INCOME MORTGAGES: RISKS TO LENDERS AND BORROWERS

2007-03-08 10:33:40

( Financial )



Are you a self employed individual looking for a mortgage? Do you have difficulty procuring the necessary financial documents to back up your mortgage application? Why not consider applying income mortgages to address your home financing needs?

Income mortgages are type of loan which is not stringent in its requirement of financial documents from borrowers to prove income. It is sometimes referred to as no income verification mortgage. It is a non-traditional way of lending and considered very risky by most lenders. Sub-prime lenders are the one specializing on income mortgages.

Self-employed, contractual employees and tenants are the usual clients of income mortgages. Income mortgages, however, was originally designed for self-employed individuals who derives their income from commissions, bonuses and other investment earnings. These types of earnings are known to be difficult to be projected due to its variability across seasons and employers.

Specific Risk to Lenders

It is discovered that most borrowers who choose income mortgages to finance their homes are inflating their incomes to avail of higher loan amounts from lenders. Lenders cannot verify in depth the declared income of the borrowers since they do not have detailed information or documentation of borrower’s income such as audited financial statements, proof of salary payment and even proof of investment earnings.

Lenders face higher risk of default from borrowers of income mortgages who inflated their incomes to avail of higher amount for their mortgage. Higher default rate risks the ability of lenders to recover its investment faster for re-lending to other borrowers. Thus, turn-over of its investment is slower and consequently delay return on their investments.

Risk to Borrowers

Inflating income will likely result to inability of borrowers to pay the loan amortization that will risk further to lowering down their credit rating as well as affect their financial status. Also, income mortgages are still subject to paperwork that requires borrowers to fill up application forms. Lying on the amount of income in legal documents such as application fee and other loan documents has legal consequences as well higher penalties.

It might be easy to avail of income mortgages but it will not be easy when you are faced with financial squabbles in the future.


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