What Are The Key Steps in a Typical Equity-Based Loan Approval?
Here at One Stop we like to be as transparent as possible when brokers refer clients our way. Because, after striking a deal to buy a house, renovate a house or make a large purchase, there’s nothing worse than looking back at your documents and wondering where your money is going.
Most equity-based lenders require proof of equity to some point. “If you own your home, you’ll qualify.” That sort of thing.
However, it’s a little more complicated than that. If you’re looking for a second mortgage or trying to buy something outside of the traditional ‘first home’, or you’re a mortgage broker having trouble finding funding for a client, we can help. Here’s how:
1. What is Loan to Value?
Loan to value is a crucial element in the loan approval process. In essence, a loan is granted based on the equity or value a person possesses. For example, let’s say Joe and Rhonda, who have been renting an apartment, recently bought a new house with a 5% down payment. This means Joe and Rhonda are sitting at a 95% loan to value ratio.
Typically, equity-based lenders max out at around a 75% loan to value ratio. This protects the buyer from interest payments they might not be able to handle.
Now, let’s say Joe and Rhonda aren’t buying their first home, they’re buying the home of their dreams, a quiet bungalow in the Okanagan in which they can retire in ten years. They still don’t have a large down payment, but they have more than 25% of the equity in their current home.
We’ve got a deal!
2. Unique Loan Approvals
If banks are the McDonald’s of mortgages, then equity-based lenders are the all-you-can-eat buffet. They’ve seen everything and they’ve got something for everyone. Part of the reason for this is that the people who work with equity-based lenders need to be sensitive to unique situations in order to find solutions. Bank-approved loans are generic – a 5% loan for a house, $15,000 for a new vehicle. There’s a place for it, but the bank won’t always recognize unfamiliar circumstances.
Banks need to see income. That’s why it can be difficult for mortgage brokers to secure deals with unique clients – ultimately that broker is at the whim of the bank as well. There are plenty of circumstances where traditional income isn’t a reality:
- Contractors or self-employed business owners
- Recently-immigrated owners of restaurants, shops or other businesses
- Retirees like Joe and Rhonda
3. The Value of Relationships
We’ve talked before about building relationships with clients, and it’s an element we feel is getting lost in today’s fast-paced society. When you’re dealing with someone’s personal life, their finances, how they live, how they work – walking a mile in their shoes is a critical component in finding a deal that works both in the short term and the long term.
If you’re a new mortgage broker or you’re looking to expand your roster of clients, concentrate on your relationships above all else. Your customers will appreciate it and they’ll refer their friends to you.
And if you’ve got a deal that just won’t work? Well, we’re here to help you, too.
Give us a shout!