Will You Pay Back the Lender?
You may have the money to pay the lender back, but will you do it? This is determined by your credit past. Have you borrowed money from other companies, yet didn't pay them back? This is the element of risk that helps determine not your ability to pay, as represented by your debt ratios, but whether you have the inclination to pay back the original lender at all.
I have seen more than my share of loan applications where the borrower made tons of money, but, for whatever reason, was simply late on his mortgage payments. He had the capacity to pay back the loan, but he didn't have the credit responsibility to carry out that obligation.
What If You Don't Pay Back the Lender?
This risk element is the element of last resort. If the borrower doesn't pay back the loan, will the lender get its money back if it is forced to take the house and sell it to someone else?
The third risk element is not the borrower, but the physical collateral. If the home goes into foreclosure, can the lender sell the property and get its money back? Lenders don't like foreclosures. They hate them with a passion. It means that something screwed up somewhere. However, in case those bad things do happen, the lender needs to know a little more about its physical asset—the house itself. This is provided by an appraisal, an independent report that examines recent home sales near the subject property that can support the value.
Is the house located in a neighborhood dominated by homes made of brick, but the loan is being made on a homemade of straw? Or mud? Is the subject property a 1,200-square-foot two-bedroom, one-bath home located in a subdivision dominated by four-bedroom, three-bath properties? In other words, is the house like everyone else's? If it is, the lender increases its chances of selling the home quickly should a foreclosure be necessary.
Okay, all that having being said, let's go on.