I shared with you my most recent painful journey in qualifying for a mortgage. It’s not over yet as the underwriter now wants a signed copy from my CPA on his company letterhead of all my company’s financials. My CPA said he charges $3,800 for a thorough audit, so I told him to go jump in a lake. Instead, I sent off my company’s financials with my signature and told my bank to take it or leave it. I think they’ll take it because I’ve fulfilled every single item on their 21 point check list. We shall see.
My mortgage pain post was shared around the web and I ended up having a good dialogue with a loan officer. He shared with me some frank insights as to why it’s so hard to get a mortgage nowadays.
If you are easily offended, I suggest skipping this post. But if you can handle the truth, and if you want to gain some perspective from someone who controls millions of dollars in loans to satisfy property buyer’s wishes, then read on.
WHY IT’S SO HARD TO GET A MORTGAGE NOWADAYS
I’ve paraphrased the mortgage officer’s feedback in order to make our dialogue a readable post.
1) The government is clamping down hard. Since 2009, the government has created enormous regulation for banks in order to not repeat the housing crisis again. For example, the CPA letterhead and signature requirement was introduced recently in Feb, 2014, and it’s causing massive headache for tons of small business owners in America. CPAs are charging usurious fees to audit because they can. Meanwhile, the government makes us send a new 7-10 page Good Faith Estimate every single time we change a single number.
The rules were created by the Consumer Finance Protection Bureau and were mandated under the Dodd-Frank Act to ban many of the loose practices during the housing bubble e.g. NINJA loans. To be considered a qualified mortgage, a loan amount cannot exceed a total debt-to-income ratio of 43%. In the past, plenty of borrowers were up to 70%+ . Average mortgage refinance or new mortgage lengths have doubled in the past four years as a result.
2) We don’t want to get burned again by liars. Borrowers signed a contract stating they’d pay their mortgages on time if we lent them the money and many didn’t. If everybody just paid their damn mortgage, this economic downturn wouldn’t have happened in the first place! Where I come from, if you don’t pay back your debts, you get beaten up, shamed, and thrown in jail. Only in America do people save so little, borrow so much, and have the audacity not to pay back a person or institution who lent them money in good faith.
Just think about the responsible homeowner who paid her mortgage every month during the downturn. Why should she suffer because her neighbor decided to welch on her promise? Good and honest people got screwed and they should be angry at their neighbors, not the banks who also got screwed. Borrowers who lied to us got bailed out with mortgage debt forgiveness programs by the government. Borrowers like to point out banks got bailed out too. But guess what? I’m a person, not a bank.
3) We hate ungrateful borrowers who don’t take responsibility. Nothing pisses loan officers off more than an ungrateful borrower who defaults on his mortgage and turns around and blames us for not paying his mortgage! We’re already getting blamed by our managers for approving bad creditors. Blaming loan officers for why you can’t pay your mortgage is like blaming your university for you not paying back your student loans. Imagine suing your company for letting you go because you no longer wanted to work. We’re infected with this entitlement mentality that must be squashed. Borrowers should own up to their financial mistakes and stop blaming others.
Borrowers who defaulted already punched us in the gut by causing mortgage departments to lose money. Loan officers were laid off in droves as a result. We have families to feed and bills to pay too. My income got cut in half, and I was let go in 2010 due to the downturn. It wasn’t until 2012 when I found a similar job again that paid 25% less. Thanks a lot.
4) We laugh at anybody who doesn’t have at least 20% down. The biggest joke is when borrowers start getting all pompous with us about why we should lend them money – as if it was our privilege. Then they tell us how they can only put down 5% and we laugh and laugh and laugh at the craziness. Borrowers who can’t put down at least 20% have no business buying a home. One job loss or economic downturn and they are finished. Go get a first time home loan from the government and milk them for all they are worth instead.
Paying private mortgage insurance (PMI) is stupid. They might as well borrow money from a friend to borrow more money from us and never take ownership of their financial lives. It’s as if nobody learned their financial lesson from the past five years. Most will turn out OK in the end, but there are enough people who can put over 20% down that we don’t bother with the rest. Save more money people.
5) Owning a home is not a right, but a privilege. I don’t know where people got it in their heads that owning a home is their birth right, but it’s not. The people who keep paying their mortgages through hell or high water are the ones who understand their privilege. They saved up, ran the numbers, and committed to a long term arrangement. They view their home as a home first and not as an investment. If everybody can view their home as a home first, there would be much less volatility in the housing market.
THE FUNDAMENTAL QUESTION FOR LENDER AND BORROWER
“If you lent someone money in good faith and they decided to NOT pay you back, and then they decided to tell everybody what a crook you are for lending them money in the first place, would you ever lend them money again?”
OF COURSE NOT!
We no longer want to lend money to the average Joe or Jane because the average Joe or Jane screwed us BIG TIME. Anybody who went through a short-sale or a foreclosure are permanently on our blacklist. We won’t tell them this out of courtesy, but that’s just the way things are now.
We’re only going to lend money to people who don’t need to borrow money. They’ve got plenty of liquid assets to pay cash and high incomes, but they don’t want to pay cash because they want to remain diversified and borrow money for cheap.
IMPLICATIONS FOR TIGHTER LENDING STANDARDS
If we only lend money to people who don’t need money, then we decrease our non-performing loans, decrease our chances of getting a pay cut, and decrease our chances of losing our jobs. Furthermore, we don’t have to listen to backlash from the public for why we caused people to default on their mortgages.
We think it’s a good thing to populate the housing market with people who can actually really afford their homes. The downturns will be less severe, and less people who’ve been paying their loans will be hurt by those who don’t.
I asked this one borrower why he decided not to pay his mortgage for a whole year since he had a steady six figure job. He said, “Because my home is under water, so why waste money?” He then turned around and said, “Banks are evil anyway.” I wanted to punch that guy in the face. Just because he lived in a non-recourse state doesn’t mean he should just walk away and screw everyone else in the process.
Maybe America will be at risk of being a nation of renters, as stated by Wells Fargo CEO, Richard Kovacevich. But is that so bad if the alternative is a nation of homeowners who are at high risk of defaulting on their loans and causing everybody massive financial pain? I would much rather have only responsible people borrow money, not entitled and irresponsible people who stretch to buy way more home than they can afford.
DON’T BLAME US FOR THE HOUSING CRISIS
We loan officers have empathy for people who lost their jobs or experienced extreme loss during the last downturn because we lost our jobs. If it’s between feeding your family and paying your mortgage, feed your family. Just don’t blame us for the housing crisis if you can’t pay your bills. Blame yourself and other people who promised to pay their bills and didn’t. We did the best we could with the information we had at the time to make your dreams of homeownership a reality.
You think just because you make this much money and have that much in assets that you deserve a loan? News flash. This is OUR money, not yours. If you want to borrow our money, then do what we ask. If you can’t, go somewhere else.
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, can’t get a mortgage, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. If you study the asset allocation mix of college endowment funds and high net worth individuals, you’ll see real estate weightings of anywhere between 5% -25%. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Check out my Fundrise review as well.
Updated for 2017 and beyond.