> $840K mortgage with 20% down for a $1.05M offer. House not appraised yet, but almost certainly above offer price since all comps from the realtor are $1.2M.
That's over four times their demonstrable annual earnings (if your earnings are as inconsistent as this, a bank is not generally going to care very much about what you were earning two years ago). Totally unsurprising that they were turned down, surely?
Also unclear whether this is earnings from a job or something else (the "adjusted gross income" would make me suspect at least partially something else). In a time of uncertainty, banks are going to be cautious, and some lenders realistically don't want to touch self-employed etc at all.
There was also a tweet saying how much of the last year was investment income, but I can't find that and Twitter actively makes that hard to search for.
A small bank or S&L that services the loan after issuing is more likely to issue the mortgage. And it’s more likely to benefit the community compared to a big bank. Worked for me.
Banks were lending seven times annual earnings as of 2021. I have not seen updated numbers, but four times earnings is likely on the lower end of the average loan to income ratio.
Yes. However, it doesn't actually say much about affordability because interest rates drive such a large percentage of costs.
A $285,000 mortgage (ignoring taxes+fees) would be $1,126/month at 2.5% APR but $1,618/month at 5.5%. If you use "conventional" lending standards a borrower with a household income of around $39k could qualify at 2.5%, but at 5.5% the income requirement would jump up to around $55k. The ratio drops from around 7.3 to 5.1.
>> Few variables are missing here like the mortgage amount you are asking for and the upraised value of the house.
> [numbers] But we didn't even get to that state with this lender.
> They excluded all my business income because it’s too inconsistent. Quote: “Your business income is too inconsistent. Only usable income is capital gains $14,527 + $780 rental income.”
Didn't get to house details, income was treated as $15k which is under the poverty line.
Gotta love the e-mail with the 2 sentences pressed together without punctuation (there should've been a period before the "We are not..."). Have education standards fallen that low that someone who writes like that is allowed to be customer-facing?
> What happened to saving for something, and then when you have the needed money, buying it out of pocket?
For buying houses? There was never an era where that was a particularly normal thing to do; in most countries home ownership becoming common came about as a result of mortgages.
> I know I will never be able to buy a house. That is why I rent.
It really depends on your local market, but for my specific case (France, Paris area), it's cheaper to buy if you stay there for ~5 years than to rent. I had some extra help from government programmes encouraging homeownership, town redevelopment and new constructions through lower taxes/cheaper loans, IIRC the generic advice for my area is ~6-7 years. Also it's technically not a mortgage because the place itself isn't collateral and it won't be immediately repossessed if I stop paying the bank, but that's just how things work here. Loan rates being what they are, there's very little incentive to save upfront for decades to be able to buy outright.
But without knowing what his sources of income are, it's quite possible it's not a nice stable W2 income, but rather self-employment and/or some weird crypto returns, etc.
Hilarious when the banks give out NINJA loans in 2006 and everyone complains about their crappy lending standards, then banks reject mortgage applications and the same folks are up in arms that they didn't just approve on the spot.
> Hilarious when the banks give out NINJA loans in 2006 and everyone complains about their crappy lending standards, then banks reject mortgage applications and the same folks are up in arms that they didn't just approve on the spot.
I don't follow. What is humorous about saying loans should do verification and that this guy has enough income demonstrated over multiple years to qualify for a loan? There is no contradiction there.
Yes there is, the guy's tweet showed his AGI per year - nothing more. No indication of source. Check his prior tweets - he wrote e-books, he mentioned how much his income fluctuates. Those are all red flags for typical mortgage lenders.
He got rejected because banks cater to certain types of customers. If his income was all W2 statements and clearly 100% salary he'd be fine. But it's not.
Hell, even trying to get a loan based on an AGI where 50% is a performance based bonus can be hard. That will be discounted heavily since there is no guarantee you'll make that much money next year.
It's only a contradiction if you treat lending standards as a single measurement of strictness, one number that goes up and down.
Claim A is that they're being too strict about type of income. Claim B was that they were being too loose about amount of income. It's rational to believe both claims at the same time.
> Claim B is not being "too strict" it's being "strict"
It's a spectrum, so it doesn't matter what a particular level is called. Claim A wants a reduction in one type of strictness, Claim B wants an increase in a different type.
> which is logically the solution to Claim A "too loose with lending standards".
The idea, for someone making both claims, is that they are being strict about the wrong things.
Being strict about income source is NOT a solution to being loose about income amount.
The mortgage crisis wasn't caused by giving too many loans to high-income contractors.
This tweet (from the reply thread) has the answer[1]:
>[Mortgages are easy to get in the US] Only if you're employed. Most mortgage lenders here are middlemen who sell your mortgage to Fannie and Freddie, and they have pretty strict guidelines on what they'll buy.
