The buy to let mortgages are type of investment mortgages in which the borrower lets the property for rent or lease. The rental income covers the entire mortgage payment. The only time the investors pay from their pocket is when the tenant leaves the property.
The investors enjoy profitable return in two ways. First, the rental income pays off the mortgage. Thus, the investors create home equity. Secondly, the home values may appreciate in value. Again, the investors create home equity. Using the home values appreciation, the investor sells the home property at a higher price.
The risk factors for investor are the depreciation, rental void and maintenance. There are no guarantees for home appreciation, but we can not create land. Land is a limited resource. Eventually, the land will increase in value.
When the tenant leaves or moves from the rental property, the investors repay the mortgage payment. This is more commonly known as rental voids. The mortgage lenders will insist on rental income to cover 125% of the mortgage payment to protect from rental void, but many mortgage lenders accept a 100% cover on mortgage payment.
Hopefully, the tenant will take care of the property. Since the tenants do not own the property, the tenants have the tendency to take the property for granted. Then, there is the natural wear and tear of the property.
In most cases, the mortgage lenders will ask for a larger down payment or deposit. The larger down payment will ensure the rental income to cover the entire mortgage payment. Often, the investors will be approved for eighty percent of the property value. And, the borrower needs twenty to twenty five percent mortgage down payment. In some buy to let mortgage deals, the borrower can put five, ten, or fifteen mortgage down payment.
The mortgage lenders may also insists on mortgage insurance. The insurance will protect the investors from loss of income to repay the mortgage. The loss of income comes from death, critical illnesses, or disability.
The investors pay higher interest rate on buy to let mortgage due to the risks. Even though the mortgage financing are risky, the investors can still find mortgage deals in which the investors pay less interest rate on mortgage deals.
On buy to let mortgage, the mortgage lenders may approve one or more properties. Usually, they approves maximum of five properties for buy to let mortgage. Just think all the tenants left at the same time. The investors will need to repay all the mortgage payment for all buy to let properties.
Before the mortgage lenders approve the mortgage refinancing, the mortgage lenders will look at rent potential of the property, income of the investors, outstanding loans of the investors, and attractiveness to the tenants. The income and rent must satisfy the mortgage repayments. And, the property looks good for the potential tenants. The tenants will want to live in the property.
The popular mortgage refinancing which is available to the investors are fixed rate, capped, discounted, and variable rate mortgage as well as cashback mortgage and interest only mortgage.
The housing market has severely weakened. There are many subprime mortgage lenders who are going out of business. To survive, some mortgage lenders lay off employees, cut down on business expenses, and closed down several mortgage centers. Unfortunately, many subprime lenders did not act fast enough.
Last year, the subprime mortgage loans accounted for twenty percent of the mortgage market. When the home prices were high, the mortgage lenders entice the borrowers with exotic mortgage like interest only mortgage, easy mortgage loan application, low introductory interest rate, piggyback second mortgage, and adjustable rate mortgage.
The subprime mortgage lenders had put the borrowers in a bigger house than the borrowers can afford. Interest rate goes high enough to cause panic, because the mortgage payments get higher as well. Suddenly, the borrowers were not able to afford to pay off the mortgage. Here are a few things to survive the mortgage meltdown.
Stay on top of the mortgage interest rate
At the end of the introductory low interest rate period, the interest rate will increase. It is important to be realistic on your financial status. In case of higher interest rate, the income of the borrower must be enough to cover the mortgage payment. At the same time, the borrower will be ready for the higher mortgage payment.
Watch closely on the trend of interest rate
Especially, the borrower uses an exotic mortgage like adjustable rate mortgage. Many borrowers do not fully understand how the adjustable rate mortgage works. With the adjustable rate mortgage, it is possible for negative amortization. Negative amortization happens when the mortgage payment does not cover the interest. Thereby, the mortgage payment does not pay off the mortgage.
Know the different mortgage refinancing options
The mortgage refinancing is a way to switch to another mortgage. Usually, the borrower switches on the drop of interest rate or at the end of the mortgage term. There are many mortgage refinancing options. The mortgage brokers will be able to direct the borrower for the best option. A drop of interest rate happens all the time. So, the borrower might be able to take advantage of the drop of interest rate.
Set aside funds for the emergency fund
It is a good idea for the borrower to set an emergency fund. The emergency fund is a set of funds for living expenses in case of loss of income. The general rule is three to six months of emergency fund. The idea is to buy time to get back on the good foot.
Consider to rent out for extra source of income
If there is an extra room, the borrower can rent out the extra room for extra source of income. The rent income may be able to cover the spike on mortgage payment. For example, some homeowners convert the garage into an extra accommodation. That would be perfect to rent out. Since the homeowners increase the ability for the property to create income, the home value appreciates as well.
Cover the loss of income with mortgage insurance
The loss of income is one of the reasons to miss the mortgage payments. The accidents, illnesses, or deaths cause loss of income on the family. It may be a stretch to repay the mortgage. The mortgage insurance will protect the family in case of accidents, illnesses, or deaths.
Realistic personal budget
The borrowers know their personal worth. Like anybody, the borrowers have several financial obligations. Discipline is the key to get back on the right foot. The borrower may be able to cut off unnecessary expenses. Then, the borrower will set a realistic personal budget to satisfy the financial obligations.
For the promise of a low monthly mortgage payment, the Americans snapped the expensive real estates. Now, the foreclosures of the real estate property are on the rise. It is due to several factors.
During the hot real estate market (2000 - 2005), the Americans enjoy a low monthly mortgage payment and low mortgage interest rate. Looking at the monthly mortgage payment alone, they snap expensive real estates. Recently, the interest rate increased in a steady state. Thereby, the mortgage payments went too high to handle.
