The Borrower

In this section we will examine the borrower's financial standing and credit worthiness. The borrower's ability to repay the loan involves the "capacity" and "desire" to make the loan payments. The borrower's capacity is measured by: income, job position and stability, and overall financial standing, including assets, liabilities, and net worth, and any profit or losses incurred as a result of any business or investment activity. This information is reflected in the borrower's loan application, and may be accompanied by a financial statement if the borrower is either self employed or involved with significant business or investment activity. In most cases a loan application and credit report should be available to the potential investor.

To verify the "capacity to pay", the information on the borrower's application is vital. You may choose to verify or examine the borrowers employment and income records such as pay stubs, W-2's, or tax returns. Another way to verify the borrower's information is to check their bank statements, stock statements, 401k's, etc. You may also choose to get verification in writing from existing lenders or accounts the borrower currently has. 

To establish the "desire to repay" you'll want to take a look at the borrower's past performance in handling credit, specifically mortgages. to find this information you can look at the credit report for payment history, or look at bank statements and see if there are overdrafts or bounced checks. 

When considering the borrower's capacity and desire to repay, you should ask whether the borrower has, immediately preceding the request for the loan, borrowed a substantial amount of money. A significant amount of concurrent borrowing may indicate the borrower is having difficulty meeting their financial commitments, or could be headed for financial difficulty in the future.

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Angela Nelson