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Despite excellent credit, it's still possible to be turned down for a mortgage (latimes.com)
35 points by lisper 1346 days ago | hide | past | web | 47 comments | favorite

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.

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.

There's also stuff that breaks unexpectedly that you're on the hook for repairing immediately, at whatever the cost. It can sometimes be difficult to fill vacancies, and in many instances those "binding contracts" aren't worth peanuts. If a tennant leaves or destroys the apartment, you could either go after them in court (expensive, time consuming, and you aren't likely to recoup very much very easily, and you certainly can't compel them to continue to pay you if they're broke), or live with keeping their security deposit (again, peanuts).

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.

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

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.

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.

1 - If a tenant loses a job and can't pay the rent, that contract isn't worth the paper its written on. You can't practically collect money someone doesn't have. Even if you collect a judgement, and sell it, you'll be lucky to get 20 cents on the dollar. Not even mentioning your time, court costs, and legal costs. Those may be recoverable, again, but practically speaking they're gone. The number of tenants who actually have the ability to pay and don't is, in my experience, very small. Few people wish to fuck with their housing situation.

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

> Can't one argue that income from rental properties is more predictable than the income from full-time employment?

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.

And op's point is that we do not have an open market due to ill conceived regulations like dodd frank.

Income from rental properties is only as predictable as your tenants.

Hell, it is difficult even if you have sustained work (not freelancing or self-employment). That's just the way things are. And, frankly, I can't blame anyone. If I were going to lend you a half million dollars, you better believe I'm going to be all up in your business and highly questionable of everything.

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.

Agreed. We really don't need a repeat of this: https://en.wikipedia.org/wiki/Casey_Serin

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.

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.

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.

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.

It's also because he's trying to get a conforming mortgage. A bank willing to do a portfolio mortgage doesn't have to conform to Fannie Mae's requirements. Whether he'll find a bank willing to do one is another matter, especially on a loan that small.

Not completely in touch with mortgages across Europe, but any freelancer should know getting into freelancing is tough - not just for work, but also for mortgages, health insurance, etc

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.

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.

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

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.)

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.

> 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.

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".

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.

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".

Exactly, it was the automatic Desktop Underwriting process that rejected this, not a human.


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.

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.

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.

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.

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!

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.

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.

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.

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.

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.

> 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.

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

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.

In the US there are highly predatory lenders who get away with things like early payment penalty charges and up-fronting the entire loan term's interest so you end up paying the full amount no matter when you pay it off.

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?

Haha, go fuck yourselves .|.



I think what almosnow is trying to say is, "banks only want to lend money to people who can prove they don't need it".

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