Risk Elements

Before I get into the confidential information, first I have to explain the risk factors that lenders evaluate when looking at your loan.

Risk elements in loan underwriting are those items that assess these questions:

1. Can you pay us back?

2. Will you pay us back?

3. What if you don't?

Can You Pay Back the Lender?

This question evaluates whether you have the financial wherewithal to pay back the money you've borrowed to buy the home. This means that you have enough money to make the house payments, while also paying for your daughters' braces, the car, the gasoline, the cell phone bill, the dinners out, the dinners in . . . well, do you have enough money to do everything you have the responsibility to do, while at the same time enjoying life?

Traditionally, this ability to pay the lender back on time every month is determined by a debt ratio.

A debt ratio is a lending term that expresses, as a percent, your monthly bills divided by your gross monthly income. Debt ratios are part of a risk element, and there are two ratios. The first ratio is sometimes called the housing ratio or "front" debt ratio, and the second ratio is called the total, "back," or "back end" debt ratio. A front debt ratio is arrived at by dividing your house payment by your gross monthly income. For example, suppose you have a house payment of $1,500 and a gross monthly income of $5,000. $1,500 h- $5,000 = 0.30, or 30 percent. Your front, or housing, ratio is 30.

Now add all your other debts beyond housing, not including items that won't appear on a credit report, such as your electric bill, food, or going out to the movies. Other debt includes minimum credit card payments, automobile loans, and other obligations, secured or nonsecured, that you borrowed and are expected to pay back. Other debt may also include child support or spousal payments.

If your car payment is $400, your credit card payments add up to $300, and your student loans make up another $200, then you would add those sums to your housing payment of $1,500 to arrive at $2,400.

Divide $2,400 by $5,000 per month gross monthly income and your back ratio is 48. Your ratios are 30/48.

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