There has been troubling news released by S&P/Experian, as reports indicate that defaults on first credit payments by consumers are on the rise. While most indicators surrounding the economy and the stock market have been positive, this boom in defaults isn’t, as it’s the first time in two years defaults have increased.
What makes this even worse is that first payments are very important when it comes to hard money residential loans. The first payment tends to be an indicator for what’s going to happen over the rest of the loan. If the borrower is late on their first payment, odds are that they’ll also be late on all the ensuing payments, if they even end up making those payments. If they miss the first payment, they may never make any payments, and a default is likely. Any way you look at it, a first payment default typically means hard money lenders will need to foreclose at some point.
This means that private mortgage investors need to be very careful when issuing hard money residential loans. How can lenders spot a borrower who is likely to default? It all comes down to carefully evaluating the person’s ability to repay what they borrow.
The Consumer Financial Protection Bureau (CFPB) has created specific rules for lenders in evaluating a borrower’s ability to repay their loan. So, hard money lenders should be looking at ability to repay to comply with the law, and also because it’s extremely risky if they don’t.
There are two key factors in evaluating a borrower’s ability to repay a loan – their income and their monthly obligations.
To determine a borrower’s income, private mortgage investors can look at recent tax returns, a W-2, a 1099 or a monthly cash flow statement provided by a CPA. One of the most common mistakes lenders make is failing to double check the borrower’s reported income. To qualify for a larger loan or just to qualify for a loan at all, a borrower may claim a higher income than they actually earn or claim that they have other residual income besides what they receive from their job. It’s important for lenders to verify exactly how much the borrower makes.
Another common lender mistake is taking the borrower at their word regarding monthly obligations. Again, borrowers aren’t always forthcoming regarding their monthly obligations if they want to give themselves a better chance at qualifying for a loan. To verify that the borrower disclosed all their monthly obligations, the lender should compare the obligations they disclosed with those listed on their credit report.
The good news is that when a lender does their due diligence and performs both of the steps above, they drastically reduce the chances of a first payment default. No borrower wants to default on a loan and risk foreclosure, and the most common reason for missed payments is simply because the borrower can’t afford it. That is partially the fault of the borrower, but it’s also on the lender for issuing the loan in the first place.
Before a lender issues a loan, they should subtract the borrower’s monthly obligations from their income and see how much is left over. They can then compare that leftover amount with how much the payment on the hard money loan will be. The loan payment should fit within the borrower’s budget without pushing it to the limit.
Considering how quickly a lender can do all this, there’s no excuse for issuing a loan that the borrower is unable to repay. It’s simply a matter of requiring that the borrower provides third-party proof of income, and then analyzing what’s on the borrower’s credit report. If both the borrower and the lender are realistic about what the borrower can afford, neither side will need to worry about a default.
At AMI Lenders our priority is to get potential customers the financing they need when they can’t get it from conventional lending sources. However, we are also concerned for their wellbeing and financial stability of our clients, so we take every precaution to prevent foreclosure on behalf of our customers. Foreclosure doesn’t help them and it is certainly not good for business.
For over 27 years, AMI Lenders have provided financing to individuals who are not able to obtain it from traditional sources like banks. Our qualified and expert loan officers will help you get the loan you need, quickly and securely. Please give us a call or, if you are ready to apply, please click on this link.