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-   -   $500K income, 800 credit score -- rejected for home loan? (http://www.early-retirement.org/forums/f28/500k-income-800-credit-score-rejected-for-home-loan-52108.html)

Kabekew 09-14-2010 06:35 PM

$500K income, 800 credit score -- rejected for home loan?
 
Holy crap, this mortgage market is STRICT! I applied for a new conventional home loan (under $417K), was putting down 70% down payment, home assessed almost twice the purchase price, made $500K in my business last year and $3 million the year before... and was rejected! (I ended up paying cash).

They said because I was "self employed," they were "worried" about negative numbers on my tax statements (my financial advisor had me sell off losing stocks to be able to carry over capital losses -- so yea, my schedule D showed $100K loss last year. But my schedule C showed $600K for $500K net income)?!

What a screwed up economy we must be in. 800 credit score and $500K income can't qualify for a $400K mortgage. Just because I'm a business owner! My loan officer actually told me if I were an employee of my company with a W2, I would have easily qualified even with a lot less income. Yet because I own the whole same business, I don't qualify.

[Moderator Edit]

:nonono:

Dimsumkid 09-14-2010 06:41 PM

I was in a similiar situation being self employed, credit score over 800 and trying to get a mortgage. They require showing your tax return and detailed list of assets to offset your self employment situation. As long as you have assets to payoff the mortgage, you should've been approved. Maybe it was the bank you were using?

73ss454 09-14-2010 06:43 PM

3M to 500K in one year doesn't look good, you're going down hill. (heh)

thefed 09-14-2010 07:12 PM

wow that's nuts. that is a reason (albeit minor) that I incorporated and pay myself a salary. If I ever apply for a loan, nobody needs to know that I am the sole stockholder of xyz company that pays me!

LOL! 09-14-2010 08:17 PM

Wow! It used to be that the only folks who could get a loan were the ones who didn't need a loan. Now even the folks who don't need a loan can't get one.

Kabekew 09-14-2010 08:36 PM

Quote:

Originally Posted by Dimsumkid (Post 978037)
I was in a similiar situation being self employed, credit score over 800 and trying to get a mortgage. They require showing your tax return and detailed list of assets to offset your self employment situation. As long as you have assets to payoff the mortgage, you should've been approved. Maybe it was the bank you were using?

That's what I'm thinking. I googled bank rates and stupidly picked the lowest one. I should have gone with my regular brick-and-mortar bank I think! (Bank of America, although they told me they are really overloaded currently, and take about 2 months to settle).

Kabekew 09-14-2010 08:39 PM

Quote:

Originally Posted by thefed (Post 978049)
wow that's nuts. that is a reason (albeit minor) that I incorporated and pay myself a salary. If I ever apply for a loan, nobody needs to know that I am the sole stockholder of xyz company that pays me!

I think you'd have to disclose you're the owner of your company (I asked them if it would have been easier if I had just W2'd myself and they said no, it's the same).

Funny though how an employee of my company on a much less salary would have qualified for my loan, but me as the owner of the same company am considered "too risky."

The mortgage industry is really screwed up!

Dimsumkid 09-14-2010 08:59 PM

When I got my loan, I was told an employee has a predictable income stream. Self employed people have incomes that can vary greatly. People lending you money apparently don't like that. They made me answer some pretty stupid questions regarding my income, why I was paying certain bills on a personal level (I was paying the mortgage on an estate house, utils, taxes, etc). I had to send an email giving an answer for each item so the underwriters could evaluate each one. The bank I used happened to be the same one that gave me my prior mortgage, just sheer coincidence, they had the best fee/interest rate.

Koolau 09-15-2010 03:09 AM

Several months back I relayed my story of getting a mortgage. With a score of 815 and 25% down, I was almost rejected because my income (made up of pension and DW's SS) was considered too low, even though I had assets to easily cover the loan. Turns out I got the loan because my tax return showed quite a bit of "income" due to taking money out of IRAs and 401(k) to put into a Roth. They wouldn't have cared if I had used the money for wine, women and song (thus lowering my net worth rather than keeping it essentially the same)! Just as long as my tax returns showed enough "income". Go figure!!! No wonder we're in a nation-wide financial mess. We gag at gnats and swallow camels. There's no sanity check in the system.

