One of the reasons why I think the housing market will stay strong for years to come is because getting a mortgage nowadays is extremely difficult. When lenders are only lending to the people with the highest credit and a minimum 20% down, it’s hard to see mass defaults in the future.
I recently went through a painful mortgage refinance. The process showed me that only the most qualified people are getting loans and refinancing. If someone like me, who has 10X more assets than the amount to be refinanced went through a lot of difficulty, so are many other people.
There was a time when no-documentation mortgages, negative amortization mortgages, and NINJA loans (no income, no job, no asset) were common place. Those loans are equivalent to when passengers could smoke on airplanes so long as they were in a “smoking row.” Unbelievable.
How Difficult Is It To Get A Mortgage Nowadays?
I documented back in 2012 that it took 100 days to refinance my mortgage. It was a painful experience given just two years before it only took 45 days to refinance. I was anxious the refinance wouldn’t go through because once you don’t have any W2 income, you are DEAD TO BANKS.
I was determined to save an extra $300+ in mortgage interest a month if it killed me. Definitely refinance your mortgage BEFORE you quit or engineer your layoff folks.
Now that we’re 12 years into a bull market in 2022+, you’d think that getting a loan would be a little easier. Nope. Getting a mortgage is as brutal as ever. As rates have moved up, the number of people who can qualify for a mortgage has gone down. Further, lenders are being more cautious just in case the economy heads into a recession.
Let me share my latest journey about how difficult it was to get a mortgage. For reference, I have over a 820 credit score and a low debt-to-equity ratio.
The Mortgage Application Process Takes Forever
If you are going to purchase a property, you best get a pre-approval letter from your bank for how much property you can buy and how much mortgage you can borrow from them long before you find your baby.
The number one concern for sellers is whether buyers can actually get a loan or come up with the cash to buy the property. With a pre-approval letter, a personalized letter with pictures, and copies of your assets, you will significantly help your case if your bid price is within the ball park.
After shopping around for mortgages online, like I always do given their massive mortgage network, I decided to go with Citibank. They offered a competitive 2.5% 5/1 JUMBO ARM since I have more than $250K in assets with them. They also have my primary home mortgage and my other small rental property mortgage, so I figured the process would be a piece of cake. NOT SO!
Despite never missing a mortgage payment in 11 years and having more in assets than the mortgage amount I was seeking, they still put me through the ringer. I was going for a “no financing contingency” offer that would be equivalent to paying cash for a property.
By going no financing contingency, I would simply wave the normal 10-14 day financing contingency clause in the contract so the seller could rest easier knowing I was a legitimate buyer. If I decided to pull out of the deal for whatever reason, the seller would keep the earnest money deposit, which is generally 3% of the purchase price at minimum.
Mortgage Denied At First (14 days into the process)
My first go around for getting a no financing contingency approval was actually rejected after two weeks. I gave them all my documents (last two years W2, all my assets statements, last two pay checks, insurance forms, rental income deposits, rental contract, K1s, etc) and I still got denied by underwriting mainly because:
1) They disavowed 100% of my online business revenue because it wasn’t at least two years old.
2) They disavowed 100% of my consulting income with Personal Capital, because it wasn’t at least two years old. The income is decent, but I just started with them on January 13, 2014.
3) They only included 75% of my rental income to account for expenses and vacancies even though I have never had a month of vacancy for my primary rental in nine years. Based on my math, I’m AT LEAST $1,500 a month cash flow positive after paying HOA, mortgage, and property taxes, but based on their math, my main rental was $686 cash flow negative. I pressed them to explain their math to me, and they just kept saying they could only allow 75% of rental income, which didn’t make sense. They were cutting my rental income down by more like 60%.
4) They disavowed 100% of my deferred income from my old employer of 11 years even though I continued to receive a W2 from them in 2012, 2013, and for sure in 2014 and 2015 due to my deferred compensation. The amounts are significant per year, but they said that unless I prove I will receive another two years of deferred compensation from my old employer, the income is inadmissible to the underwriter.
