Have You Heard About the Mortgage Holiday Proposal?

Imagine the impact a year long mortgage holiday could have on the American economy. 12 long months without the need to make even one mortgage payment; the money consumers could keep in their pockets could be used for much needed purchases and also bill payments to help consumers get back on their feet. Who would pay for such a mortgage holiday? The federal government, of course – or, to be more correct and get right back to the source, you and I.

Sure, at this point the mortgage holiday proposal is still a bit of a pipe dream and there is actually nothing in the works, but the idea has found favor with consumers and informal polls suggest that should a proposal be made, the general public would back it. The program itself is not as new as it may sound to American ears. Across the ocean in Europe it is already a staple in the fiscal landscape of some countries.

Most notably Spain offers unemployed homeowners the opportunity to defer nearly half of the mortgage payments they owe for up to two years. Spanish mortgage lenders are mandatory participants of the plan and the government backs the expenditures that must be laid out for the mortgage holiday program to succeed. Great Britain is now also taking a closer look at this suggestion and something that is known as the “Homeowner Mortgage Support Scheme” is now loosely bandied about.

As it stands, British mortgage lenders may – at their discretion – temporarily defer interest payments. Unfortunately, these payments are later on tacked on to the end of the loan and thus increase the amount of money that must be paid to satisfy the note. If the American Congress would imitate this kind of deal and go even further to make it a one year mortgage holiday, it could potentially cost taxpayers a staggering $600 billion. On the other hand, seeing how much money the Obama Administration is funneling to the banks in an effort to keep them afloat, it is a mere drop in the bucket.

What is more, unlike other stimulus plans currently in the works an in execution, a mortgage holiday would actually put the money into the consumers’ and not the banks’ pockets, making it a true stimulus incentive for spending, and a great means of inspiring banks and businesses to offer spending incentives. In a day and age where virtually anyone is holding a hand out for a bailout payment, it is only a matter of time until the flaws of governmental bailouts of big institutions will render them meaningless.

Unfortunately, it is doubtful that the bank sponsored lobbying groups will allow such a program to come into consideration any time soon. Instead, there is a good chance that more bailouts of the banks will be lobbied for, while the needs of the individual homeowners may be cited as motivation for the bailouts, but in the end will not be addressed when the money is actually transferred to the banks.

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Why Prequalify for a Mortgage Loan?

In the past it was easy to apply for and receive a mortgage loan. Lenders were open to entertaining loan applications that showed no verifiable income and that could have been rather risky investments. As the loan market tightened significantly over the last few years, prequalifying for a mortgage has become a necessity. The process itself is rather easy. Applicants contact a lender of their choice and discuss the various mortgage loans available. The applicant then gives very basic information with respect to debts, income, liabilities, and also offers permission for the lender to pull a credit report. Once all the data is available to the lender, the bank determines how much money they would be willing to lend to such a borrower.

It is important to realize that prequalifying for a mortgage is not the same as applying for it. Instead, it simply presents a rough outline of an applicant’s financial facts to the underwriting department for evaluation, and based on the facts given, the underwriters devise a rough amount of funds they are willing to invest in this consumer. Banks do not charge any up front fees for prequalifying borrowers and instead provide them with a document that states that the consumer is a serious buyer who has the backing of a bank. This explains – in part – why prequalifying for a mortgage is an excellent idea.

Prospective home sellers see a bank’s prequalification letter as a guarantee that they are dealing with a potential buyer who is serious about the transaction. This virtually guarantees that the real estate deal will not fail for lack of funding. Mind you, a prequalification is not a guarantee for a loan, but it is more of a probability that the bank – based on the information they were given – determines that the consumer is an adequate credit risk and is willing to lend a certain amount of money. Moreover, it determines a spending cap for the consumer. This also puts sellers at ease, since it only brings prequalified buyers who actually can afford the loan needed to their doors.

A seller who is working with a number of potential offers for a home will be careful to choose the would-be buyer who looks like s/he will be part of an easy real estate transaction. Sure, in some cases a buyer might accept the offer from a buyer who did not prequalify with a lender but is willing to pay more than the asking price; in most cases, however, prequalification ushers a would-be buyer to the front of the line. What is more, it has the potential to put both buyers and sellers into a more favorable negotiation.

Lenders appreciate working with buyers who are prequalified since it helps them to already establish a file on the would-be borrower, and the transaction – when s/he finds a property that suits – can proceed quickly. As a matter of fact, with a prequalification, real estate buyers can actually ahead of time determine a convenient closing date and make it part of the real estate transaction.

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