That is, most lenders don't actually use their own judgment about what counts as high risk or what is an appropriate interest rate to charge, but are simply planning to resell to Fannie/Freddie, and thus copy-paste their standards.
This ... was a shock to me. I had always assumed "banks are happy to lend to anyone who doesn't need the money". Then I retired on crypto gains and tried to get a mortgage (mid-late 2020), where I saw the very same disconnect -- even with liquid assets more than twice enough to buy the place outright, it didn't matter. Nor did arbitrarily increasing the down payment. Anything above 50% down didn't affect the rate, and even then I'd pay above 5% interest, when conventionals were getting under 3%.
To show you how absurd it is, the FatFIRE[3] people advocate getting around this by setting up a trust that pays your own assets right back to you.[2] Apparently, if the trust would live for 3 years, and you've already taken two months of this "income", Fannie considers that just as good as a super-reliable W2 income, and will treat it as conventional. Then, you dissolve it after buying and invest the money like you would have before.
I ended up just paying cash for the place, which has its own advantages: you can beat out tenuously-financed offers with a lower bid, and you avoid some of the closing costs and mortgage expenses. It still would have been nice to lock in 30 years of 2.8% interest to apparently-clueless banks.
Final note: This guy should be able to get a loan, since, even with the income fluctuations, it's consistently high, but yeah, it wouldn't be conventional with the absurdly low 30-year-fixed rates.
Not really surprising, since as you put it, most mortgages are cookie cutting products that have a long checklist of qualifications. They are designed for W2 income earners and if you step off that well-worn path, they can't help you.
Others can help you, but you won't be able to access the typical residential mortgage market.
Depends on what your model is. If your model is, "banks want easy money, and will lend to low-credit risk people" then it is surprising, because the same risk should get the same rate. Finding out that the market is dominated by an entity with artificial constraints on its lending standards, and which doesn't care about long-term interest rate risk, is then a surprise.
>Others can help you,
Not really. The other alternatives get a loan, but not at the Fannie-subsidized sub-3% rate.
> If your model is, "banks want easy money, and will lend to low-credit risk people" then it is surprising, because the same risk should get the same rate.
Well, yes, banks _do_ want easy money. And lending to someone with 10 years consistent employment history is much easier than lending to someone with a complex self-employment situation; the former is likely largely a case of looking up risk tables, whereas the latter likely involves significant work by a human specialist.
Like, maybe the person in the tweet _does_ have the same risk as, say, the average person earning the same average income, but there's no way for the bank, or the tweet reader, to know that without substantial work.
Even in countries which doesn't have a Fannie Mae equivalent, self-employed mortgage lending is generally treated specially.
>And lending to someone with 10 years consistent employment history is much easier than lending to someone with a complex self-employment situation;
But that doesn't explain my situation, where the 30 years of mortgage payments are already there, with no need to validate income history.[1] And before you argue, "but you could go to Vegas and bet it all on black", a) that wouldn't explain why Fannie suddenly becomes okay with it if you set up that artificial trust, and b) the conventional mortgagee has at least the same risks to being able to keep up that income.
>Like, maybe the person in the tweet _does_ have the same risk as, say, the average person earning the same average income, but there's no way for the bank, or the tweet reader, to know that without substantial work.
I addressed that -- even if he increased the down payment to get risk parity, he would still pay a huge interest rate premium over conventional.
>Even in countries which doesn't have a Fannie Mae equivalent, self-employed mortgage lending is generally treated specially.
Other countries don't have a Fannie equivalent, in the sense of "lender that makes artificially-low-interest, 30-year-fixed mortgage loans". In those countries, I (or the tweet author) would establish that my loan has risk parity with the lowest-risk mortgages and would get the lowest rates. But in the US, even if this guy worked with a bank, who validated that he was such a low risk, they wouldn't be able to sell it to Fannie, and he'd have that huge (or variable) risk premium.
>They should be going to a specialised lender.
On that point, agreed, but it wouldn't change the core insight about Fannie being a "stupid" lender that can get people artificially good terms for stupid reasons.
[1] And, in case it matters, Fannie only looks at about 2 years of history, from whence they conclude that you'll definitely earn that much more for 30 years.
I think the key is that banks generally dont hold mortgages on their books (there are exceptions for some customers).
As such they need a buyer for those mortgages and the buyer wants mortgages that conform to a standard so they can be packaged into bonds and sold off.
Despite you being a good credit risk, you're just not the "right" customer for them. In your words, you're not "easy money" for them because easy money is originating the loan then selling it off to make it someone else's job.
Well, for these types of situations, there are other lending facilities. You can borrow against assets if you have lots of liquid assets (e.g., stock that you cannot sell due to cap gains).