5) Curiously enough, the only income they allowed was my W2 income from my online revenue even though I just started paying myself last September, 2013. I’ve been purposefully paying myself a modest wage because I don’t need more income, I don’t want to pay 15% FICA tax on the income, and I need to pay myself at least some income according to the IRS for S-Corps. If it was completely up to me, I’d pay myself $1,000 a month and do year end distributions.
Because I was denied a no financing contingency loan, I didn’t bid with confidence because why bother? Everybody else was coming in with cash or a no financing contingency loan, so I wasn’t even competitive. As a result, I lost the first home I bid on.
The Second Time Around Apply For A Mortgage – New Strategy (took another 10 days)
I was clearly not happy that my loan was rejected, so I e-mailed my personal banker to help me find another way (See: How To Get Better Service From Banks). I was working with an unfamiliar mortgage officer who didn’t seem to have his act together because he’d e-mail me the same question two or three times, on multiple occasions, and was unresponsive when I contacted him.
My personal banker got me in touch with another mortgage officer who I recognized after speaking to him years ago. He was much more on the ball and had an assistant to help gather all the documents and cross things off the list. He responded to all my e-mails, and I was equally responsive to all of his.
Since 90% of my income was disavowed, we went a new strategy of doing an Asset Based Income analysis to supplement my current income. In addition, he routed my loan to their “Affluent Channel”; a specialized group that will fully underwrite, review my income, assets and credit profile; thereby eliminating any guesswork so that I could bid a no-contingent offer. Again, I could pay cash for the property, but I wanted to get a loan since interest rates are so cheap.
In about 10 days, he sent me a congratulatory e-mail saying I was approved for a no financing contingency loan. Fantastic! But of course things were not so easy. In order for me to get the no financing contingency loan, he sent me a list of 21 more things I needed to fulfill according to the underwriter!
What is the point of getting approved for a no financing contingency loan when I’ve got so many other things I need to prove? At this point, I was very distraught and was about to just forgo the entire mortgage application process altogether. Paying cash is so much easier because you answer to nobody. An appraiser isn’t even necessary. But I stayed calm and carried on.
The list of 21 new things I need in order to qualify for a mortgage AFTER I had already supposedly qualified:
1. A copy of the Hazard Insurance policy, binder, or certificate verifying coverage amount, premium, and the first year’s paid receipt, if applicable.
2. A copy of the fully executed Contract of Sale verifying purchase price of $XXXXXXXX.
3. A copy of the Earnest Money check #__________ in the amount of $____________ clearing prior to___________ .
4. Borrower must sign and date form 4506T at Application for 2012 & 2013 personal federal tax transcripts AND must sign and date form 4506T at Application for 2012 & 2013 business federal tax transcripts for your business.
5. This program requires minimum deposits with Citibank and/or assets held in a Citi institution at loan closing of at least $250,000. The assets must be in place at least 10 business days prior to closing in order to avoid federal Truth in Lending redisclosure and closing postponement requirements. The terms of your loan are subject to this verification of assets, if unverified your loan terms will change.
6. Borrower(s) to provide an acceptable copy of the most recent months’ asset statements and/or other documentation to verify that a minimum of $1,000,000 in investable assets plus 12 months verified Principal, Interest, Taxes, Insurance and Assessments (PITIA) will be available after the loan is closed.
7. This interest rate requires verification of $250,000 or more in investable assets with Citibank no less than 10 days before the settlement date in order to avoid Federal Truth in Lending re-disclosure and possible delays with your loan closing. The minimum $250,000 in investable assets must be above and beyond any monies used to close your mortgage loan with Citi.
8. You have applied for a loan program that requires the payment of upfront fees. Payment has not been received. Please contact your sales representative to pay the upfront fees.
9. Borrower’s credit report reflects an alert for a previous address unit/apt number X was not a residential address but rather a restaurant/bar/nightclub. Borrower to provide letter addressing whether he has any knowledge of a previous address with this unit/apt number. (letter must be signed and dated)
10. Borrowers to provide copy of Bank of America mortgage statement for loan #XXXX for property located in Lake Tahoe to verify payment includes taxes and insurance. In addition, provide copy of HOA billing to verify monthly assessment for condo.
