Have lots of money, but denied mortgage, what now?
July 5, 2009 8:58 PM   Subscribe

My fiancee and I recently applied for a mortgage on a $200k property in Portland, OR. We have a lot of assets (at least I think so), but were denied for a mortgage loan where we would have put 20% down. Why, and what can we do about it?

[Posting anon because of personal finance information]

Right now we have approximately $75k cash on hand, $15-20k equity in our current home (which we are selling), we own $100-150k worth of undeveloped land in northeast Georgia, a car that is paid off (worth $19k on KBB), and zero debt. We both have excellent credit ratings.

She is a freelance web designer (telecommute) and pulls in $45-60k per year. I'm a grad student on a $16k salary, working on an MS which I will receive next May. In the past I have made $44k per year, so I'm not too worried about job prospects.

We are both still a little stunned that we were denied the loan. The loan company just refused us flat out, didn't even send the application to the underwriter. They said that our combined salary wasn't enough to get approved, since my fiancee is self-employed but has only been officially this way for the past couple months and they can't include her former salaried position as income on the loan application, which we don't really understand since money is money (?). She has been pulling in more than $40k/yr for the last 5 years.

(FYI, she currently has an arrangement to work nearly full time, at a higher hourly rate, with her former full time employer... the only reason she's not on their employee payroll anymore is because we moved out of state, and due to some complication in tax law they had to move her to contract status).

What can we do now? Should we apply with another company?

I feel like we are in excellent financial shape, with enough money to put 20% down and still have $ left over to cover 2+ years of mortgage payments!!! Like what the hell, is anybody getting a mortgage these days?
posted by anonymous to Work & Money (18 answers total)
Your original lender's standards have changed with regards to the amount of risk they wish to take. Sucks to be them; you guys sound like the best kinds of borrowers.

Apply with another lender or broker. Seriously, if I can get pre-approved for a loan in SoCal, you guys can.
posted by infinitewindow at 9:07 PM on July 5, 2009

they can't include her former salaried position as income on the loan application, which we don't really understand since money is money (?)

Think of it like this: if she had been laid off, would it make sense to include her former salaried position? All they care about is right now.
posted by smackfu at 9:12 PM on July 5, 2009

As infinitewindow wrote, you either got nailed by a lender who has an exceedingly strict risk structure or their warehouse line of credit doesn't have sufficient room, especially if you got declined towards the end of the month or the end of the quarter. (From what I have been told, warehouse lines of credit--which is what several lenders use to finance mortgages until they can be sold, if they can be sold--renew at the end of a month or quarter and approvals can be tight until then.)

Other than that, I would imagine what spooked them more than anything is your fiancee's being self-employed. Lots of loans for self employed people are getting tossed by lenders wanting to do "traditional" 30-year fixed loans to W2-employed borrowers. You will probably need to seek a mortgage broker, even though yours should be an easy loan to write. 20-25% cash down out of existing resources (i.e. not a gift or "gift" from a "non-profit") at the median $68,500 salary you both can (I presume) document would be insane for a bank to not underwrite. If you continue to get turned down then (assuming your credit is really excellent, which I have no reason to doubt) the mortgage industry truly is screwed.
posted by fireoyster at 9:15 PM on July 5, 2009 [2 favorites]

A coworker was denied for a mortgage in a similar situation a few months ago. The reason they gave was that his debt to income ratio would be too high. They would not consider the portion of his income that was overtime because it was variable and not guaranteed. Secondly, they wanted to count his current home as debt unless he had a signed one year lease to rent it, or completed the sale of it.

Basically, they don't want to get stuck if you can't sell your current house and/or your fiancee's freelance work dries up. Keep trying. Maybe try some local banks or credit unions. It may not hurt to go back to the mortgage company and ask if they can tell you specifically why you were denied.
posted by Yorrick at 9:24 PM on July 5, 2009

Go to a different lender. There are lenders who will be willing to work with you, and I don't think you'll be sub-prime, but you may have to shop around a bit.