Texas Proud 09-15-2010 09:18 AM

It is strange how they do this.... my mother bought a condo over a year ago when it was harder... she does NOT have that much income... maybe $24K total... and the loan would have been in the $60K range...

They kept asking where she was going to get the income etc.. got tiring... when my mother saw how many fees etc. they were going to charge... she said "I will pay cash"....

The strange thing is they do not look at your liquid assets... but I am surprised they would not lend to you since the downpayment was so big... heck, that would cover any potential loss...

SunsetSail 09-15-2010 09:53 AM

Quote:

Originally Posted by Kabekew (Post 978035)

What a screwed up economy we must be in. 800 credit score and $500K income can't qualify for a $400K mortgage. Just because I'm a business owner! My loan officer actually told me if I were an employee of my company with a W2, I would have easily qualified even with a lot less income. Yet because I own the whole same business, I don't qualify.

[Moderator Edit]

:nonono:

I have heard of similar situations. I don't know that a w-2 would make it easy, but I think it is easier. My boss makes over $350K year in w-2 regular salary income. He also makes a bonus of up to 35% of that regular salary (its even reported in SEC disclosures). It still took two months and a letter from a high level C-suite officer regarding the bonus amount for the bank to approve a loan - this is a $13 billion company with excellent credit and cash flow. He was making a downpayment of almost 50% on a house that appraised at 140% of its purchase price. It was a high cost area conforming loan (about $720K, I think).

There is a market failure here but I think it is caused by government intervention.

SunsetSail 09-15-2010 09:56 AM

Quote:

Originally Posted by Texas Proud (Post 978201)
It is strange how they do this.... my mother bought a condo over a year ago when it was harder... she does NOT have that much income... maybe $24K total... and the loan would have been in the $60K range...

They kept asking where she was going to get the income etc.. got tiring... when my mother saw how many fees etc. they were going to charge... she said "I will pay cash"....

The strange thing is they do not look at your liquid assets... but I am surprised they would not lend to you since the downpayment was so big... heck, that would cover any potential loss...

I've been told by a friend that is a VP in a credit risk loss mitigation department of a large bank that the banks are only concerned with keeping a mortgage performing, so their concern is that payments are made. There are so many road blocks to foreclosure that they don't care whether there is a huge amount of equity in the home.

Andre1969 09-15-2010 11:42 AM

Quote:

Originally Posted by Texas Proud (Post 978201)
I
They kept asking where she was going to get the income etc.. got tiring... when my mother saw how many fees etc. they were going to charge... she said "I will pay cash"....

I recently looked into getting my HELOC refinanced to a regular 30 year mortgage. My credit union is now offering a 30 year fixed for 3.75%. However, they wanted something like $8800 in closing costs! Once I heard that figure, I didn't bother to fill out the rest of the paperwork. I figure heck, I'd rather just take that $8800 and throw it at the HELOC to get it paid down, rather than blowing it on starting another mortgage!

Right now, I'm at 3.5%, but it's variable, and I know it won't stay low forever. Maybe it would make more sense to just pay the money and get it locked in at a guaranteed low rate, and not have to worry about inflation. But I just don't feel like jumping through their hoops right now.

jimnjana 09-15-2010 11:58 AM

You may want to look at a Penfed home equity loan if you want now that you own the place out right.... I think the equity loan requirements may be easier to meet than mortgage requirements.

BigNick 09-15-2010 01:10 PM

Quote:

Originally Posted by SunsetSail (Post 978222)
There is a market failure here but I think it is caused by government intervention.

Do you have any evidence for that? I'm guessing that without government intervention, there might not have been any banks around. Here in Europe the politicians are shouting at the banks to lend more.

Dimsumkid 09-15-2010 01:34 PM

I just remembered something strange about my mortgage requirements for the current loan. They seemed to be really concerned about all my assets that were used to secure the mortgage and I had to show current bank and portfolio statements the week of closing. I got the impression they were worried that I'd wipe out all my bank and brokerage accounts! I was paying over 30% down on the house and had to open an escrow cd with another 15k so I didn't have them withhold my RE tax payments too. I also had my prior mortgage with this same bank and paid that off years before w/o any issues.

haha 09-15-2010 01:57 PM

This is at least good news for those of us who might be cash buyers of real estate.