Many homeowners have no choice. They have to sell their home. Eventually, the homes for sale flood the home market. There are too many homes that are not selling. It means the demand is low. Using the law of supply and demand, the homeowners see the home prices go down. So, they have to sell at a lower price too.
Also, the mortgage delinquents for subprime mortgage have risen. Although the subprime mortgage is a small portion about one fifth of the home market, the subprime mortgage proliferated during the hot real estate market. The mortgage delinquents for subprime mortgage are big enough to make an impact. Today, there are $1.3 trillion subprime mortgage which is outstanding.
At that time, the mortgage underwriter standards are relaxed on credit. The Americans enjoyed an easy access to easy credit. Now, the mortgage underwriter standards have tightened. It is hard to get a credit now. By the way, the mortgage underwriter is the one who basically approves or rejects the mortgage application.
The subprime mortgage loans are a mortgage in which the subprime mortgage lenders lend a mortgage to borrower with bad credit score. The FICO credit score ranges from 300 to 850. With a score below 620, the mortgage lenders consider the mortgage as subprime mortgage.
Since the mortgage market melts down, many subprime mortgage lenders went bankrupt. That is why the investors are staying away from subprime mortgage lenders.
Lastly, the home values and homeowner wages remained stable. If the home values appreciate, the home values offset the higher mortgage payment. Unfortunately, the supply is plenty and the demand is low.
Mostly, the foreclosures of home are in the low income neighborhood too. The income of the homeowners fails to increase as much as the higher mortgage payment. It is a stretch to repay mortgage payment.
The mortgage underwriter understands the mortgage loan qualification, approval, and pre-approval. He makes the decision if the borrower qualifies for the mortgage. If the mortgage application fails to meet the qualification level, he determines the best mortgage loan options for the borrower.
To qualify for the mortgage, the mortgage underwriter basically looks at the credit history, credit score, down payment, equity, income, and outstanding loan. So, he also understands how to repair bad credit rating, and increase the credit score.
The credit history tells how the borrower pays off loan obligation. As you pay off the mortgage, the Credit Score increases. A high score is a positive indicator. The borrower will possibly be approved for the mortgage.
The income and debt ratio helps the mortgage underwriter prove that the income is enough to cover the mortgage, and outstanding loan. To prove, the mortgage underwriter verifies all the different source of income.
First, the loan officer prepares the necessary documents for the mortgage application. Then, the loan officer enters the personal and credit information into the underwriting system. The system checks the qualification of the information. Eventually, the loan officer gets the qualified application. Then, the loan officer sends the qualified application to the mortgage underwriter. The mortgage underwriter verifies the documents including pay stubs, and bank statements. If there are missing documents and unsatisfactory documents, the mortgage underwriter asks the borrower to provide the documents. This makes sure that the borrower has enough income to pay off the mortgage. Finally, the mortgage underwriter gives the final approval.
All these steps ensure that there is absence of fraud, and meets the standards. So, the mortgage underwriter knows the good and bad practice on mortgage application. The standards are set by the company and government.
The Islamic Sharia Law prohibits the payment of interest. To use a mortgage is the most common form to purchase a home for many countries. On a conventional mortgage, the borrower needs to pay interest. So, the devoted Muslim avoids to purchasing a home.
A few years ago, only the very rich can really afford to purchase a home. Now, mainstream financial institutions are changing to accommodate the Muslim devotees. Financial products are created. So, the Muslims are able to purchase a home.
As many countries lack the knowledge and language of Quran (Islamic bible), the Muslim scholars is needed to review the financial products. This is to make sure that the financial products are halal (permissible). The Muslim scholars also look at the money that is use by financial institution. The money must come from permissible sources.
There are more and more Muslims that is living on a country with different predominantly religion. Naturally, the financial institutions are seeing the need to tap the Muslim market. It is believe to be worth in billions.
The Murabaha and Ijara are the two mortgage refinancing options that meet the Islamic Sharia Law. In English, the Murabaha means deferred sale finance. As for Ijara, it means lease to own in English.
In Murabaha, the borrower pays twenty percent as down payment. So, the borrower needs a substantial amount of capital in this option. First, the borrower shops for a home like the conventional mortgage. Next, the borrower pays the twenty percent down payment. Then, the financial institution purchases the home for the borrower. In return, the financial institution sells the home to borrower on a higher price. The higher price is determined by original price, repayment period, and down payment. Finally, the borrower agrees on the repayment amount and term agreement.
In Ijara, the borrower looks for a suitable home. After he found a suitable home, the borrower negotiates the price to the home owner. When the price is settled, the financial institution purchases the home to gain ownership. Then, the borrower agrees to the lease agreement. On top of the lease, the borrower pays additional to pay off the mortgage.
In any case, the borrower can pay off the mortgage without penalties. In reality, the Murabaha and Ijara are more expensive than the conventional mortgage. However, the Muslim devotees feel at ease. They rather pay more as long as it is permitted to their religion.
Technically, the home is sold two times. First, the financial institution purchases the home. Then, the borrower purchases the home from financial institution. So, the borrower pays the mortgage refinancing closing costs two times. Recently, the mainstream financial institution charges only one closing costs for equality.
Muslim communities in many countries are growing steadily. It is a dream to purchase a home someday. Nevertheless, there will be a few obstacles that will get in the way. It is just natural. Many devotees will feel guilty to take part that violates their religion. So, it is okay to pay extra. There are no complains. At first, many devotees think that conventional mortgage is the only way to proceed. Times are changing. Mainstream financial institutions bends toward their need and religion.
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