Based on what I was told just recently as the SO and I shopped for a mortgage, being self-employed is not regarded by lenders as highly as having a regular W-2 position is. I.e., they'd rather you have a W-2 position at a lower salary than be self-employed at a higher amount of gross pay; they regard being self-employed as riskier. (I don't know if this is really true — in most states you can get canned from a traditional employer as quickly as your business as a freelancer can dry up, but that's the alleged reason.) The amount of time your fiancee has been self-employed may factor into it as well; from the lender's perspective, s/he doesn't have a long track record as a self-employed worker.

I don't know for sure but I suspect that they basically discount your fiancee's self-employed salary by a certain amount, effectively as penalty for being self-employed, and then calculate the debt-to-income from there. I guess this because lenders seem able to give nonnegotiable go/no-go decisions very easily when you give them rough income requirements, so there's obviously some sort of calculator they're plugging this into, with relatively simple logic that's giving them the thumbs up or down. But it might as well be a black box from your perspective.

If it's an option, you might want to wait until you have a salaried position again: between the two of you, then you'll have a solid, predictable income and have more than enough assets to qualify for a hefty mortgage at the best rates. If that's not possible, you'll just have to shop around and find someone who's willing to work with you.

We found our lender via Bankrate.com, but were careful to look only at lenders with a physical presence in the area. Our agent strongly recommended against 'virtual' lenders that lack local branches, as she'd had some very bad experiences with them in the past. (The few that we talked to for rates actually seemed pretty responsive, though, so I'm not sure how valid an objection this is.)
posted by Kadin2048 at 9:24 PM on July 5, 2009

i live in central va. a few months ago i was told by a local business attorney that, while a lot of the big banks (wachovia, bank of amereca both have lockdown presence here) had basically no new money to lend, some of the regional banks were much more sound. he had had bank representatives ask him personally to spread the word that they were ready to lend, trying to counter a general perception that credit was not even worth looking for. you should look elsewhere for financing, especially from local sources. while any lender has certain bottom line standards, a smaller institution can sometimes have a greater capability to actually look at you as an individual person asking for money rather than an algebraic formula that didn't compute.
posted by cvilleluke at 9:41 PM on July 5, 2009

Get a mortgage broker. They'll shop your profile around and find you the best deal. And they'll do all the work for you. The lenders pay them, so it's free for you. Best thing I've ever done.

FWIW, I'm also self-employed.
posted by acoutu at 9:55 PM on July 5, 2009

One thing I didn't see anyone mention when I scanned the responses is the fact that you're already homeowners. You need to be able to make mortgage payments on both the current house and the new house, which seems like it would not be do-able on that kind of income. It doesn't matter to them if you're selling it or not, because what if it doesn't sell? So they have to run the numbers based on your current income and your current ability to pay your debts -- including two mortgages. Which doesn't sound possible on that income.
posted by rabbitrabbit at 10:47 PM on July 5, 2009

Yeah, seriously: mortgage broker. The majority of lenders really want to see two full-time salaried employees and do not reward academia or the entrepreneurial spirit.

We were in a somewhat similar position when we bought our house. We ended up with a sub-prime mortgage because I didn't have two years of audited accounts as a self-employed person. This was not a big deal to us because a) we knew we could comfortably make payments even if our rate quadrupled, and b) we knew we could refinance at the two year mark directly with our bank.

You are not a typical borrower. You need to do everything you can to look more like one (do not say "nearly full time" - just state the annual contract value) and work with a broker who has experience matching lenders to your borrower profile.
posted by DarlingBri at 11:52 PM on July 5, 2009

and they can't include her former salaried position as income on the loan application

I think that self-employed individuals need to show two years of tax returns as self-employed. This page backs that up, but I'm sure the standards differ.

