Assignment: Leverage
Henri and Lila are looking at ways to borrow more money since the house they ideally want costs $150,000 more than they had anticipated ($450,000). They only have $50,000 to put down on this home. If their restaurant was recently re-appraised at $950,000 after they made improvements and they put a mortgage on that property of $400,000, should they use their restaurant as the additional collateral? Their net monthly income from the restaurant is $7,200 a month and they applied to you for a loan at 6% but the interest rates are expected to move to 7% in the near future.
You as a lender know that the preferred debt to loan ratio is 34%.You are the lender to whom they have applied for a mortgage, would you make this loan and why based on this information? Respond to the following checklist items:
From the lender's viewpoint:
- Calculate the monthly payment to amortize the debt.
- Calculate debt ratio of loan to income.
- Discuss the factors in granting or not granting the loan.
Respond from both the lender's and borrowers' viewpoints:
- What are the risks and benefits involved for both parties? What are the ethical factors to be considered from the real estate professional's perspective regarding recommendation of loan products?