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How banks determine which Mortgage borrower is likely to default on loan.

wealth or income, marital status, Age, Education level, location and loan to Collateral ratio.

Banks are in the business of lending money and getting interest from those loans. Many of these loans are mortgages for houses and other buildings. So for the banks to reduce their risk as much as possible, they have studied and determined what types of borrowers are more likely to default than the other.

The Wealth or income of the borrower is one major determinant of who is more likely to default on their loan. The wealthier or higher income the borrower, the less chances that they will default on their loans. So the banks make sure to check the income of their borrowers to make sure they are able to pay their mortgages.

The Marital Status of the borrower is another factor that affect default rates. Married people are usually more responsible than single people and are found to have less chances of defaulting on their loans even though they have other family responsibilities to take care of. Unmarried and divorced people have higher chances of defaulting on their mortgages.

The Age of the borrower is also another factor that influences default rates. Older people are usually more responsible and have relatively higher incomes than younger people and hence less likely to default.

The borrowers Education Level is another factor. Higher educated people have better ability to make more money and better understanding of their responsibilities and hence have much lower default probability than lower educated people.

The Location of the property in relation to the location of residence for the borrower also affects default rates. This is for people who have commercial properties that they have mortgage for. It was found that if the mortgaged property is in another State or region away from where the borrower lives, the chances of loan default are higher. So the banks prefer to lend more for properties located close to the borrower place of residence.

If the mortgage or loan requires the borrower to have a guarantor, it was found that the Closer the Relationship between the borrower and Guarantor, the lower the chances of default. If the guarantor was a close family member of the borrower, the borrower usually does their best to repay the mortgage. However if it was just their friend, the borrower has higher chances of defaulting.

The Ratio of loan amount to collateral is also a determinant of default rates. If for example the loan is worth $100,000 and collateral is worth $100,000, the borrower will have less chances of default as opposed to if the collateral is worth $50,000 for a $100,000 loan. This is because the borrower with less collateral can easily decide to have the bank take the collateral of a lower value when he defaults on the loan.


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