel that asking for some kind of documentation of the loan and the repayment agreement is not appropriate to the circumstances, it is important to remember that you are making a financial transaction. The documents are intended to protect both the lender and the receiver. They should spell out the amount being borrowed, and repayment terms, including any delays that may apply. If your loved balks at this kind of agreement, you can take this as a warning signal that you should think hard before going through the credits.

It is also important to take into account their own circumstances, before agreeing to loan money. Can you afford to make the loan without any financial problems for you and your family? Its first responsibility is their own duty, then using any surplus that may have to help those around you. Make sure that by extending a personal loan you will not soon find the need for a loan.

In conclusion, ask yourself a question: If the personal loan can not be repaid on time, or perhaps not at all, how would that affect the relationship? The money has been the downfall of many a marriage and friendship. If the relationship you share with the receiver is something we want to keep, that the enlargement of a personal loan should be something to do with the conviction that if the loan can not be reimbursed you will not allow that fact to create negative feelings to that person. Be very sure you can actually perform such a determination before the enlargement of the loan.

Lending money to help a loved one is a generous gesture. Make sure your gesture does not give rise to resentment in the event of an unexpected obstacle coming.

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A third concern described in the Statement on Mortgage Lending refers to penalties for early prepayment extending far into the term of the loan. Such penalties are usually quite substantial, and are not always fully explained in advance to the borrower. Moreover, borrowers are not always informed about additional monthly payments, like insurance, taxes, and closing costs that accompany the purchase of property but are not part of the loan itself.

Three months before releasing the final Statement, the agencies released it for comment from the public, as well as from members of Congress and various financial institutions. It is interesting that the lending industry’s most repeated comments were in opposition to the requirement of full disclosure of rates and fees relating to ARMs. Such full disclosure was described as “information overload.” We find it difficult to understand how non-disclosure of all costs connected with a loan could be considered anything other than deceptive lending practices. It is only when lenders offer full disclosure and open discussion to borrowers that they will be thought of as reputable entities. To fight mandatory disclosure of costs and fees seems to indicate that they have something to hide.

Most comments on the Statement also pointed out the need for a better, more inclusive definition of the term “subprime.” The final 2007 Statement references the Expanded Guidance (2001) for full criteria for considering a borrower “subprime”.

The 2007 Statement recommends that the borrower be given a full schedule for repayment of the loan, including an informed estimate of associated closing costs, insurance, and taxes. This should be provided by the lender at the time the loan originates. The document also recommends that these extra charges be calculated into the borrower’s debt-ratio status.

All in all, the 2007 Statement on Mortgage Lending provides excellent guidance for the many questionable practices that seem to have become intrinsic to subprime lending. It is inclusive of other earlier such statements, and refers the reader to the earlier 2001 Expanded Guidance document when necessary.

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What is the LTV Ratio?

The LTV, or lending risk ratio, is determined by dividing the mortgage loan amount (after subtracting your down payment) by the value of the property. The higher your down payment, the lower this ratio will be. The lower the LTV the cheaper your mortgage costs in the end, and the better chances you have at securing your loan.

High LTV Disadvantages

If your LTV is high, it can affect your ability to secure the loan in a myriad of ways. A high LTV is a risky situation in the lender’s perspective, because high LTV loans are more at risk to default. If you are competing with other buyers, the lender will most always go with the lower LTV and a larger cash down payment. It can affect your chances of buying.

If you have a high LTV, you are also most likely going to be dealing with higher interest rates and additional insurance costs to protect the lender. These extra costs will increase the cost of your mortgage in the long run and make your payments higher. If you don’t have the 20 percent cash down payment, some lenders will require you to have a larger monthly income to qualify for a 95 percent LTV mortgage. The loan amount is the same, but if your down payment is low, they will need more security.

