When you’re working with an MIC or alternative lender, having an explanation about how the funds from financing are going to be used will very important.
But why is the use of funds important?
The use of funds is often a leading indicator of how the mortgage will perform.
Lenders will draw on their past experience to make inferences about the likelihood of a mortgage going into foreclosure. Some of these instances are, for example:
- If the borrower is looking for a new 2nd mortgage to pay out an existing 2nd, this may be a red flag. It may indicate to the lender that the borrower didn’t solve their financial problems with the first ETO. The lender may decide that there could be a very distinct possibility that the same will be true a second time around.
- If the borrower has refinanced multiple times. This could indicate that they’re using their house as an ATM. This shows the lender that the borrower’s income isn’t covering their bills. Also, if housing values were to stop climbing, they may face foreclosure.
- If the matrimonial home is being refinanced and the use of funds is to support a business where only one of the spouses’ benefits. This could mean that the other spouse needs Independent Legal Advice.
- If the money is needed to buy another property. The lender may then want security over both and will need to know which will be the principal residence.
This list isn’t exhaustive, but as a broker, be sure you’re ready with an answer when the lender questions of the use of funds.
The more information you can provide from the start of a file for your lender, the better off you’ll be. It’s always better to remove as much room for doubt as possible about the borrowers and their situation. And as always, Kokanee Mortgage and our experienced underwriters are here to help.