Final answer:
Lenders may refuse a mortgage or lessen the loan amount due to the borrower's high risk profile, indicated by imperfect credit history, low income, or no assets, all which contribute to the classification as a subprime loan.
Step-by-step explanation:
Potential Reasons for Mortgage Refusal or Reduced Amounts
Lenders may refuse to provide a mortgage or offer a lesser amount than initially agreed to for several reasons.
One significant factor is the assessment of the borrower's ability to repay the loan. If a lender believes that a borrower poses a higher risk of default, possibly due to imperfect credit history, low income, or lack of assets, they may decline the mortgage application or provide a lesser amount.
This hesitation is often grounded in the potential of the loan becoming a subprime loan, which carries characteristics such as low down-payments, negligible scrutiny of income, and NINJA loan status (‘No Income, No Job, or Assets’).
Furthermore, if the environment has changed since the initial agreement, such as an increase in interest rates, the terms of the loan may become less favorable to the lender, leading to a reduced offer.
Lenders are also influenced by whether they intend to hold the mortgage as an asset or sell it through securitization.
Banks that plan to sell the loan may engage in riskier lending practices, as they do not bear the long-term consequences of borrower default.
To reassure lenders, borrowers can demonstrate financial stability through a strong credit score, consistent income, and proper documentation.
Other strategies include securing a cosigner, offering collateral, or agreeing to higher initial payments to show commitment to repaying the loan.