11. Borrower to provide most recent Citibank account statement for account #XXXX.
12. Borrower to provide documentation to verify that the following CDs do or do not have penalties for early withdrawal: Citibank #XXXX, First Republic Bank #XXXX, First Republic Bank #XXXX.
13. Borrower provided on-line account statements for three CD account but the statements do not verify the owner of the account or depository or date verified. In addition, Borrower to provide statements that contain the required identifying information. In addition, provide documentation to verify that the following CDs do or do not have penalties for early withdrawal: #XXXX, #XXXX and #XXXX.
14. Borrower to provide documentation to verify the source of deposit to Citibank acct#XXX 2/5/14 for $XXXXX.
15. Borrower to provide documentation to verify the source of deposits to Citibank acct#XXXX 3/10/14
transfer $XXXX, 3/10/14 transfer $XXXX and teller deposit 3/24/14 $XXXXX.XX.
16. Borrower to provide letter addressing the deposit to Citibank acct#XXXX 3/8/14 for $XXXX from X Bank. This was an ACH transaction, please explain nature of relationship with the company. Additional conditions may be requested.
17. Borrowers to provide copy of HOA billing for XXXXX as property is listed as a townhome per Citi mortgage records.
18. In order to use rental income for departure residence located at XXXXXXXX, San Francisco, the following requirements must be met: 1) Exterior appraisal to verify not less than 30% equity in the property, 2) fully executed lease agreement and documentation that security deposit from the tenant has been deposited to borrower’s account. If the 30% equity in the property cannot be documented the full PITIA payment must be used to qualify and six month PITI reserves is required in addition to the twelve months PITI reserves required for property being purchased. An appraisal to be order by Citibank.
19. Borrower to provide copy of HOA billing for condo property located at XXXXXX (Primary rental).
20. Borrower to request a Profit & Loss and Balance Sheet for the first quarter ended 3/31/14. **For Corporations, S-Corportions and Partnerships, the P&L and Balance Sheet must be on a CPA’s letterhead or evidence provided that the document(s) has been reviewed by a CPA. All documents must be signed and dated by borrower(s) and CPA**
21. Borrower’s credit report reflects an alert for a previous address that is indicated as a receiving or forwarding service. Borrower to provide letter addressing whether he is aware of using a mail service in the past.
The following items will be required at your closing.
1. Changes to sales contract to be initialed by borrower.
2. All Borrowers must sign and date form 4506T for personal 1040s and business 1120S for 2013 and 2012
3. Provide Hazard Insurance Binder and paid receipt. (Does not apply to Cooperatives.)
4. If your loan becomes a higher-priced covered transaction as defined in the federal Truth in Lending Act’s Regulation Z, we may require additional documentation and verifications, re-underwrite your loan, and withdraw this approval if your loan fails to meet Citi’s requirements.
5. If your loan becomes a higher-priced mortgage loan, the federal Truth in Lending Act’s Regulation Z requires that an escrow/impound account be established and maintained. We may revoke any waiver of escrow requirements.
6. If your loan becomes a higher-priced mortgage loan but is not considered a qualified mortgage, it may be subject to special appraisal requirements under the federal Truth in Lending Act’s Regulation Z. This approval may be withdrawn if these appraisal requirements are not met.
SHOOT ME NOW!!!!
A Misunderstanding In My Mortgage Application Perhaps? (7 more days)
After three and a half weeks of gathering all my documents, getting rejected the first time around, and now finally getting “approved” I was absolutely distraught to receive this MEGA LIST of follow up things to do before I could qualify for my pseudo no financing contingency loan. I took a week long break to get back any documents because I was burnt out.
I didn’t feel confident at all bidding with a no financing contingency. What if I won and Citibank turned around and screwed me? I would either have to forfeit my earnest money, or sell securities and pay early CD withdrawal penalties to come up with 100% cash. That is not an ideal situation. I calculated I’d have to pay $14,000 in interest penalties for one group of CDs for example if I withdrew early.
I told my new mortgage officer that their list of 21 things was ridiculous and that I was strongly considering just paying cash to avoid this hassle.
