The degree of risk in any individual loan is determined by answering two fundamental questions:
- Does the borrower’s overall financial situation, which is comprised of income, assets and credit history, indicate that he or she can reasonably be expected to make the proposed monthly loan payments in a timely manner?
- Is there sufficient value in the property pledged as collateral to assure recovery of the loan amount in the event of a default?
Source: Real Estate Finance by Walt Huber, MS and Lenin P. Messick, IFAC – Qualifying the Borrower, Chapter 13, Page 287.