Prepare When Obtaining a Mortgage Loan

With a little preparation, and possibly some patience, you can save 20 percent or more of the home’s purchase price and steer clear of the hassle and extra costs. If you find this is not possible, it may be time to look at a home with a lower price. It’s better to be able to afford your home, than to tie yourself in a situation with a chance of default.

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For me, when it came to re-tooling, I tried everything, and as I became comfortable - there was change. Whether the sources dried up, or underwriting guidelines tightened - whatever it was it seemed like I was constantly re-tooling - and my volume of production slipped by 80%! Because I have been doing this since the late 80’s - I simply had to find a new niche, a new way to grow my business and support my family. What was I going to do?!

When I started in this business, back with thermal paper fax machines (anybody remember those?!), there were really only 2 kinds of loan programs, government or Savings and Loan money. I stayed away from the government stuff, heard it was too hard and took too long and the government limited origination fees to just 1%, so I stayed with the S&L stuff. Now, with S&L’s gone and WallStreet money still not back yet - seems like the old days are here again - with the major focus on FHA loans!

I have seen statistics that expectations for FHA are in the range of growth near 1000% - seems as thought this time, I am not going to miss this wave! So, I read all I could, I even purchased some great training and reference manuals to ensure my understanding - and then I went out to originate. Although the learning curve was steep, I am now back to production levels I haven’t seen since the refinance boom of 5-7years ago. Although the numbers are similar, the revenue is not! Yes, it is true that origination fees are limited, but to encourage the use of these products, seems that YSP (yield spread premium) is what will fuel the economics of this new wave of FHA loan production.

Don’t miss it this time, learn all you can - the guidelines are strict - but with the millions of homeowners needing help our of those payment option arm, and high rate subprime loans pending their next adjustment - there is quite a demand for our services. Remember, there will always be a need for home loans, we as mortgage professionals just need to be ahead of the curve and ride the different waves of the market to serve our clients and earn our living - don’t quit, just do your homework, and ride this FHA wave!

Anyone who is in this business and is not making FHA loans, should learn how to get yourself or your company FHA approved.

To learn how, Download this: How to Get a FHA License

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The typical traditional bank loans take 3 to 6 months to close. The obvious constraint is if your deal needs to close before 3 months or if the seller is anxious to close in a fast time frame. Private funding typically takes 30-90 days to close and the right mix of information, opportunity and right-time-right-place has seen private deals close in a manner of days!

Most commercial lenders have very specific guidelines on documentation of the source of income or proof of asset ownership. Obtaining these documents from the current owner(s) is a big challenge if not impossible. Tax returns and additional personal information are sought but few are willing to open up their finances to just anyone. Private investors tend not to look at past performance of the property but seek a good analysis of what the future potential is. Be prepared with a sound business plan!

Many borrowers cant qualify for traditional commercial loans if they have existing high business expenses. Again, existing financials need to be examined by the bank to determine if prior performance indicates worthiness for the loan. This time its your financials under the microscope. This type of information is useful in proving yourself to private investors but not required.

Special business properties such as mobile home parks, restaurant /bars, cash businesses, new development construction projects, nursing homes, assisted living centers, etc. may be outside of the traditional lenders interest. The reasons differ but are often related to the perceived risk or lack of knowledge about the type of investment. Again, private investors are more interested in your plan and its soundness rather than the category of property.

Relative short balloon payments on special purpose business loans are fairly common with traditional loans, some due in as little a 3 years. If your business plan does not specifically show how returns on the profitability of the property will support the balloon payment the loan is often denied. Private funding may also have balloon payments but you can always seek a different structure that fits your needs and plan rather than trying to plug your plan into an institutions way of doing things.

Assumability of the loan is not often offered with commercial loans. If your plan for the property includes later selling it for a profit you need to consider how potential buyers will finance the purchase from you. If you cannot transfer the loan to a qualified buyer you will be at the mercy of them obtaining a loan from an institution and meeting all of their requirements. This is time consuming and costly for the borrower creating a delay in you moving on. Conversely, private funding can often be structured so that you may transfer your existing agreement to another without any of the constraints.

