Two Formulas Banks Use to See If You Qualify for a Loan
Whether it's a home you plan to occupy or an investment property you are looking to buy the odds are you're seeking financing to make the purchase. Let's look at two key ratios the banks use to decide how much you qualify for.
Two Formulas Banks Use to See If You Qualify for a Loan
You are going to have all of your regular items the bank wants to see - i.e, credit score, employment history, assets, liabilities, etc.
However, they will use this and the information on the property to run a couple formulas that really drive the decision.
1.) Front-End Ratio
This ratio takes all of the potential expenses for the property you want to buy - items such as mortgage payment, taxes, insurance, etc. The total of those expenses is then divided by your gross income and multiplied by 100.
The industry standard for banks is a front-end ratio of 28% or less. For FHA loans the ratio is 31% or less.
2.) Back-End Ratio
This ratio functions similar to the front-end except instead of adding up the property expenses it adds up your personal monthly recurring debt.
Recurring debt is things such as credit card payments, student loan payments, child support and any other loan payment you may already have.
The total of all those items is then divided by your gross income and multiplied by 100 to get your back-end ratio.
Most banks do not want that ratio to exceed 36%. However, lenders do make exceptions based on credit score or cash reserves set aside.
Conclusion
Now that you understand these ratios you can get your ducks in a row and find the financing to buy that property!
Note: this applies to traditional financing. When you get into commercial or private lending on an investment property, then items such as debt service ratio play a big part in qualifying.
You can use the scaredycatguide property calculator to derive debt service ratio (DSCR) along with much more!
Get access here: Property Calculator
For a blueprint on how to make money with rental properties grab a copy of ScaredyCatGuide to Investing in Rental Properties.
Posted from my blog with SteemPress : https://scaredycatguide.com/real-estate-investing/two-formulas-banks-use-to-see-if-you-qualify-for-a-loan
FICO is about to expand their scores as well which could now include points for bank account balances and also eliminate certain liens on some properties. I was surprised to see that but I guess they want people to take out more loans.
Sounds like ingredients for the next bubble ;-)
Who is at fault in a foreclosure?
When the bank offered you a house loan on your current long term salary.
But the bank did not tell you that they gave the company you work for a business loan to move the production over seas. (in essence, are pretty sure you are going to lose your job.)
The person who fails to pay on time, which, in your example, is you. Absent fraud, coercion, or undue influence, you entered into that loan agreement with the bank voluntarily. Intervening circumstances may release you from your obligation, but that's between you and the bank, and the burden is on you to demonstrate good cause for renegotiating your contract.
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What i spoke about actually happened, on a large scale.
I know what the law says, and it is written by the banks for the banks.
The entirety of the law is written based on money. So, a banker doesn't care what you do, you have to pay them money. A fair contract would be that a farmer offers wheat for a loan to buy a tractor.
The banksters should be tied to outcome of the crops and market. Putting all of the burden on the farmer makes for a very unbalanced contract.
And since the money for the loan is created out of thin air from fractional reserve lending, the bank actually puts nothing into the deal/contract, making it null and void.
How about this scenario?
You get a loan from a loan shark, but before it is due, they break your knees. Now you can't pay the loan. Who is at fault?
The loan shark's. Duh. That doesn't relate at all to the previous scenario, where no force or.violence was employed.
Contract law is contract law. It's built on the express premise that a promise, once made, ought to be honored, and that refusal to honor a promise absent very good cause is grounds for restitution.
You could replace fiat currency with gold notes and the case is still the same. Unless someone is threatening or coercing you into an agreement, you've volunteered into it. The responsibility is on you.
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Additionally, you can't say the bank has put nothing into the deal. Clearly, the fiat money offered by the bank to the home buyer was worth the consideration of allowing the bank to hold a lien on the house. Otherwise, what incentive was there for the homeowner to buy the home?
If you're talking about the mortgage securities crisis in 2008, it is a mistake to reduce it to "banks were hustling people.". If you're referring to something else, I'm curious what that situation was so I can research it.
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I used to believe that was the case, so i can sympathize with your position, however, it is completely and utterly false.
You believe that:
The actuality is:
So, the bank never gave anything, so in actuality, there was never a contract. There was a guy who took his bank to court and got the mortgage nullified based on showing that the bank gave nothing.
There is a good video on this, but ThemTube is not letting me find it.
No, that's not how I think it works. You enter into an agreement to purchase the house from the seller, who agrees to sell you the house for a certain price denominated in whatever currency. Not having the requisite amount of currency on hand to pay the price outright, you turn to the bank. The bank then agrees to settle your debt with the seller in exchange for a lien on the house and repayment of the agreed price to the bank. The transfer of title and money is handled through escrow, so the buyer doesn't directly pay the seller, and the seller doesn't deliver the title to the bank.
With fiat, you're correct that the money is created. It's created at the Fed and disbursed to banks. With fractional reserve lending they can lend even more money that they don't have. However, this is by statute and is authorized by the largest lender in the land: the Fed. While some banks go beyond the statutory limit for fractional reserves, the banks within the statutory limit are guaranteed by the Fed. That's why it is the lender of last resort. Not saying I agree with it, but it is what it is.
My point is that, even with 100% reserve requirements, bank loans for houses would still follow the same formula, and the buyer would still be responsible for repaying the amount owed to the bank. If the bank provides the requisite amount to the seller, they've met their obligation.
We can argue about the legitimacy of cashless transactions in bank databases and the nature of currency, but ultimately if the seller receives their agreed-upon consideration from the bank through an agreed-upon debt obligation between the buyer and the bank, the buyer is responsible for repayment.
I'm curious to see this video you mentioned.
Like i said, i used to believe that way.
However, the banking system does not work the way you think.
A part i left out is that you pay the bank twice for that mortgage.
THIS IS ON TOP OF the fact that they never gave you anything real.
If you do not have a burning desire to see the FED burn to the ground, you don't have a clue about what it is doing.
If you don't see the price of something rise in the store and then curse the FED, you don't know what is going on.
(and neither did i)
The place to start is G. Edward Griffin's book The Creature From Jekyll Island
Video by him about the book
Then follow up with Mike Maloney's Hidden Secrets of Money Series
https://www.youtube.com/user/whygoldandsilver
I do, so you're preaching to the choir. Again, I'm not arguing about what ought to be the case. Only what is the case and what is enforceable at law. Contract law wasn't written by banksters; its codification was certainly influenced by them, but contract law derives from the English common law, which predates any organized system of banks by centuries.
It's not a matter of believing one thing or another. You can read the law and, if you understand it with sufficient clarity, you can see how it will be applied. That's the advantage of positive law (I'd argue its only advantage).
Once again, so long as the bank comports with the standards issued by the Fed and the statutes regarding fractional reserve lending promulgated by the federal government, it's a good contract and enforceable at law. Banks don't give you anything when you purchase property. They give the seller the money. What you get is a release from your debt obligation to one entity in exchange for another (private person to institutional lender). That doesn't defeat the contract, as you are still given valuable consideration under the law.
That example is called "getting hustled" ;-p