Ha

SunsetSail 09-15-2010 03:30 PM

Quote:

Originally Posted by BigNick (Post 978354)
Do you have any evidence for that? I'm guessing that without government intervention, there might not have been any banks around. Here in Europe the politicians are shouting at the banks to lend more.

I knew someone would call me out on this and it’s an opinion only so I have no ‘proof’. I will do my best to explain my reasoning. You are probably right about no government intervention in the current crisis, but that position fails to address root causes.

During the Great Depression the US federal government decided it needed to encourage home ownership and so it formed the precursors to the fannie mae structure. It was later changed to its current form in the late sixties. This quasi-governmental organization piped along quite nicely and did two primary things for my point (1) subsidized the transaction cost of the entire mortgage process by taking over the major portion of the secondary market for 'prime' loans with an implicit federal government guarantee; (2) eliminated the possibility for any true private enterprise to compete on the secondary market for these types of loans because no one has a credit rating better than the fed gov't.

Next in the early seventies, freddie mac was formed to do the same thing as fannie mae except for private non-FHA, VA, etc. insured loans. Same implications as fannie mae, but an increase market base.

Next in the late seventies, came the Community Reinvestment Act (CRA). The CRA encouraged lending to lower income communities, but without lowering borrowing standards.

No really big problems so far other than philosophical ones about government size and intervention.

Jump to the late 1990s, the Clinton administration pushed fannie mae to expand lending to low income individuals under the CRA. So there was an effective lowering of the borrowing standards for CRA loans.

Effectively through this entire period lending institutions have been pushed out of traditional plain vanilla lending. They went to making money on plain loans by being just a loan originator or a servicer, but selling the loans themselves in various forms.

Early 2000, tech bubble pops - money goes into a hard asset - real property. Prices soar way too high in real estate. The system is stressed and fails - no need to recap the whole financial crisis. Real property prices fall, our current administration sees this as major road block to economic recovery (and reelection?). Major government programs are put into place to stop prices from falling back to their correct levels to meet supply and demand. At the same time major government regulation is passed to stop the 'evil predatory' lenders from doing what they were pressured to do in 1999 by the Clinton administration. All that is left is for mortgage lenders to operate in a very narrow field. If a mortgage stops performing it is almost impossible for a lender to recover anything now. Our illustrious FIRE members post on the forum how they can’t get loans even though they are fantastic credit risks.

Summary:

- No frannie mae/freddie mac - no risk distortion on underlying mortgages
- No CRA under late 90s directive - no lending standard distortion - no pushing lenders out of normal profit risk curve
- No legislation/executive action to prop prices - price levels return to normal, lenders can foreclose (I know this hurts some individuals, but more people are hurt from prolonging economic pain) and people with great finances can get loans.

FreeAtLast 09-15-2010 06:29 PM

I was declined a loan when I moved into this house about 23 years ago. I had a small business in the computer service industry. No hard assets but plenty of cash flow. The bank explained they would give me the loan on the condition that they get a co-lender involved for about 25k. It was supposed to be seamless.
They called me as my furniture was being put onto the truck to tell me that there was a problem. I can't quite remember what I told them, however, the builder came up with the 25k loan instead of another bank and he eventually sold off the note and I paid it down quickly.

M Paquette 09-16-2010 11:13 AM

Quote:

Originally Posted by SunsetSail (Post 978405)
- No frannie mae/freddie mac - no risk distortion on underlying mortgages
- No CRA under late 90s directive - no lending standard distortion - no pushing lenders out of normal profit risk curve

Alas, Fannie Mae, Freddie Mac, and the CRA are all US-specific. It is difficult demonstrate that the housing bubble, which was felt over much of the world, was due to these programs.

http://homepage.mac.com/mpaque/.Publ...tory-net-2.jpg

The German market was kept well supplied with cheap (and low quality) housing courtesy of the former East German government. Japan was, and still is recovering from it's very own real estate bubble peak from over 20 years ago.


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