What are the two primary factors in determining whether or not funds will be lent to an applicant for a residential mortgage loan?
What will be an ideal response?
A potential homeowner who wants to borrow funds to purchase a home will apply for a loan from a mortgage originator and supply financial information used to perform a credit evaluation. The two primary factors in determining whether the funds will be lent are the payment-to-income (PTI) ratio and the loan-to-value (LTV) ratio.
The PTI, the ratio of monthly payments (both mortgage and real estate tax payments) to monthly income, is a measure of the ability of the applicant to make monthly payments. A lower ratio indicates a greater likelihood that the applicant will be able to meet the required payments. The difference between the purchase price of the property and the amount borrowed is the borrower's down payment.
The LTV is the ratio of the amount of the loan to the market (or appraised) value of the property. The lower this ratio, the more protection the lender has if the applicant defaults and the property must be repossessed and sold.
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