No-Contingency Offer Is A Misonomer
Here’s his response,
“I think there’s some misunderstanding to what it really means for a no-contingency offer, as this is being misused in this industry. The only person that can remove a no-contingency is you the buyer. No lender can ‘remove’ the loan contingency even though I get questions like this from both buyers and agents alike all the time. We are responsible for informing you what given conditions are remaining and that we ask if you can demonstrate the required conditions, if you feel confident that you can meet those requirements, you can remove or submit an offer without contingency.
The purpose is to have your loan fully underwritten so that the underwriter can fully list items that needs to be met. Initially we submitted a pre-approval, that is with a credit check, income and asset analysis and generally if the basic parameters are met—you will be issued a pre-approval letter.
In your situation, your file has been escalated to an underwriter and a 2nd level that has put signatures on this loan for approval. You will note that the conditions are very detailed and explicit and that’s the intention, to keep you informed of what is still outstanding. We do not entertain this for everyone as the standard industry practice is to do a basic review until a buyer has a property in contract.
Some of the conditions are merely informational, such as the requirement for the $250,000 deposit with Citi, others only apply at the time you offer is accepted such as items 1-3, 8, etc.”
In other words, even if you are approved for a no financing contingency loan or regular mortgage, there is still a lot of work to be done. In my case, it was simply spelled out in detail. No wonder why many deals fall through. If sellers knew how difficult it was for a buyer to borrow money nowadays, they would only accept real cash offers!
Mortgage Lending Standards Are Stricter than Ever
Do not believe your eyes and ears when you hear the media talking about loosening lending standards. They are probably reporters who are just highlighting hearsay. I’m down in the trenches and reporting to you guys first hand what’s going on.
Sure there will be some banks that will be more lenient than others. But based on my own refinancing experience and this current mortgage application experience, I’ve never had it so tough. Yes, my W2 income is a former shell of what it once was, but my assets are greater than ever.
Despite the bank seeing my cash situation that is way more than the loan I was looking for, they still wouldn’t provide any leniency. I’m thinking this has something to do with California being one of the no-recourse states which let’s you walk away from your mortgage without any repercussions for your other assets.
The average credit score for a rejected mortgage applicant of 760 is just the tip of the iceberg. The greatest irony is that government sponsored first time homeowners programs are MORE lenient and MORE risky than private mortgage programs. I don’t see how allowing only 0-3% down for first time home buyers is a good idea since the reason why they are going through this program is because their income and existing assets are probably a little too light for private mortgage programs.
The government is allowing first time homebuyers to kayak right next to a bottomless whirlpool in the middle of the ocean. Now you know why interest rates for Jumbo loans are lower than conforming loans. Lower income, lower asset borrowers are actually more at risk.
Main Takeaways Of Trying To Get A Mortgage
* Prepare to go through documentation gathering hell for one month.
* Prepare to still spend two to three months to refinance a mortgage.
* Just when you think it’s over, it’s not over. It’s like waiting in the terminal for a delayed flight. They give you hope with a 30 minute update, and dash your hopes away until you realize you’ve been sitting in the waiting lounge or tarmac for four hours.
* Borrowers today are much more qualified than borrowers of the past.
* The next housing correction will not be as severe as 2007-2010 because less people will be forced sellers.
* Super strict lending standards are good for the long term health of our country.
* There might be widening dissension among renters and homeowners in major cities that are experiencing property appreciation.
* You will want to give up. You will ask yourselves many times, “Is this all worth it?”
If you have W2 income, are extremely patient and organized with your finances, and have a credit score above 729, you should be able to qualify for a mortgage. You might not get as much as you wanted, which is why it’s more important than ever to have as large a cash buffer as possible.
You don’t want to find your forever dream house and put in a weak bid because you have no confidence in getting a loan. The time to search for a good mortgage officer is a month before you are serious about buying a home. Success rewards the prepared!
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How Difficult It Is To Get A Mortgage is a Financial Samurai original post. Well-qualified borrowers are getting mortgages at lower rates than average. Therefore, it behooves you to get your credit score and finances right.