
Despite excellent credit, it's still possible to be turned down for a mortgage - lisper
http://www.latimes.com/business/realestate/la-fi-lew-20140112,0,7530878.story#axzz2qDA8vw8z
======
elemeno
In Summary - The Author, due to having recently switched from being a full-
time to a freelance worker, cannot prove that he has the ability to pay the
mortgage he's applying for and thus his application was denied.

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.

~~~
anthonycerra
Can't one argue that income from rental properties is more predictable than
the income from full-time employment? In the former, there are binding
contracts between the landlord and tenant that guarantee the landlord income
(similar to the relationship between a homeowner and a bank, which seems
hypocritical on the bank's part). In the case of full-time employment the
employee is not guaranteed to have a job as an employer can fire someone at
any time for any reason.

~~~
pavel_lishin
Leases almost always have a provision for breaking them, typically with 2
months payment as a penalty fee.

So you're guaranteed some income, but all of your tenants can leave at any
point.

~~~
jedrek
As opposed to full time jobs, that can fire you at will and you might get two
weeks termination pay?

~~~
georgemcbay
That's the real kicker for me, the idea that being currently employed under a
W2 means anything for future earnings. That is a very outdated concept, IMO.

~~~
sliverstorm
It's not as strong of an indicator as it was in the past, but if you have
years of track record with your employer you _probably_ will keep getting that
paycheck in the future- _and_ if you get fired, you can probably find a new
job.

Not a perfect signal, but it's not like there actually is a perfect signal to
be had.

------
jrockway
This sounds pretty reasonable to me, actually. He has no history of being
successful enough self-employed to support paying a mortgage. Give it some
time, and I'm sure they'll loan him money.

Also keep in mind that this is a mortgage for an investment property, not a
primary residence. So even more risky for the bank.

~~~
mikeryan
I agree this is a shitty edge case but when switching from W2 to a 1099 is
really just a semantic difference then switching from W2 to unemployed in the
first few months.

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.

~~~
khuey
Switching from W2 to 1099 is by no means a semantic difference. If it is, then
it's probably illegal to be treated as an independent contractor.

~~~
Benvie
I think he meant there's no difference between being unemployed and just
starting as 1099, since there's basically no taxes paid to show you're making
any income for a while.

------
madsushi
Banks have no obligation to lend someone money if they don't think they can
repay. Loans aren't a privilege, or a right. The banks reserve the right to
refuse anyone.

~~~
pasbesoin
Well, by simple extension, I as a tax payer have no obligation to -- through
my government -- lend money to banks.

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.

~~~
nknighthb
You really should, since it's not the bank rejecting the loan, it's Fannie
Mae[0].

[0]
[http://en.wikipedia.org/wiki/Fannie_Mae](http://en.wikipedia.org/wiki/Fannie_Mae)

------
lmm
He owns four properties already. And he seems to be saying he avoided paying
tax on most of his income. Can't say I'm feeling too sorry for him.

(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.)

------
techsupporter
I'm astounded at this article for several reasons:

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.

~~~
jonknee
> 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.

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.

~~~
pbreit
If he owns them free and clear, why weren't they throwing off tons of income?
This whole article didn't seem to pass the "smell test".

~~~
jonknee
He said income wasn't the problem, the lack of W2 income was. This is the
outcome when the decision tree is a strict set of forms and boxes to check. It
lessons the likelihood of rogue employees pushing through bad loans, but also
increases the likelihood of not making some loans that would be good.

~~~
pbreit
He wrote that the loan officer would review his freelance income after 12-18
months. He's clearly at the wrong bank if it won't consider the income coming
in on 4 properties owned free and clear.

Like I said, the whole article didn't pass my "smell test".

------
cletus
tl;dr author recently changed from full time employment to being self-employed
and wanted to refi an investment property.

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.

------
dba7dba
About a year or 2 ago, a realtor friend couldn't complete a sale of a house in
Southern California for a Medical Doctor because the loan was not approved. A
young MD who has a full time job.

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.

------
cheald
Unfortunately, that's basically the state of mortgage lending now. If you
don't have an established W2, you can go piss up a rope as far as the banks
are concerned.

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.

------
jread
This is nothing new. Conforming loans for self employed have always required 2
years tax returns. I just went through this process myself. It is more painful
than W2, but if you have 2 years returns, acceptable debt to income ratio, and
decent credit, you can get a loan. What has changed if there aren't many non-
conforming loan options like there were in the bubble years.

------
martin-adams
This is something I also got affected by in the UK in the last couple of
months. I've been the director and working part-time for my own company for 13
years, but switched to working full-time for my company in 2012. I'm
effectively a freelancer but under a limited company.

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!

------
mesozoic
Summary is: It's really dumb that you have to take a regular "job" for a
couple of months to buy a house.

And I agree.

~~~
storborg
Not to buy a primary residence: to buy a (5th) investment property with bank
financing. This is noted in the first few paragraphs of the article.

~~~
jonknee
Not to do any of that actually, it would be to take equity out of a property
that is owned free and clear (just like all the other properties owned by the
author):

> 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.

------
whiddershins
I am one of the people who benefited from subprime lending, and without it, my
whole life would have been different. I was self employed in 1999 when I
bought a house in Brooklyn, and I paid an extra percentage point on my
mortgage because I couldn't "prove" my income.

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.

------
squirejons
the interest rates are too low for the banks to loan much.

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.

~~~
jonknee
> the interest rates are too low for the banks to loan much. Once the rates
> rise, they will be handing out loans on the street corner.

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.

------
almosnow
Contrary to common sense; if they believe that you can actually pay back
within the mortgage terms you are not precisely their target audience.

~~~
alexkus
Not really, they still make money from someone if they've had a mortgage for a
minimum period. They're still making the interest every month until it is paid
back, even early. If someone pays back money early then it means they can lend
out more (assuming leverage limits are being enforced). And, depending on the
initial conditions of the mortgage, they may even get more money because of
early repayment fees.

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.

~~~
almosnow
Never said they didn't make money from you, I just said you are not their
target audience, as in implying that you are not precisely a customer that
they are dying to have with them, in other words, they can axe you out without
thinking about it too much.

Also, downvotes? really? do you guys even bank?

~~~
almosnow
Haha, go fuck yourselves .|.

c:

