Despite excellent credit, it's still possible to be turned down for a mortgage
latimes.com
latimes.com
The rest of the article being about how he owns several properties outright (that he rents out) and apparently has money in the bank is somewhat immaterial since the part that a lender cares about most is "can you continue to pay your debt from your sustainable income stream" - not your rental business which can be volatile and unpredictable income wise.
That lending rules have been tightened is surely a good thing even if it does mean the some people will find it harder to own property. Borrowing money to own a home is nobodies right, but something you should have to prove you're able to do - as the swathe of sub-prime mortgages that subsequently went underwater only a few years ago shows.
So you're guaranteed some income, but all of your tenants can leave at any point.
Not a perfect signal, but it's not like there actually is a perfect signal to be had.
Sure, in an open market for lenders some may agree it's in their interest to risk their capital, or they may not, if the numbers don't add up.
2 - we just went through a rather unexpected bout of widespread unemployment
3 - the author appears to not have verifiable income streams (ex rent) with which to service the mortgage. If you are unaware, at least in markets I'm familiar with (and I have some familiarity with this), newly purchased rental properties rarely cover the mortgage + taxes + maintenance. You often expect them to be cash flow negative for some period. Which doesn't even begin to mention the risk of not finding tenants. Or the tenants not paying. And even in the latter situation, depending on where you are, it can take many months to forcibly remove them.
4 - basically, the author just switched from w2 to self-employed and therefore has no history with which to demonstrate his self employment is anything but a fantasy. If he had a year of demonstrable self-employment history, he probably would have been fine. His complaint, in general, seems overwrought.
5 - and again, in case anyone has forgotten, we just went through a bout of systemic risk due to banks selling mortgages people couldn't service combined with people overestimating their ability to pay. Therefore, even if he is stuck in the cracks, this is the price of insuring a lack of systemic risk to the system (for which the US taxpayer is on the hook), particularly when banks just demonstrated you can't trust them to properly underwrite mortgages.
6 - credit != ability to pay. You can get very good credit simply by taking small loans and paying them on time. In my experience, those two things aren't well related at all. Note you also may make $250k/year, forget to pay a small medical bill (which is easy to do), get sent to collections, and have a credit score in the 600s.
7 - in the history of tenants we've had to evict (thankfully very few, and not all for nonpayment of rent), several have had very good credit
When I bought my house about four years ago, I had everything going for me. Consistent employment history with the same employer at around six figures the entire time (starting a little under that and ending a little over that). I had the 20% to put down on the home. I had perfect credit. I had no debt and no history of debt problems. Additionally, the home I was buying was in a blue-collar neighborhood at a price of about half of what I could afford (I don't need a half million dollar home and wanted the lee-way of knowing I could have massive negative life changes in the future without worrying about the capacity to continue paying my mortgage).
It took them the full time of the loan, constant mailing back and forth of many hundreds of pages of documents, many phone calls, a lot of explanation, and it took until the very final day for it all to come together.
As difficult as it was for me, I imagined it must be unbelievably so for those with less stable work history or a lower income or a history of some debt problems or carrying even a little existing debt. It's unfortunate, but at the same time . . . this is the way I feel they should have been questioning every potential loan for the past couple of decades, instead of just the last few years.
As you say, if they had, we wouldn't be in this mess to begin with.
This also informs my opinion of people wanting to look into your facebook and twitter history (if you have one; I don't). While I instinctively want to cry foul, because of privacy and because the internet should be as much a place of unhindered open thought and exploration as it can, I also think asking to see your last six months of facebook posts and analyzing your circle of friends is not too ridiculous if I'm lending you a huge sum of money.
Don't get me wrong - I don't like it. It still feels . . . uncomfortable . . . to me. But I understand it.
Also keep in mind that this is a mortgage for an investment property, not a primary residence. So even more risky for the bank.
BTW I'm pretty sure there's a way around this if he incorporated and made himself a W2 employee and paid himself a set salary but I'm not an expert.
Perhaps we should have let these "too big to fail" banks indeed fail.
Banks don't simply serve individual, private interests. They also serve a public interest -- to oversimplify into a word: liquidity.
I suppose I should read into the details of the OP article. Nonetheless, saying that banks have "no obligation" is I think incorrect. Saying they shouldn't make loans under bad circumstances, I agree with.
P.S. Sorry if and as I've over-reacted. But I'm tired of banks on the one hand taking advantage of a very privileged position (including government support) while on the other claiming their sole purpose is to serve in the absolute whatever they define as their private interest.
I flew a bit off the handle in my comment. I should have read through the OP article. Perils of too much coffee and multi-tasking.
I'll leave my comment, instead of deleting it, since its already gained a reply.
What touched me off, is that, defined as "private" as they may be, as business institutions, banks are nonetheless very much social institutions. One of the fundaments of modern society.
And, as more people transition to self-employment, access to capital including for things such as home purchase, is going to be increasingly significant to society in terms of the numbers seeking such.
The idea that self-employment removes you from the ability to access such loans: That will be a significant concern that needs to be evaluated and addressed.
(FWIW it took me eight months to get a 75% mortgage on a flat to live in. And that's as someone who's conventionally employed.)
1) That it's held up as an indictment of Fannie Mae mortgages. Someone with four leased properties and being savvy enough in the property market to buy and rehab a fifth should know better than to approach a FNMA-backed lender for a 70/30 cash-out refi. Even FHA, previously one of the less-stringent guarantee agencies, only allows four properties under the same ownership.
2) The author is shocked that a program designed for purchase money financing on a buyer's owner-occupied property would turn down an investment landlord.
3) The author makes no mention of approaching any other financial institution or lender. Since, given point 1, he is pretty good at construction but poor at leveraging other people's money (not a slam, that's what _any_ investor wants to do), he wants a bank that writes and services portfolio loans. Which, by the way, means he'd probably be required to want a loan at no more than about 80% LTV across all five properties.
You must have missed the third sentence: "I own four properties free and clear." He doesn't have a bunch of loans already (which is risky if the market falls apart, see 2008). He has a bunch of assets.
Like I said, the whole article didn't pass my "smell test".
This isn't surprising. Two years of history for self-employed is pretty standard (albeit arbitrary). Specifically for the US, investment mortgages are difficult to get them because Fannie Mae is reluctant to underwrite them.
These combine to an unsurprising denial.
One question not answered is if the author offered to secure the loan against other properties owned or if the author would have been willing.
Reason? he/she had not been working long enough (less than a year at the job). Afaik, it was to be his primary residence.
So I'm not surprised.
It used to be that people in the author's situation could get a "stated income loan", in which you more or less say "this is what I make", and the bank doesn't (or can't) verify it. These sorts of loans were widely abused by loan officers prior to the housing crash to get people into loans they couldn't afford (of which they get a percentage, so their incentive to sell high-dollar loans was significant), and as a result the banks basically just pulled them all.
If you don't have verifiable income these days, you should expect a bank to not lend to you.
Different lenders have different rules. One lender turned me down because my company showed a tiny loss (strategic to reduce my corporation tax bill and contribute to my pension instead). The company doesn't owe anyone any money, it's just how it's accounted for by my accountant.
Fortunately for me, another lender only looked at my personal income, but that did mean we needed to find extra capital.
Bottom line is, if you're a director of a company, the company accounts have to show history and be squeaky clean. If you're an employee of another company, you just need 1 months payslip if I recall. Crazy!
And I agree.
> I own four properties free and clear. I have no debt.
> Not just any mortgage, but a cash-out refinance of less than six figures on a foreclosure I bought for cash, rehabbed and turned back on the market as a rental.
This "no doc" mortgage was virtually no risk to the bank, because the amount of equity in the house was enough that if they foreclosed on day 1, they wouldn't have lost money. Meanwhile, I was able to improve my situation by buying an income producing property and maintaining it and renovating it. And this changed the trajectory of my life by fascilitating stability in housing costs and a long term investment.
In decades previous this would have been impossible, it was traditionally the case that only people with W2 income could get a mortgage, and I think the invention of "no doc" and "stated income" mortgages was a huge step forward in the United States, opening up important options for people who had been marginalized simply by choosing not to work for an existing company.
I am tired of the ignorant rhetoric surrounding the housing bubble. Subprime mortgages are not a priori bad. Neither are "No doc" and "stated income" mortgages. The function of a subprime mortgage is a fairly simple algorithm: because there is a greater risk in loaning to someone who doesn't have sufficient W2 income, the borrower pays a higher interest rate to offset the higher foreclosure rates.
The reason the bubble formed was because housing prices were rising, largely due to lowered interest rates which were in part a reaction by the fed to the post 9/11 recession. As a result of rising housing prices, foreclosures hit historic lows, causing the illusion that subprime mortgages were no riskier than normal mortgages. This meant that investing in them was free money, for a time. The nature of this temporary scenario was obfuscated by creative financial professionals who packaged subprime mortgages in to securities. They claimed they had used special techniques to make "A rated" securities out of packages of high risk loans, and the returns seemed to bear that out. But it was an illusion caused by low default rates ... no one defaulted on their mortgages because they could always sell for more or refinance for more money ... as long as housing prices continued to rise. Once housing prices stopped rising, the packages turned out to be exactly what any rational person would have expected: a bunch of high risk loans with higher interest rates hopefully offsetting the risk. Unfortunately, a bunch of greedy people had allowed themselves to ignore the bubble nature of the whole thing and a number of financial institutions faced bankruptcy. That's all, and it fundamentally has nothing to do with whether higher risk mortgages are a bad thing, and everything to do with bubbles, and why bubbles form. I think Kenneth Galbraith's "A Short History of Financial Euphoria" sums up the nature of bubbles well: someone reinvents leveraged investing thinking it is a new thing, people go crazy ... it is always exactly the same.
And yes, you could conclude from this that Osama Bin Laden caused the housing bubble. But I don't want to give that guy too much credit.
I really think it is a horrible shame that we have reverted to the old way of evaluating mortgages, I don't think a younger version of me has the options I had. And that is too bad.
Once the rates rise, they will be handing out loans on the street corner.
Right now the banks are trying to drive up home values via restricting supply of new homes. Few loans == few new homes built.
Restrictions in supply == higher home prices.
The banks are colluding with the fed govt to drive up home values so that the mortgage derivatives the banks own will once again become worth something.
it is all about lowering rates and lending to corporations that will buy older homes and rent them out at extortionate rates, and then not lending to consumers so that the home builders cannot build much new supply.
The USA is and always has been run for the purposes of Capital.
That makes no sense if you know how banks and mortgages work--the loan's interest rate has little to do with the profit for the loan originator. The money is made on volume. When the bank makes a loan they almost immediately sell it to someone (lately the Fed) and have made the full amount of money they will ever make on that loan.
Now that interest rates have spiked off the bottom there are fewer loans being made and much less profit (banks are firing people in mortgage departments right and left). If the rates continue to increase it's going to greatly squeeze financial sector profits.
In the UK there are mortgages available for those doing consulting work (i.e. not on a regular salary). They generally have an interest rate about 2% higher than mortgages available for those with salaries.
Also, downvotes? really? do you guys even bank?
c: