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Archive for August, 2015

Loan Underwriting Process

When a person applies for a loan, he is termed to be an endorser or applicant of the loan. A person or organization who lends the loan is known as the lender. In between the lender and borrower, sometimes, there is an existence of a loan agent. After the application is made, the agent and the lender undertakes a very important procedure known as underwriting. In some cases, the underwriting is done by both, the lender as well as the agent, but in some cases, only the agent does the procedure.

It must be noted that there is no single loan underwriting definition, and the concept of underwriting is used for a varied number of reasons in the world of finance.

What is Loan Underwriting?
The underwriting procedure basically involves ascertaining the creditability and capability of the borrower to repay the loan. In cases where the loan is a commercial or mortgage loan, the projected value of the collateral is also forecast. Thus, basically, the underwriting process involves ascertaining the recovery of money, and its rate of recovery. The process in itself is quite intricate and difficult. Loan underwriting is usually conducted for bigger loans, such as mortgage and auto loans. The smaller loans, such as cash advance and payday loans, however, do not have this complex underwriting processes. Instead, a simple approval process is used. In the United States, Freddie Mae and Fannie Mae, along with the Federal Housing Administration, provide the detailed underwriting guidelines.

Loan Underwriting Procedure
The best way to understand an underwriting procedure is to understand the considerations and aspects of loan underwriting. The guidelines that are provided by the aforementioned institutions are based upon the following aspects.

Income: One of the most important aspects that is considered during the process is the income of the borrower. The loan’s installment is also calculated as per the income of the borrower. The size of the loan, i.e., the total amount that is lent, the down payment, and rate of interest are all decided upon the income of the borrower.
Debt to Income Ratio: The second important factor that is considered is the debt to income ratio, which is the ratio between the monthly payable debts and monthly income. Debt to income is sometimes also calculated for the entire year. The intention of calculating such a ratio is that it gives the perfect amount of income that is going to be used to pay the debt.
– Employment and Source of Income: A very important aspect that is considered by the underwriters is the employment status of the borrower, and the source of income. Underwriters also further analyze the income projection and the growth of income rate, in cases where the loan is very long-term.
– Credit Report: The credit report of a person considers two important facts―the credit history and the credit rating. The history is a record of all the previous credit related activities of the borrower. The rating is a figure that denotes the credit weight of the borrower. A rating is usually expressed in the form of a credit score, and is calculated on the basis of the credit history, late payments, and defaults.
 – Projection of the Property: The value projection of the property is also considered by the underwriters. This projection is taken into consideration in cases where the asset is a real estate. There are cases where mortgage and home loans are defaulted by the borrower, or foreclosure has to be initiated. In such a case, the lender takes over the ownership of the property, and sells it off to recover losses. The projection of the value of the property, is thus, an important aspect of mortgage loan underwriting.

It must be noted that commercial loan underwriting is different and much more complicated than the underwriting procedure for individual customers.

Hardship Loans

The concept of hardship loans is quite different as they belong to a separate class of loans. Roughly parallel to the debt consolidation loans, hardship loans are utilized as means of solving financial junctures. Several people have successfully used such loans during the time of economic recession. In some cases, due to the negative status of the economy, the loans did not have a significant positive outcome. But in cases where the economy is booming, this category of loans tend to be of great financial help. The results, are thus mixed.

Hardship Loans for Students
The most common hardship loan is the one that is given to students, and is provided by many major banks such as Wells Fargo. More often than not, students are compelled to apply for common student loans as a result of high educational fee structure. During the course of their education, they are also forced to borrow various other loans such as cash advance loan and other personal loans. After their graduation, a large number of students are in grave debt or do not have any financial means to pursue their education further. The Federal Family Education Loan Program is a program that is offered for several such students, through which an Economic Hardship Deferment is implemented. This helps the students to defer the repayment of several loans. This deferment enables them to modify their loan. In such a case, the student loan installments are subsidized or rather reduced, with the hardship loan paying a part of the installments. The hardship loan is repaid later, and that too at a very low rate of interest. In order to use such loans to one’s advantage, there are some strict qualifying conditions that are to be fulfilled by the student.

Hardship Mortgage Loans
Two very common real estate loans include ‘hardship mortgage loans’ and ‘hardship refinance loans’ that are availed by people in cases where the current mortgage tends to be troublesome. Now, the hardship loan in such cases can be used for 3 purposes, namely, refinancing, modifying the mortgage, or for consolidating the current mortgage. The process of refinancing involves differing the current installments. Any person can borrow such a hardship loan for real estate. The hardship loan amount is forwarded to the lender of the mortgage, who reduces the monthly installment. The reduced amount is then fulfilled by the hardship loan. The hardship loan can be repaid after the mortgage loan is paid off.

Hardship Loans for Consolidation
In several cases, loans are given for debt consolidation where the borrower is neck-deep in debt. This loan works exactly like a consolidation loan where it is used to repay some existing debt in full. After repaying all the lenders with differed payments, the borrower of the loan has to repay the lender of the hardship loan. The difference between a conventional consolidation loan and a hardship loan is that the repayment schedule of the hardship loan starts after some time, and not immediately, like it is in the case of a consolidation loan.

Hardship Loans for Victims of Natural Disasters
These loans or grants are utilized by people who are the victims of natural disasters. The grants are made available by Federal Emergency Management Association (FEMA) which help the victims recuperating from a natural disaster by partly providing them with the essential items they have lost and by supplying financial aid required in housing, clothing and basic food needs.

Hardship Loans for Veterans
Certain offices of veteran’s affairs, offer hardship loans pertaining to health matters such as medical bills or surgery, when a veteran is unable to pay the net amount. A person can inquire in their own office and obtain information on such grants and if at all the benefits are available to them.

The mechanism and features of these loans differ from lender to lender and also according to the purpose of the loan. Some common variants of the loan include hardship personal loans, hardship loans for bad credit and hardship home loans.