I find that a lot of people think that starting the mortgage approval process begins once they sign a contract or “get serious” about a home. They should actually start before they start looking.
By starting the process early, home buyers or anyone looking for a first or second mortgage can position themselves for more favorable banking terms. If there have been problems in your credit history, starting the process early can help you address these issues so that they will not impact on your ability to receive the loan you want on your terms.
The first step is always an assessment of how someone looks in the eyes of the banking system–the mortgage teller, the bank’s underwriter, the regulators from the Bank of Israel and other parties involved with approving the loan.
Mortgage bankers in Israel (and abroad) consider three primary factors:
- The borrower’s ability to make the monthly payments on time (ability to pay),
- The borrower’s willingness to make the monthly loan payments on time (willingness to pay) and
- The security that has been offered if the bank needs to take the property for lack of payment which they really do not want to do.
In the simplest of terms, what the mortgage bank is doing (or should be doing) is assessing the risk of not paying on time or at all (default) and, assuming the level of risk is acceptable, charging an appropriate interest rate.
The first two factors, “ability to pay” and “willingness to pay,” are determined by the bank’s criteria for accessing risk, which is based in part on the Bank of Israel’s regulations and which is based in part on international guidelines (Basil). These criteria are primarily made up of generic facts statistically based on the behavior of thousands of borrowers in the past. The last item, security, is determined by various factors and is the subject of another article.
The details of the statistical rules used by the banks to determine our ability to pay and willingness to pay are extensive. In fact, this magazine does not have enough pages to give you a description of all of the criteria and the calculations and guidelines, nor do the banks make such a thing easily accessible. (In the U.S. we used to get a “telephone book”-sized set of guidelines.)
Let me give you a general idea and some examples:
The “willingness to pay” is based on your credit history or if you made payments on time in the past. When I first started working on bringing consumer credit reporting to Israel (in the early 90s), I was told by many in the banking industry that they did not need it because they looked at bank statements for bounced checks and returned horaot kevah (monthly payments via standing bank orders).
Fast forward a decade and a half. We have consumer credit reporting in Israel that is being widely used and in addition, they still look at bounced checks. It is important to note that there is a law in Israel that after bouncing 10 checks in one account over the course of a year, the ability to have a bank account is restricted (called mugbal and there are different levels of this). The credit reporting law includes warnings in the database that are sent out after five checks in one account bounce over a proscribed period of time.
We are not talking about some extreme case–like fraud, theft or anything of that kind–just someone who was either a little sloppy with balancing his checkbook or someone who has had a few “unusual” situations.
The good news is this is something you may be able to correct. If you start being careful how you manage your account, assuming you have not bounced 5 checks, usually the banks will look back only three months on accounts the borrower has in other banks. So by planning early, you can “clean up” your credit. This is one example of many criteria in the “willingness to pay” category.
Consider an example of “ability to pay.” How income is recorded and received can have a major affect on the mortgage bank’s ability to use it to assess an ability to pay. The amount of someone’s salary is obviously important but so is how long they have been earning that amount. The significance of how long they have been earning that amount can be affected by occupation. An entrepreneur who has successfully launched a business may now be earning NIS 20,000 per month but may be in a difficult situation if, for the past two years, his/her monthly earning was NIS 6,000, for example. In many cases, the bank will not use the NIS 20,000 to assess an ability to pay because, due to the lack of history, it will be viewed as lacking a measure of “sustainability.”
Here, too, there are exceptions. When an attorney goes from being a stagair (apprentice which is required after graduation) to working on his/her own, if they had a history of income as described above due to a professional designation, the mortgage bank may use the NIS 20,000 per month to assess their ability to pay because they can see an ability to sustain that income because it’s common for the profession. How income is recorded and received can have a major effect on the mortgage bank’s ability to use it to assess the ability to pay.
These are just some of the factors involved in determining your ability to receive a mortgage. There are many other factors as well. By beginning the mortgage process early with a broker, you can dramatically increase the likelihood of receiving a loan on your terms.
Moshe Wilshinsky is the CEO of Moville Mortgage & Finance LTD.
073 796 2226 and press the special 711 Bizness Magazine extension. U.S.: 201 377 3418; UK: 208 596 4501. Website at www.movillefinance.com