Mortgages lenders look at both borrower and property before approving a home loan. This means both borrower and collateral (the house) must meet certain criteria.
The Main 3 Categories:
First, the borrower's credit scores, income, job history must fit into the mortgage company's guidelines. Most people already know about the importance of credit scores though.
Secondly, the loan's LTV. Banks are very sensitive to the amount they loan relative to the value (LTV) of a property. LTV means "Loan to Value." For example, 100% loans have a 100% LTV. The borrower is getting a loan for 100% of the property's value. The higher the LTV the higher the risk. Naturally, banks prefer low LTVs as these loans usually mean lower risk. Low LTVs mean lower rates, generally speaking. The lower the LTV the less risk of default.
Finally, the property itself-or the underlining collateral-is the final category bank's review before approving or declaring a mortgage.
For example, a borrower can have excellent credit, be willing to put 50% down (low LTV) and still get declined because of "substandard collateral." This simply means the property itself is not one the bank wants to lend on.
Examples of substandard collateral:
1) Non-Warrantyable Condominiums: This means there are fewer than 50% owner-occupied units within the condo complex. It's occupied mostly by renters. For example, if the condo has 100 units and only 20% are owner-employed is a non-warrantable condo; and therefore more risky in the bank's eyes. Some banks do not lend on non-warrantable condos at all, however most banks will just limit the loan to value (LTV).
Let's say a borrower qualifies for a 95% loan or an 80/15/5 loan. However with a non-warrantable condo they may only qualify for 85-90%. Bank's typically reduce LTV when there is an inheritable risk with either the borrower or the property itself.
How does one know if the property is non-warrantable? Just talk to the condo's HOA people and ask them. Sometimes they will not tell you directly and you'll have to ask the mortgage person to order a condo questionnaire which is the document that states the property's official owner / renter ratio. Some complexes even charge you $ 100- $ 250 for this document.
2) Properties with Ag Exceptions: Again, banks typically do not lend on a property with an Ag Exemption. These homes must get financing via farm and ranch lenders.
3) Properties in a decreasing area: If the mortgage company's appraisal shows the property is decreasing in value most banks will, again, reduce the LTV-make the borrower bring more money to closing-or not lend at all. Right now there are several "hot spots" in the US where properties are declination 10-20-30% +. Naturally, these are areas where it's very difficult to get financing because banks do not want to lend on homes that show a declining trend.
Finally, most people think credit scores are the only issue in obtaining a mortgage or refinance; however banks look at much more.