Lenders are just risk adverse now. Low interest rates are still being quoted, but few borrowers actually qualify in the end. You ought to be a little mad, given all the games that were played in the last few years to get every jobless liar into the house of their dreams. But, as others have said, you are bound to find a lender who will want to lend to you. Keep looking, and try a broker.
posted by fatllama at 11:58 PM on July 5, 2009 [1 favorite]

Check out credit unions. I've gotten better loans through my credit union, better processing, as well.
posted by theora55 at 9:33 AM on July 6, 2009

Greenfield property is seen as risky by banks, so they're probably not looking at your $150k in greenfield property as you do. Do you use it for hunting or fishing? Rural property can be notoriously illiquid. For what it is worth my friend's family had a really hard time selling the land rights to some property they owned and basically gave it away (it had natural gas on the property so the mineral rights were valuable and sold quickly to a trust). Your $19k similarly is a quickly depreciating asset, 4 years from now it will be worth nothing but you'll still be needing a car.

So really you have $75k in cash, you're working as a grad student making $16k and she's self-employed making between $45k-60k in a bad economy. On the low end you're probably pulling in like $3400 a month after taxes? Let's say you sell your house and net $15k, you're looking at $90,000. After 20% down you're looking at maybe $1064.48 a month or 31% of your take home pay.

I've been told that banks are liking cash flows at 25% of take home pay, and if you were salaried you'd probably fit in but with such a short history of being self-employed are probably a huge risk and question mark.

Furthermore, if I were a bank I'd question as to why you have such large cash reserves while being self-employed. It would look to me at least, that you're either being very conservative or need that much liquidity in the course of doing business as a self-employed person. I bet if you were willing and able to plow more of your cash into your house, you'd be a lot better off (though logically with low interest rates you'd want to leverage more of a house, how economics doesn't always work out like in textbooks!). But in the end: cash flow, cash flow, cash flow.

PS I'm looking for a house right now and have similar troubles. I've been told that due to my age I have a high risk of being first in first out in a layoff situation (at least statistically) and that they were looking for a 25% down and 25% of take home pay, plus liquidity for 6 mos. of payments. So I'd only be a sure bet for a $200k house if I had $50k in cash plus $5900 for 6 mos. of payments plus pulling in $47856 after taxes, which is something in the 75k-80k range? Your experience seems to reaffirm that this is indeed what the banks are looking for right now.
posted by geoff. at 10:09 AM on July 6, 2009 [2 favorites]

N'thing the advice to get a broker. Mrs. Ga$money and I just bought a house, and our broker not only got the best deal for us, he was instrumental in explaining the process (we're first time buyers), the current market conditions, came along to hold our hands at the signing, and basically helped us out with anything else we wanted to know. When the time came, he also gave us daily updates the interest rates and advice about when to lock it. We're in Seattle, so I don't know if Portland is out of his range, but send me a mefi mail if you want his info.
posted by ga$money at 10:16 AM on July 6, 2009

I've learned recently income, and proper steady 9-to-5-ish (read: not academia or freelance/entrepreneur) income, is worth much more to lenders than assets or even credit. I had excellent credit and a LOT of money available for a huge down payment, and it seems they just don't care about that anymore. It bummed me out a lot.
posted by ifjuly at 12:24 PM on July 6, 2009

I've learned recently income, and proper steady 9-to-5-ish (read: not academia or freelance/entrepreneur) income, is worth much more to lenders than assets or even credit. I had excellent credit and a LOT of money available for a huge down payment, and it seems they just don't care about that anymore.

The reason why the term "toxic debt" came into existence was because of bad lending practises. Despite the fact that busts happen with monotonous regularity, in any boom borrowers start borrowing on the assumption that their incomes can only increase and lenders start lending based on similar assumptions - with utterly predictable consequences.

The reality is that most small businesses fail, and even previously successful ones can fail suddenly as a result of very small shifts in a particular industry.

