After the international financial crisis which blighted the real estate market in USA and had severe percussion on banking and lending sectors in 2007, the Federal Government started taking a lot of procedures to prevent another same event from happening. The crisis emerged instantly in February 2007 when large number of debtors found incapable of paying back their mortgages as a result of their unqualified financial situations. In this article, we take a closer look at the american mortgage system.

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Many companies especially in the United States have fallen victim to the crisis as some went to filing for bankruptcy like Lehman Brothers, while others suffered from plummeting share prices and dropping equity.

 

[For more about American real estate market check: What is so special about real estate investment in USA?]

 

Market regulations

The untamed expansion in providing mortgages to consumers despite their creditworthiness or financial capability to payback under the pressure of the American political leadership and the ex-president George W Bush was the crisis stimulant.

That’s why the current US government went to passing new laws entitling financial firms and banks to be more careful while approving mortgages by checking applicants’ creditworthiness.

American mortgage

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1- Credit score system

The credit scoring system was first used in 1989. Dependence on credit scoring grew since the financial crisis. The scoring system evaluates the creditworthiness of each individual with scale rangin from 350 to 800.

The scoring method includes a number of factors including the value of income, debtor’s commitment to delivering past payments on time, kind of loans, number of loan applications, and many other factors.

The credit score is issued once annually for free, while citizens have the right to check for their credit score again for a fee from the national accredited scoring agencies: Equifax, TransUnion, and Experian.

Mortgages providers entitle their applicants to have high credit score in order to be qualified for getting approved which means not to be less than 600. By this way the creditor will make sure of the debtor’s ability of paying back.

credit score

2- Debt-to-income ratio

The debt-to-income ratio is considered one of the main indicators of creditworthiness. Many banks and institutions require filing it with the application papers to help in defining the loan risk.

Debt-to-income ratio is calculated by adding the borrower’s monthly commitments of payments. Like for instance let’s say an American citizen pays $1500 monthly for his mortgage, $400 for auto insurance, and $100 for credit card, then the total value will be 2000 dollars.

By dividing 2000 on the gross monthly income, we will get the ratio. Back to our example, if we assume that this citizen’s monthly income is 6000 dollars, then the debt-to-income ratio will be 33% (2000/6000X100).

Debt-to-income-ratio

GCC States on the same route

GCC states are following USA on the same route towards regulating the real estate market performance and limiting the lending activity.

Gulf real estate, same as many other international markets, was deeply hit by the financial crisis as prices in some location fell to half its value.

This prompted many GCC governments to set new laws regulating mortgage issuance like the minimum deposit value law passed in KSA which states the mortgage deposit to be at least 30% of the whole mortgage value.

UAE also imposed a new law for the same cause, in addition to many other laws regulating real estate development activity and real estate brokerage.

 

[For more about mortgages check: Real estate finance | What is it and what are its main forms?]

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