Banks and lending institutions often monitor their investments by requiring ongoing financial reporting requirements. Although they are not a partner in your venture they behave like they are. Until you break free from the loan this monitoring relationship will continue. Private funding investors may also require periodic financial reports but as long as the agreed terms of the funding are being met they may have little interest.

Some institutional lenders still require the borrower to live in the same state as the property. In todays realm the reasons for this requirement are lost. Legal issues may be a bit easier to deal with because of the requirement but not enough to limit the borrowers to properties in their own state.

There are many more differences between traditional loans and private funding. The differences usually favor the non-traditional private funding world. You may pay slight more for private funding overall but if you cant qualify for a traditional loan, or the timing will not work you should not even consider cost when comparing the two options.

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Usually, lending investor has a lot of evaluation process before they approve your loan. You should undergo to different evaluation, and aside from the evaluation they will ask you to present proof of property such as car registration, land title and many more. Some require you to have a guarantor, just in case that you fail to pay your dues, they will have some to pressure to help you or will pay the amount of money you borrow.

This process should be strictly implemented, remember you are lending money to those people whom you have met for the first time. They should pass all the requirements needed before approving their loan.

One of the best methods in evaluating the applicants is through background checks. You should learn the true identity of the applicant. In background checks you can have different records such as criminal record, court record, employment history and some property records if any.

In background checks you can identify those who are fraud and who has bad image in terms of borrowing money. Of course you don’t want to be scammed by an individual and lose money; it might lead your business to closure and bankruptcy that most of the lending investor afraid of. Better to conduct background checks before lending money and as a security measure for your business.

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1) CASH FLOW - This is the most important of the 5 C’s as that is how my loan is going to be repaid. Historical cash flow is a good indicator of future cash flow just as the history of anything is a good indicator of any future event. My Detroit Lions are historically a bad team and indications are that they will be bad in the future. A company that has historically struggled in cash flow often will struggle in the future as that may be an indicator of miss-management, lack of desire for a product, or an excessive amount of fixed expenses to name a few. Conversely, strong historical operations often, but not always, bodes well for future earnings. Simple cash flow is often calculated as: Net Income + Depreciation + Amortization + Interest Expense divided by 12 months of loan payments on the subject loan plus any other debt obligations of the company. The rule of thumb is that this ratio should be 1.20 times or greater.

2) CHARACTER- Many banks may have this ranked in a different spot, I have always felt this was the second most important “C” and in some cases equally as important as Cash Flow. Character represents the strength, ability and desire of a Guarantor to support the debt if called upon to do so. Credit history of a Guarantor, like historical cash flow noted above, is a good indicator of a Guarantors propensity to pay. A loan team will look at assets and liabilities of a Guarantor exclusive of the subject loan. Moreover, Guarantor’s personal cash flow exclusive of the income derived from the subject business is analyzed. These three factors: Credit History, Personal Assets, and Personal Cash Flow are essential facets in determining the character of a Guarantor.

3) COLLATERAL - In event of default, collateral is often times the only way a bank can recover some or all of the loan proceeds and hence is usually the secondary source of repayment on a loan (cash flow is first). Collateral can comprise a myriad of item such as cash (my favorite), various forms of real estate and land, assets of a company such as accounts receivables, inventory, equipment, vehicles, and many, many other choices. Other than cash, banks will margin the amount that they will lend on a type of collateral. For example: for a commercial apartment complex the b ank may lend 75% of the value versus 50% of the value of inventory. This is the hedge in case the loan goes sideways that may allow the bank to recover most, and hopefully all, of the principal outstanding on the loan.