In this case, you've got income streams which aren't especially desirable to a lender and assets which aren't especially desirable to a lender. You can almost certainly borrow elsewhere, but you might be setting yourself up for financial disaster if you do. Is there any particular reason why you want to take on a huge financial burden at a time when your financial future is so uncertain?
posted by Lolie at 12:49 PM on July 6, 2009

my fiancee is self-employed but has only been officially this way for the past couple months and they can't include her former salaried position as income on the loan application

Ding ding ding! We have a winner! It's because you can't document two years* income from a steady source. If your fiancée had moved to another employer in the same type of work, you, most likely, wouldn't have a problem. However, since she's now self employed, she'll need to document two years* of self employment income.

This also: You need to be able to make mortgage payments on both the current house and the new house, which seems like it would not be do-able on that kind of income. The lender will count both mortgages against you until they have proof that the house is sold or is being sold concurrently with your purchase or proof that the house has been rented. If it's rented, any income or loss of income will also affect your income to debt ratios.

Do any lenders still do low or no documentation loans? Finding one of them is your best bet. You'll probably have to put more money into your down payment.

Regarding mortgage brokers: their fee is not always free. It can come out of your or the sellers (or both) loan proceeds. However, one may be your best bet on finding a lender that will fit your needs.

*Might be more or less length of time depending on the lender
posted by deborah at 4:14 PM on July 6, 2009

I don't know what I would have done without my mortgage broker. I just graduated from law school and had to deal with student loans and not working full-time very long. He worked with my boyfriend and me to get our debt to income ratio within the guidelines and really just made the process super painless.

If you need a referral, I would be happy to provide one - just email me.
posted by miss meg at 7:23 PM on July 6, 2009

It's rough when a company turns you down. For me it has been helpful to understand the logic.

There is a domain called Corporate Finance, which studies these kinds of contracts. E.g. Tirole, J. (The theory of corporate finance) shows mathematically what are the logical conditions for giving a loan.

Keeping it simple. The crucial factors are

1) The size of investment (I)
2) You must have a certain amount of personal capital (A)
3) You must have an incentive to behave. I.e. even if things go wrong, your private benefit (B) (in case you weasel out) should be smaller than the utility you get from behaving. In other words, they cannot ultimately know if you (as an individual) are reliable, but they can create a contract which makes the borrower (reliable or unreliable) behave.

The model above is an entity (a function), and then its all conditions must be fulfilled. Otherwise, it is possible that the borrower will misbehave. From your stand point, no 3. is problematic

- Your fiancee as an entrepreneur might face a situation, where she would not have an incentive to continue paying the debt (I-A), if the cash flows from her business went down. If she was an employee, her contract with the employer would make sure that her risk of losing this incentive is smaller. This estimate is forward looking, not historical as they try to evaluate your behavior in the future.
- In their records, you are a student without a job, and thus your future incentive to keep on paying back the debt is also questionable. This will change of course when you get a permanent job, as it would give you a permanent incentive.

--> As an outcome, it is possible to calculate a limit (A), which tells how much money you should have in order to get a mortgage without having a permanent job. Unfortunately, when your incentives get smaller, the letter A increases a lot! Thus, a permanent job is many times more important than a lump sum of money as a collateral.

What to do?

The companies rarely calculate these issues for every customer, they have pre-set/fixed rules.

a) Thus, ask your friends what conditions they have, and what company they are using.
b) Try companies, the client/mortgage pool of which differ from each other. They might have different policies. If the companies have similar customer pool, they are likely to have similar risk exposure and thus similar policies.
c) Remember that the financial crisis changed everything. The rules are stricter than earlier, as your company is a borrower too, and have also difficulties in getting funds.
d) Get a piece of paper, which proves you have a permanent job with reasonable salary for no. 3) or make a smaller investment for no. 1).
e) Do not take it personally, as it is bad business for a company not to give you a mortgage. Thus, there is a reason. Instead, try to find another door.

Hope this helps!

posted by Doggiebreath at 10:04 PM on November 30, 2009 [1 favorite]

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