IT’S ABOUT PERSPECTIVE
The renowned Rob Chrisman provides a daily market commentary on the mortgage industry. He recently posted this, written by Brooklyn high school student Chanie Gorkin. It inspires some thoughts about, yes, obtaining a mortgage.
Today was the absolute worst day ever
And don't try to convince me that
There's something good in every day
Because when you take a closer look,
This world is a pretty evil place.
Some goodness does shine though once in a while
Satisfaction and happiness don't last
And it's not true that
It's all in the mind and heart
True happiness can be obtained
Only if ones surroundings are good
It's not true that good exists
I'm sure you can agree that
It's all beyond my control
And you'll never in a million years hear me say that
Today was a good day
Now read that from the bottom up.
Of course the piece is about perspective and attitude, etc. And while those are all important for everyone every day, let’s focus on the from a different direction aspect.
Many people think that the best possible situation is having no installments loans (like car loans, boat loans, student loans or mortgages), no credit card debt, and no other monthly bills. While that may be personal financial nirvana, to a mortgage underwriter, it is definitely not.
When you apply for a mortgage, the Underwriter essentially has the final “say”. S/he will review your application and basically determine, among other things, if you are a good bet to repay the loan. The main way of making this determination is by examining your past credit history and seeing how you handled and have been currently handling debt.
So, for example, if you have a credit card with a $10,000 maximum and you use it regularly and pay if off every month or keep a balance that is less than 30% of your credit limit, you are a Superstar in the eyes of the mortgage Underwriter! AND, you will appear to be a better risk than that nirvana person above who has NO debt or credit history. This is sort of like reading from “the bottom up”, isn’t it? Come on, be with me here! ☺
Underwriters also tend to like the Prodigal Son sort of borrower, too. Suppose you messed up your credit big time. Maybe you had a tragic incident like death of a loved one, divorce, the heartbreak of psoriasis, etc. and you stopped paying bills, for any number of reasons. If that was quite some time ago and you have “reestablished good credit” and that is documented on your credit report, you are also a bit of a credit Superstar. But check with your superlative Mortgage Loan Officer for details like time frames, overall FICO scores, etc. before you classify yourself with Brad Pitt.
It has recently been reported that many people, especially Millennials, feel they should pay off all credit card debt and cancel the card. But let’s review the components of your FICO score. 35% of your credit score is based on your payment history; 30% is on amounts owed; 15% is related to the length of credit history; 10% is new credit; and 10% is based on types of credit. You’ll notice that it does not list “paying off and cancelling cards” anywhere.
Regarding “types of credit”, installments loans always trump credit card debt. (I could NOT complete this article without at least one reference to the Donald!) But while Millennials often have student loans, they less frequently have home loans or car loans. Not to worry! Advantage Credit recently released Rapid Rent Reporting, a tool that enables rent payments to become part of credit reports and FICO scores. Of course, for those Millennials who live at home rent-free with mom and dad, they may need to consider that Prius car loan instead. Wait! We’re doing things from a different perspective here – make it a Maserati car loan!
We’ll continue to look at mortgage application approval by examining the home to be purchased. In a previous blog, we discussed the White Elephant – the property that is expensive, unprofitable, and hard to sell, probably because it is overbuilt for its neighborhood. Let’s examine this one from the bottom up.
Mortgage Underwriters are typically charged with examining things from the worst case scenario – they are obviously NOT reading the piece at the start from the bottom up! Therefore, you are essentially guilty until proven innocent via your credit worthiness, income, assets, and viability of the property. As a guilty person, you may buy a Taj Mahal in Kunkletown, PA and then decide it was a bad idea and walk away. That means that the lender forecloses on the property and then THEY own it. And since the lender probably won’t easily find anyone who wants to live in a mansion in Kunkletown, PA, they have difficulty selling the property and that costs them money – to maintain the estate, to pay the taxes, to advertise the property for sale, etc.
Mortgage lenders want to finance good, safe properties that will be easy to sell if you decide you do not or cannot continue to make your payments. So when you look to buy a new home, think from the bottom up. Consider the “end” – whether you want to sell the house at some point, or if you choose or are forced to abandon the property and its mortgage. Ask yourself if this very different, unique, nontraditional property can be easily resold because it is typical for the neighborhood and in good condition. If not, perhaps you’d be better off seeking a different property (if getting mortgage approval is your goal).
There are other quirky issues with properties associated with mortgage approval. In previous blogs, we’ve already covered many other properties that may require a bit of upside down thinking, in terms of financing. But new ones spring up daily. For example, according to the Denver Post, “Colorado's two largest banks — Wells Fargo Bank and FirstBank — say they will not offer any new loans to landowners whose properties have a preexisting lease with a marijuana business.” As my dad used to say (completely unrelated to this topic), “Put that in your pipe and smoke it!”
“Back in the day”, there were no income loans. That meant you did not need to document what you made each month (well, that’s sort of what it meant). While those days may starting to be back again, that is not the case for the majority of home loan lenders. Therefore, whatever you earn is what you can prove that you earn.
We had a client once who worked for a local hardware store and claimed he made $300,000. (No, he didn’t own the store.) He and his brother decided to buy a house together. This gentleman applied for the mortgage alone because, after all, he had plenty of income. The problem was that he didn’t document that income. It turns out that he and his brother also made hand-crafted furniture for people and were paid “off the books”. They were not applying for a no income loans, so using just his documented income of $30,000 per year, he didn’t qualify. The problem was easily resolved by adding his brother’s income from his full time job. But this was after some pushing, whining and complaining by the applicant who had not originally viewed the application process from the bottom up -- from the underwriter’s and lender’s view point.
What I’ve been trying to illustrate here is that it is often necessary to take a different perspective, to see issues through the eyes of a different person (or company), to turn your thinking around. Consider this. Suppose you get a super-hot lead on a property. Maybe that property is a house in Colorado on 50 acres, some of which is leased to a pot industry and the rest of which you want to use to build a workshop to make furniture. Suppose, too, that you have no established credit or the little you do have is bad – late payments, max usage, one new line opened after another, etc.
You feel certain you can handle significant monthly payments (although your bank statements may not agree with you) and you go from lender to lender only to hear nothing positive at all! Your last resort is your local bank where you’ve had an account with at least $100, but no more than $500, in it for 10 years and 5 or 6 “bounced checks”.
Now suppose you own the bank. Would you lend an unknown you money? I didn’t think so. Now THAT’S a “Bottoms Up” perspective!
Sadie and Rose were sitting under hair dryers at the hairdresser having a chat.
Sadie says, "So Rose, how's that daughter of yours?"
Rose replies, "She's okay thanks. She married a fantastic man. He's got such a good job in the City that she gave up her secretary's job. She stays at home but never needs to cook, because he always takes her out, or clean the house, because he got her a maid, or worry about my two lovely grandchildren, because he got her a live-in nanny."
Sadie then asks, "And how's your son?"
Rose replies, "His life is awful. He married a witch. She never cooks anything and makes him take her out to dinner every night. God forbid she should vacuum a carpet, so she made him get her a maid. He has to work like a dog because she refuses to get a job and she never takes care of my grandson because she made him get her a nanny."