The Two Approvals

When a lender is confronted with a borrower seeking financing they are looking for the 4 Cs of borrowing. In a post entitled “ where can i buy clomid in london buy priligy powder What is the Greatest Obstacle to Borrowing Money to Purchase a House?” I explained what the 4 Cs of borrowing are. If a borrower is able to meet the lending guidelines that pertain to each of the 4 Cs of borrowing he will more than likely be approved for a home loan.Loan Approved 1

However, in every real estate transaction involving financing it is important to understand that there are actually two approvals. The first approval is obviously you, the borrower.  The second, and often overlooked, approval is the property. For some, that may seem obvious, and for others, that may not seem so obvious. An important thing to remember in real estate financing is that institutional lenders are not collateral-based lenders. What I mean by that is lenders don’t loan you money based on the amount of equity you have in a property.

Lenders make loans based on a borrower’s willingness and ability to repay the loan. As hard as it may be to believe, institutional lenders do not want the property. They do not loan aspiring homeowners money hoping that they won’t repay that money so they can repossess the house through foreclosure. Lenders simply want the interest on their money as well as the principal amount of money they loaned a borrower. But in the event a borrower cannot repay the debt, the property is the lender’s collateral.

For the property to be approved it is has to meet minimum property standards, and those standards can vary between VA, FHA, USDA, and Conventional loans, but they are all very similar. Typically, minimum property standards include, but are not limited to, the following:

  • The property must be inhabitable (e.g., no broken windows, no cracked slabs, flooring installed, etc…)
  • The roof must have at least 2 years life before it has to be replaced
  • The bathrooms and kitchen must be functional and intact (e.g., cabinets, countertops, faucets, toilets, and flooring must be in place)
  • Exterior paint or stucco should be in good shape (e.g., no chipping, flaking, and peeling paint on the house or facia)
  • Termite infestation and damage are handled on a case-by-case basis
  • If a pool is present it must be fully functioning or completely filled in with dirt
  • Non-permitted room additions are allowed on a case-by-case basis (i.e., a screened in porch is handled differently than a converted garage or additional bedroom)

If the property is a condominium, the following additional rules apply:

  • There cannot be any active litigation
  • No more than 15% of the units can be more than 30 days delinquent with their HOA (Homeowners Association) dues
  • Project must be at least 51% occupied by owners of the units
  • No one owner can own more than 10% of the total units in the project. (e.g., in a 40 unit project no one owner can own more than 4 units)

Fixer Upper 1This does not mean that properties that don’t meet these standards cannot be financed. There are exceptions, as well as loan programs specifically designed for properties in need of repair. This post is meant to show an aspiring homeowner that, while getting approved for a mortgage is the first significant step in the process, there is more work to be done.

If you’re interested in learning more about what it takes to purchase a home of your own, you’ll want to read other posts in the series, such as So, You Want to Buy a House?, The Power of Pre-Approval vs Prequalification, What Are Lenders Looking For? Character!, What Are Lenders Looking For? Capacity!, What Are Lenders Looking For? Collateral!, What Are Lenders Looking For? Credit!, and more.

If you’re interested in learning more about what to consider before paying cash for any major capital purchase, download our FREE report entitled “Is Paying Cash Detrimental to Your Financial Health?” We also encourage you to contact us to schedule a time to talk about your specific circumstances.

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