#9 Personal Needs for the Borrower
Number nine on the list the borrower’ personal needs are too high
Personal needs are the actual expenses that the borrower is incurring everyday to live. Personal needs can consist of rent payment, or mortgage payment which ever they have or both if they own rental properties. It also can consist of car payments, credit card payment, normal living expenses such as utilities, insurance taxes etc.
The lender needs to know that the personal needs of the borrower can be covered from their income, spousal income or through other investments they may have. Personal needs can be covered by the new investment but they will be deducted from the net operating income when the lender does their calculations to determine if they will approve or deny a loan.
I don’t want you to think that net operating income or seller’s discretionary income as sometimes it is referred to will be affected by the personal need calculation. They just want to know that the personal needs can be covered.
There are various methods that a lender may use to determine personal needs. But whether they use one method or another the data is going to come from the borrower’s credit report. Some lenders take a hypothetical number based on experience, other lenders take all their revolving debt and multiply by a factor, and some lenders take all of the expenses on a PFS or Personal Financial Statement and multiply that by a factor.
For example one lender that we work with doubles their annual debt service for revolving credit and 1.25 time any other debt service such as rental property, with a credit for the gross rental income to be calculated in their total income to the borrowers.
If the property or investment cannot support the requested debt service and the personal needs the loan will most likely be adjusted downward or denied
For personal need calculations as well as debt service calculations read our book GET Your Loan Closed!, now we include FREE weekly commercial loan training as well with each purchase.
