The reasons for this can be explained analyzing the effects that homeownership has on the loan terms and requirements for approval. There is a variable that is greatly modified by homeownership which has important incidences on all loan terms and requirements: the risk of default for the lender in the financial transaction.
Risk Of Default And Approval
The approval process is ruled by the lenders fear of default: The higher the risk of default, the lower the chances of getting approved. In the event of default, the lender is actually losing his investment because there are little chances of recovering the money unless the lender has sufficient assets to compensate for the loses.
The risk of default and approval are thus, greatly related. If the applicant can provide any aid to reduce the risk of default, the lender will be significantly more comfortable at lending the money that the borrower needs. Thus, it is important to know which modifiers can reduce the risk of default and boost the chances of getting approved.
Consequences of Homeownership
Along these modifiers we can analyze various options: collateral, simple homeownership, down payments and a co-signer. Collateral provides the best form of guarantee as it is a particular asset that is used for security of a loan and the lender can take legal action of repossession in the event that the borrower defaults on the loan.
A down payment is useful for certain secured loans that already have collateral but the risk of default is still high. Then, the borrower offers a certain amount of money that has already been set aside by him, so as to reduce the amount of money needed to purchase the home or the car and thus, leaving the property with a higher amount of equity left. The property guaranteeing the loan is then worth more than the debt it is guaranteeing.
A co-signer is obliged to repay the loan along with the main applicant and thus provides an additional guarantee for repayment. This is also associated with homeownership . If both the applicant and the co-signer are homeowners, chances of getting approved are greater as the lender has additional properties to obtain repayment from in the event of default.
Finally, we’ve reached the modifier that can provide a great risk reduction without too many hassles. Simple homeownership provides a reduction on the risk involved in any financial transaction regardless if the property or properties are used as collateral for the loan. This is due to the fact that all of the applicant’s assets guarantee in a way the repayment of the loan.
All the assets legally guarantee any debt that the owner may have and that’s the reason why a co-signer who is also a homeowner provides an additional guarantee and lowers the risk even more: He doesn’t only provide an additional income but also, an additional real estate guarantee or guarantees.
Jess Peterson writes finance articles for Yourloanservices.com where she shares her knowledge about how to get money for a starting-up business, consolidating any kind of debt, repairing a home even with a bad credit history and other financial subjects.