4) CAPITAL - A bank is a partner in an endeavor with a borrower. The loan officer wants to make sure that a borrower has some skin in the game so as to lose something if they walk away from the loan. Capital is the amount of equity or money that is put into a transaction or has been built up by a company through historical profits (retained earnings). The amount of equity in or necessary retained earnings differs based upon the type of commercial real estate, the situation in the market (today you need more equity in), or the type company you are lending to. No magic secrets here but a bank should not have to take on all of the risk. Look at the mortgage industry today to see what happens when the Borrowers take no risk - they easily can walk away from their house and not lose their down payment, because they never had one!

5) CONDITIONS - This “C” is usually such things as competition, management succession, and most importantly today market conditions which you lend in. Some lenders can easily remember to the turning of the century and all concerns over whether businesses were Y2K ready from their computer and operational standpoint. Certain companies were deemed to be more susceptible to Y2K concerns than others. In today’s market, certain businesses or real estate are more likely to experience cash flow concerns or failures than others. In my market, companies tied to the automotive operations, or Tier 1 suppliers, will likely experience cash flow concerns and hence should be evaluated tougher when analyzing the credit worthiness of a Borrower.

As noted heretofore, commercial lending is not done in a box and is not an exact science. Much goes into determining whether a Borrower is credit worthy. Different banks have different criteria but all commercial banks use the 5 C’s of Commercial Lending as a tool to assist with that process.

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You can see the effects of misuse of subprime lending in real estate markets all over the United States. For example, people who have bought homes during the last few years using subprime lending usually have not been able to provide a down payment of 20% on their purchase. Private mortgage insurance (PMI) is required in such cases. Private mortgage insurance is available at additional cost to the buyer, above and beyond the required homeowners insurance. With PMI, the lender has a guarantee that if the buyer defaults on the loan, the mortgage amount will be repaid to the lender. The cost of PMI is now deductible from the buyer’s income tax!

Defaults on subprime loans are becoming more and more common. One reason for this increase in defaults is that, lulled by the ready availability of subprime lending, many people have purchased homes they really cannot afford. Some of these are carrying adjustable rate mortgages (ARMs), which are readjusted every couple of years - always upward. In past years, someone who was interested in an ARM needed to qualify not only for the initial rate, but also for two subsequent upward rate adjustments. In recent years, this has not been true. These ARMs have been offered at extremely low introductory “teaser rates,” and those who qualified for the introductory rates were not required to qualify for subsequently adjusted rates. Rates have gone up by several percentage points. Mortgage rates for many people have nearly doubled. In combination with the record high cost of gas and oil, along with steadily rising prices for food and commuting by public transportation, this means that large numbers of families are unable to continue to pay on their subprime mortgages.

Another effect of easily-available subprime loans is that many people who knew nothing about real estate or property management decided to buy real estate. One reason real estate prices were driven to levels that were both unrealistic and unsustainable is that “flipping” properties had become common. This means that people were purchasing real estate, “fixing it up” a bit, and then reselling it for a very good profit. In time, these artificially high “bubbles” burst. Prices fell suddenly and dramatically, and these inexperienced individuals found themselves with property they had bought with the intention of reselling quickly — and with no buyers. The value of many of those properties is less than the amount owed on them. Foreclosures are rampant. Foreclosure sales in a particular neighborhood reduce property values in that neighborhood still more. This kind of cycle is not easy to break.

Subprime lending, then, can be an excellent way to provide a second chance to restore credit and to purchase a home. On the other hand, its effects can be very dangerous if they encourage inexperienced individuals to jump into a rapidly-changing real estate market. Be sure you understand the expected effects before you take any action involving subprime lending!

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Experts say we may feel the repercussions of these events in the financial world for years to come. The sub-prime lending crisis has led to restrictions on the availability of credit for prime lenders and may lead to a US recession.

Sub-prime lending means companies making loans to risky borrowers who do not qualify for market interest rates due to the customer’s poor credit history, unemployment or other causes. Sub-prime lending occurs in many financial markets, including mortgage, automobile and credit cards. With the much higher risk comes a much higher payout.

