In the US, If you want to put $400,000 down and borrow $100,000 with a mortgage to buy a $500,000 home, is it really so important to have good credit with so much collateral? If you were to default the bank will get all that equity so it seems to my uninformed mind that banks might desire you to have bad credit in such a situation as above were %80 of the house is already put down.
Add a comment
|
4 Answers
is it really so important to have good credit with so much collateral
Yes it is important to have good credit, the bank may not lend or may charge higher for bad credit.
If you were to default the bank will get all that equity so
You are missing the fundamental. Bank cannot take more than what they are owed. When they take possession of house, they auction it. Take what was due from the sale and return any surplus to the owner. This entire process takes time and hence bank wants to avoid giving loan to someone who they feel is risky.
Edit:
There are different aspects of risk that the bank factors.
- Whether someone will default on repayments. This is established by income and credit score. Based on this they would assign low, moderate, high risk.
- In case of a default, will the Bank lose money. This is determined by the equity in the house. The more equity, the more the Bank is safeguarded that even in adverse conditions, the Bank will not lose money. The only advantage with your example is the bank may not lose money even if price crashes by more than 50%.
-
Ok, Thank you, that clears things up but could the down payment be used as collateral if both parties agree?– LowbrowCommented Sep 26, 2016 at 14:00
-
"Bank cannot take more than what they are owed." They will take more to pay for their costs of repossession and sale, as well as accumulated interest. Commented Sep 26, 2016 at 14:20
-
@TorKlingberg the bank are owed that money as charges for not complying with the terms of the mortgage so they are not taking any more than they are owed in the same way that getting more money than they lent due to interest isn't taking more than owed.– MD-TechCommented Sep 27, 2016 at 12:43
-
@Lowbrow What does "taking the down payment as collateral" mean? You pay the down payment to the seller, it's not your money anymore once the sale is done. Do you mean a future down payment when you sell? In that case that feels functionally identical to putting the house itself as collateral - if you can't continue to pay your loan, you or the bank need to sell the house to pay off the loan. The bank isn't going to agree to get their money at some undefined later point, only if and when you decide to actually sell - they will insist that this sale happens now (ish).– xLeitixCommented Dec 18, 2023 at 6:30
Used car dealers will sometimes deliberately issue high-interest-rate subprime loans to folks who have poor credit.
But taking that kind of risk on a mortgage, when you aren't also taking profit out of the sale, really isn't of interest to anyone who cares about making a profit. There might be a nonprofit our there which does so, but I don't know of one.
Fix your credit before trying to borrow.
If you put down 80% of the purchase price for a house, you can very likely get a loan with few problems. After all, people with credit scores in the mid-500 range can get loans with 20% down.
My question would be this -- if you actually had $400,000 then why not just buy a $400,000 house? If the goal is to improve your credit then if you buy a house for cash, you can then take out a home equity loan and make the payments, which would greatly improve your credit.
answered Sep 26, 2016 at 2:00
-
-
Here's a good article to answer your questions on that: foxbusiness.com/features/2014/03/06/… Commented Sep 26, 2016 at 3:36
-
Wanna bet? You could be faced with the Ben Bernake problem, where you have plenty of money in investments, even a decent self-employment income, but can't get a mortgage because you don't have W-2 income.– jamesqfCommented Sep 26, 2016 at 20:09
-
Believe it or not, no-doc loans still exist, so you can find a mortgage that doesn't require proof of income. They're not as prevalent as they were prior to the crash in 2008, but it's troubling that there's a resurgence of that type of lending again. Who says we learn our lessons? (chuckle) Commented Sep 26, 2016 at 22:59
-
@Daniel Anderson: I'd be interested in knowing where to find such a mortage. I've been trying to refinance (for low interest rate) for a while. Have about 30% LTV, credit score around 800, enough in investments to cover the mortgage amount several times over... But no W2 income.– jamesqfCommented Sep 27, 2016 at 5:38
In this example you are providing 4x more collateral than you are borrowing. Credit score shouldn't matter, regardless of how risky a borrower you are. Sure it costs time and money to go to auction, but this can be factored into your interest rate / fees. I don't see how the bank can lose.
-
The problem is, reaching someone who can override the bank's usual policies may be difficult. You might succeed at small lical banks, or credit unions, which are more willing to consider unusual cases.– keshlamCommented Sep 25, 2016 at 22:29