Applying for a mortgage in 2016 was truly one of the most eye-opening financial experiences ever. I now know why many consumers had absolutely NO CHANCE in making sound financial choices when it came time to borrowing money from banks before the crisis. Consumers are still being led astray today.
Roughly 25% of homes nationwide are purchased for cash, probably due to the difficulty of getting a mortgage, institutional investors, and a rise in cash rich baby boomers looking to downsize. In San Francisco, the cash buying figure is closer to 35%. I told myself many times during the mortgage qualification process that I would just pay cash. But I soldiered on and swallowed my pride because a 2.5% rate for a 5/1 Jumbo ARM was just too enticing to pass up.
FREEING UP MONEY AND MAKING BETTER USE OF SPACE
I’m currently thinking of doing what many retirees do: downsize. I like to call my move “right-sizing” as it sounds more positive. I think the ideal square footage per person is roughly 700 square feet i.e. family of two = 1,400 sqft, family of three = 2,100 sqft, etc.
I’m not down with McMansions as it doesn’t feel good to have a lot of unused rooms when there are people out there just looking for shelter. Having a house too big feels like paying $29.99 for an all-you-can-eat buffet, but only eating $15 worth of food because you just ate lunch three hours ago.
In addition to wanting to right-size my home, I also want to free up some cash flow in my pursuit to generate $200,000 a year in passive income just in case one of my financial buffers fails. Generating income is supremely important for those of us who no longer work full-time jobs. It’s nice to have a good amount of assets, but generating a healthy passive income stream is what financial independence is all about.
THE SHOCKING RESPONSE FROM THE MORTGAGE BANK
Any rational person would view right-sizing their home in retirement or semi-retirement as a logical thing to do. We often think we’ll grow into our homes, but sometimes we never do. I’m also looking for a change of scenery and a home with a view in Golden Gate Heights after almost 10 years in my existing home. I’m amazed at how much more you can get outside of the north end of San Francisco (Marina, Cow Hollow, Pacific Heights, Presidio Heights, Russian Hill).
Take a look at this e-mail from the mortgage underwriter to my mortgage officer during the final weeks of the mortgage approval process. I found a pretty sweet home in Golden Gate Heights and told my bank the address and the pricing so I could arrange appropriate financing. This letter is proof that banks caused the financial meltdown.
I have an issue with the occupancy. The proposed home of purchase is smaller and would require significant improvements to be in similar condition as his current home. I looked up the current residence on the internet to get an idea of what his home looks like. Borrower indicated he wants to move to a different, less busy area with a view. He is not selling the departure residence and its value is double the value of the proposed home. He owns two additional rental properties, one a vacation rental and the second a condo. This just doesn’t seem to make sense as a primary residence. But I need a Risk opinion. – Mortgage Underwriter
In other words, the underwriter has a PROBLEM with me downgrading to a home that’s worth 50% less because she thinks I’m up to something. What kind of cockamamie bullshit is this? I suspect the underwriter thinks I’m really just buying a cheaper home to remodel and flip or rent out, which I’m not. For your info, primary home mortgage rates are generally 50 bps lower than rental property mortgage rates.
If I was a lender, I’d be pleased if one of my long-time clients decided to generate rental income equivalent to double his existing home mortgage, while downsizing to a new home with a smaller mortgage. The underwriter is baffled that I could ever think about living with less.
The curious thing is that I think the new Golden Gate Heights view home is just as good as my exiting home that costs twice as much. I’ve always wanted panoramic views of the ocean and I’ve finally found it. Sure, the proposed home is 300-400 square feet smaller, but I can still raise a family of three or four comfortably.
THE SOLUTION TO THE UNDERWRITER’S PROBLEM
My mortgage officer said I needed to write an ADDITIONAL LETTER (first letter was a 750 word letter saying why I wanted a mortgage) highlighting the following “concerns”:
1) Smaller home
2) Dollar amount of improvements and renovations to make it my primary.
3) Repeat again why the area is great.
What was I supposed to do? Not write a letter at the tail end of this arduous mortgage application process? No. Of course I had to respond. Here’s my second letter to the bank:
Dear Bank Of More, More, More,
I believe the secret to building wealth and achieving financial freedom is to live below one’s means. For almost 10 years, I have been living at my existing residence. The house has been fantastic, but I’ve finally realized it’s simply too large for me.
I’ve enjoyed my area in my 20s and mid 30s, but I feel it’s time to “right size” my living situation with a smaller dream home with panoramic ocean views. I think ~1,800 sqft with three bedrooms and two bathrooms is ideal. The house can easily accommodate a family of four, and if I wanted more space I can simply build out another 1,000+ square feet since the lot is more than double my existing lot. I plan to spend some money remodeling the place to make it perfect.
I believe I found my dream home in Golden Gate Heights. The broker is 70 years old and is from out of town. He didn’t put any pictures on the MLS and had a simple black and white flyer. The only reason why he got the listing was because he grew up in the house next door and knew the family. I believe if the home was properly marketed by a SF broker with professional photography and staging, the home would have easily sold for $150,000 more given the large lot and views. Fortunately, I drove by the home one evening, randomly shot the broker an e-mail, and put in a competitive bid based on what he had at the time, which was only one other bidder who had to sell their house to buy this house.
I believe Golden Gate Heights is the next gem of a neighborhood to be discovered by San Francisco buyers – very much like Noe Valley was discovered 10 years ago. Most all of the property in Golden Gate Heights are single family homes. The street is quiet and the access to Highway 1, 101, 280 is very convenient with 19th avenue close by. Public schools are also outstanding in the area with Lowell High School, Alice Yu Elementary, and Clarendon Elementary, all rated 10 out of 10 online.
I’m surprised the “drive by appraisal” for my existing primary residence came back with such a high amount. I think a more realistic value is 30% lower given the proximity to a busier street. The appraiser used comps that are in more prime locations. So as you can see, the spread between my new home and my existing home value isn’t as large as it seems, especially if I do some remodeling.
I don’t plan to sell my properties because I’m not in current need of the money and property prices have shown to appreciate over the long run. Furthermore, the potential rental income from my existing home is enticing.
I plan to make this new Golden Gate Heights home a “forever home.” When you’ve found a $3 million dollar view for less than half, you’ve got to seize the opportunity. Thanks for your consideration.
Not a bad letter right? I was trying to contain my annoyance, but I wanted to lead off strongly with living below one’s means to knock some sense into the underwriter. I’m pretty positive this underwriter is not financially independent, otherwise, he wouldn’t have questioned my desire for less.
After several days, my mortgage was finally approved.
BANKS ARE JUST AS AT FAULT FOR THE MORTGAGE CRISIS
We read a very candid perspective from a loan officer who basically blames homeowners for welching on their mortgage obligations for causing the world’s financial destruction in 2008-2010. I can see the logic. If nobody ever defaulted on their mortgage, the meltdown never would have happened.
Now that I see how absolutely BACKWARDS mortgage underwriters are in their way of thinking, I completely believe banks were very much at fault for causing the financial crisis by pushing unnecessary levels of loans towards borrowers. My bank’s thinking was set in only one direction: more. People can only upgrade their homes with more square footage, bigger lots, and fancier features rather than downgrade. That’s absurd.
Until the risk departments at banks start realizing that not more is not necessarily better, I fear that once again, borrowers are getting in over their heads again.
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Updated for 2017 and beyond.