Sub-prime lending has become extremely controversial in recent years and the current crisis was foreseen by many experts. What turned the sub-prime mortgage fall-out into a crisis has been predatory lenders that attempt to gouge sub-prime loaners for as much profit as possible or may be deliberately misleading or lending to borrowers who could never meet the terms of their loans, thus leading to defaults, seizures and foreclosures.

Sub-prime lending is very risky for both lender and borrower due to high interest rates, that’s why they are offered at a rate much higher than A-paper or prime loans due to that increased risk.

Due to the recent crisis, hundreds of thousands of borrowers have been forced to default and several major sub-prime lenders have filed for bankruptcy and the US may feel the crunch of this crisis for years to come.

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The Truth in Lending document, or TIL as it’s affectionately known in the Biz, tells the consumer a lot about what he/she is getting into. It tells so much so that it can confuse a person, too. Thus, it is important to know and understand what it tells you. It allows one to make an informed decision. A TIL should be part of the beginning of the loan process and the end. When it’s all said and done, a mortgage customer should have reviewed an estimated TIL before closing, and then have also signed his/her final TIL at loan closing. The information found on the estimated TIL shouldn’t be too far off from the final TIL. If it is and you don’t understand the explanation for it, it’s time to put on the brakes.

A TIL will reflect your loan amount, interest rate and the amortization of your loan. A TIL comes in a standard layout, and most TILs will look the same from a distance, though there may be a few variations, like a payment reflection, lender’s logo, etc. But the nuts and the bolts should be identical in format.

The main thing you notice about TILs is they all have four boxes containing numbers stretched across their horizon. These boxes don’t mean much to you until they’re explained. But these are important numbers, which is why they are so blatantly highlighted in these little boxes. They shouldn’t be brushed off. If the TIL is an estimated or intial TIL, you’ll see a little “e” by the numbers in the boxes. Pretty straight forward - “e” means estimate. The final TIL you sign at closing should reflect all the numbers on your HUD-1 settlement papers and the “e” should be gone. That means you’re signing the final, real McCoy that is calculated by your final numbers.

The first box on the TIL reflects the Annual Percentage Rate (APR) or cost of your credit expressed as a yearly rate. Don’t panic, this rate is not your interest rate. It is the rate that the closing costs are actually costing you annualized over a year, and generally it is higher than your interest rate. However, if your mortgage is locked at a 5% interest rate, but your APR rate is 10%, you should reconsider the deal or get a second opinion. You’re paying too much.

The second box is the Finance Charge or the dollar amount the credit will cost you. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan. The third box reflects the Amount Financed or the total amount credited to you on your behalf, minus Prepaid Finance Charges.

The fourth box is the one that gets most people’s attention - the Total of Payments. It’s the amount that a customer will actually pay back in principal, interest (and mortgage insurance, if applicable) if they keep the loan for the full term and stick to the outlined amortization schedule. Ouch. People find this number a little incredulous. I guess it really sends it home that mortgage lending is a business, and some company is going to make some money from it.

There are three other things on a TIL I like to point out to a customer. One is the late payment penalty. People need to know what it will cost them if their check gets to the Servicer late. It’s usually 4% or 5% of the monthly principal and interest payment, depending on the loan type. Another VERY important feature a lender should point out to a customer is if there is a PRE-PAYMENT penalty on the loan. A pre-payment penalty means that if you pay the loan off before a pre-determined time, you pay for the luxury of doing so. Make sure you know the terms of the pre-payment penalty if you should have one, and that you are certain you can live with it. They can be quite costly. Finally, the TIL tells you that should you pay off your loan early, you won’t be entitled to any of your closing costs or interest being refunded. In other words, don’t expect to get any of the money you have already paid back.

Simple enough, right? To tell you the truth, it is confusing, even for a mortgage lender. Take time to understand this document and ask all the questions you have regarding it. Don’t be shy.

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