Pay Dirt Series – Why the Use of Funds is Important to MICs

MIC lenders will often want to know what the use of funds will be.  Why does this matter?

The use of funds is sometimes a leading indicator of how the mortgage will perform.  Lenders draw on their past experience to make inferences about the likelihood of a mortgage going into foreclosure.  For example:

  • If the borrower is looking for a new 2nd mortgage to pay out an existing 2nd This may indicate that the borrower didn’t solve their financial problems with the first ETO and a new mortgage may again not solve them.
  • If the borrower is a serial refinancer (is that a word?). This would indicate that they’re using their house as an ATM.  This indicates that their income isn’t paying the bills, and if housing values stop going up, they’re in foreclosure.
  • If the matrimonial home is being refinanced to support a business that only one of the spouses benefits from, it may mean that the other spouse needs Independent Legal Advice.
  • If the money is needed to buy another property, the lender may want security over both and will want to know which will be the principal residence.

This list isn’t exhaustive, but as a broker, be ready to answer the lenders questions about the use of funds.