Common Red Flags for Risky Borrowers
While you hope that every borrower is a solid prospect, the truth is that some borrowers can leave a lot to be desired in the mortgage arena. A few red flags may not be deal breakers, but knowing the signs of a risky borrower can help you extend more favorable terms to help protect you from a deal that goes sour.
Fannie Mae recently released a list of common red flags to look for throughout the mortgage process. By comparing them to risk management solutions, you can grow your portfolio without diluting it with defaults and foreclosures.
On the application
The first step in the home buying process is the application. Even if it’s just for prequalification purposes, an application can tell you what you need to know about the buyer’s financial stability. Look for discrepancies in the credit history, such as invalid Social Security numbers or variance from other applications and documents. A lack of credit history can be a concern, as well as liabilities that were not shown on the original application. Keep an eye out for a high number of recent inquiries and accounts that were all opened at the same time.
Employment and assets
A potential customer’s employment history denotes his or her ability to pay mortgage payments, so employment verification can help prove a buyer’s current job standing. Beyond employment verification, check for common red flags such as vague job titles (vice president, for example), an employer that cannot be contacted, a self-employed individual who does not make estimated payments or year-to-date earnings that end in even dollar amounts.
When comparing assets to income, a buyer’s employment and education can be a red flag, as well, while mortgage pros also should be on the lookout for excessively high checking balances, spotty loyalty to banking institutions, large deposits without proper explanation or a high rate of undiversified assets.
After checking a potential buyer’s application, employment and assets, the loan makes its way to underwriting, where common red flags can emerge before the mortgage closes. The home appraisal is part of that process. Watch out for such issues as a purchase price that is extremely high or low when compared to the predominant market value; inappropriate comparables; photos that seem to be awkward or taken from a strange vantage point; significant and sudden appreciation in value; or an appraisal dated before the sales contract was signed.
There also can be significant problems with the titling process, including the seller not being on the title, a short ownership, delinquent property taxes and, of course, if the title was prepared for a party other than the lender.
While it’s not always possible to spot a problematic borrower, risk management and assessment could help protect you from diluting the integrity of your portfolio. Verification, credit reporting, asset data and examining past payment history should all be part of the red flag management process to protect both you and your potential buyer.
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