Definition of "Credit risk"

Nora  Haddow real estate agent

Written by

Nora Haddowelite badge icon

All Towne Realty

The definition of credit risk is at the core of lending. Banks lend money to businesses and individuals and expect to recover the principal and win interest. Banks offer a variety of loans, each designed for a particular group of borrowers from the market. On the one hand, people with good credit scores and high incomes and businesses with large sales figures will usually get low-interest loans - they are more likely to return the money and interest, so the credit risk is low. On the other hand, borrowers with bad credit scores and companies who are desperate for funding at all costs will receive high-interest loans because they will have difficulties in repaying their debt, which means that the credit risk is more significant. So, the banks can identify the quality of their borrowers from the amount of interest they are willing to pay. The credit risk refers to the probability for a lender to recover all his money and the interest from the borrower. From which the term name as credit risk. What is the risk of loss in case a borrower becomes unable to repay the loan? Obviously, this risk is greater for the borrowers willing to pay high interest rates since they are more likely to default.

An even shorter definition for credit risk would be banker’s biggest fear.

Events that can lead to a default

(1) Due to unforeseen circumstances, the borrower may lose the financial ability to repay the loan placing the collateralized property at risk of foreclosure.

(2) In the case of an adjustable rate mortgage, due to rising interest charges, payments could become unaffordable. The borrower may default on their mortgage and lose the property.

(3) In the event of a depreciating asset, the loan value may exceed the value of the collateralized asset.

(4) In the event of the death of the borrower, payments on a loan will become a liability for the heirs.

A default generally occurs after 270 days in which a borrower hasn't made any payments. However, student loans are considered in default after 120 days of missed payments. Credit defaults are the materialization of the credit risk.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Mortgage Terms

Using a brokers time and expertise to become informed and creditworthy, then jumping to the Internet to get the loan. ...

A contract provision that adjusts the payment on an ARM periodically to make it fully amortizing. ...

A borrower who doesn't pay. ...

Allowing the interest rate and points to vary with changes in market conditions, as opposed to 'locking' them. Floating may be mandatory until the lender's lock requirements have been met. ...

A condominium project with features that lenders view as favorable in terms of their risk exposure on loans secured by individual condo units. The requirements of warrantability include ...

A borrower who does not meet the underwriting requirements of mainstream lenders. Sub-prime borrowers pay more than prime borrowers and are sometimes taken advantage of. ...

Also called variable or flexible rate mortgage, an adjustable rate mortgage (ARM) is a mortgage where the interest rate is not constant, but changes over time by the mortgage lender. ...

The definition of a foreclosure bailout loan: a secured loan obtained by a mortgagor in order to save an owner-occupied house that is under foreclosure. It is a refinancing loan and it ...

Refinancing that omits some of the standard risk control measures and is therefore quicker and less costly. The rationale for streamlined refinancing is that, while it is an entirely new ...

Popular Mortgage Questions