This is very common for stock-rich-income-poor workers who have long term stock comp. Of course, doing that encumbers the stock/asset rather than the house, which isnt exactly the same, but you still get the money to buy a home.
I've heard of people using their line of credit based on equity holdings and the interest rate can be pretty close to prime, but obviously isn't fixed.
I considered those, but they have variable rates (which are likely to be much higher than 2.x% over the 30 year term) and risk being margin-called during a crash.
That wouldn't work in my scenario since I had already quit and the gap in W2 makes you suddenly high-risk. But yes, the fatFIRE people recommend getting the mortgage before you retire, which is what I should have done.
I agree with claytongulick's point too, I'd feel bad about applying anywhere with this intent.
Nothing new? Even getting a mortgage in 90s and early 2000s was difficult when self-employment.
As an employee I am struggling to get a small mortgage (1/4) for a house abroad in my home country. Having more than half of the house price doesn't matter :(
It’s kinda new. In the late 1990s after quitting my job I got a mortgage. They had all types (my favorite offer was one where you just paid back interest for 30 years and at the end owed the whole principal again). But back then as long as you put 20% down you were ok.
Then we had a mortgage crisis where too many people were defaulting…
This is to be expected. For mortgages, absolute amounts matter much less than long-term predictability (especially so in these times). A government employee with 65k salary has better chances for mortgage approval than a contractor bringing in 150k.
The 1099 vs W2 issue is a huge problem with mortgages. I used to have my own company, and I was paid 1099 for consulting. I’ve had the business for five years and it was profitable. however the Bank would not give me a conventional loan, so I changed things around and made myself my own W-2 employee.
Started issuing myself paychecks and taking taxes out, and three months later I went back to another bank and they were happy to give me a 30 year fixed conventional.
This is why I always recommend working with a mortgage broker instead of directly applying with banks - especially if your source of payments is not a 9-to-5 salaried job. Not every bank wants or is set up to handle your business, and the broker’s job is to find the lenders who do.
I’m sure the poster will be able to obtain a mortgage, just perhaps not by direct application to banks.
How is there not a company specializing in mortgages for people who don’t have 3 years of W2’s?
Some of the situations I’m seeing in the threads below seem like no-brained, low risk loans that would be free money to a bank.
If it’s a question of modeling risk, is it purely a function of banks not having the tools to model non-W2 earnings?
The whole thing seems absurd, but there has to be a reason for it. Regulation? Past financial crisis? Fat and happy banks loaning to W2’s? Wealthier people not needing mortgages?
47 comments
[ 3.3 ms ] story [ 88.9 ms ] threadhttps://twitter.com/dvassallo/status/1513685250655760384
Also unclear whether this is earnings from a job or something else (the "adjusted gross income" would make me suspect at least partially something else). In a time of uncertainty, banks are going to be cautious, and some lenders realistically don't want to touch self-employed etc at all.
https://twitter.com/dvassallo/status/1513683918058262528
There was also a tweet saying how much of the last year was investment income, but I can't find that and Twitter actively makes that hard to search for.
A $285,000 mortgage (ignoring taxes+fees) would be $1,126/month at 2.5% APR but $1,618/month at 5.5%. If you use "conventional" lending standards a borrower with a household income of around $39k could qualify at 2.5%, but at 5.5% the income requirement would jump up to around $55k. The ratio drops from around 7.3 to 5.1.
https://www.longtermtrends.net/home-price-median-annual-inco...
>> Few variables are missing here like the mortgage amount you are asking for and the upraised value of the house.
> [numbers] But we didn't even get to that state with this lender.
> They excluded all my business income because it’s too inconsistent. Quote: “Your business income is too inconsistent. Only usable income is capital gains $14,527 + $780 rental income.”
Didn't get to house details, income was treated as $15k which is under the poverty line.
I know I will never be able to buy a house. That is why I rent.
But people being able to bid higher on houses (because they can and do get higher mortgages) drives prices up even more... so that is no solution.
For buying houses? There was never an era where that was a particularly normal thing to do; in most countries home ownership becoming common came about as a result of mortgages.
It really depends on your local market, but for my specific case (France, Paris area), it's cheaper to buy if you stay there for ~5 years than to rent. I had some extra help from government programmes encouraging homeownership, town redevelopment and new constructions through lower taxes/cheaper loans, IIRC the generic advice for my area is ~6-7 years. Also it's technically not a mortgage because the place itself isn't collateral and it won't be immediately repossessed if I stop paying the bank, but that's just how things work here. Loan rates being what they are, there's very little incentive to save upfront for decades to be able to buy outright.
But without knowing what his sources of income are, it's quite possible it's not a nice stable W2 income, but rather self-employment and/or some weird crypto returns, etc.
Hilarious when the banks give out NINJA loans in 2006 and everyone complains about their crappy lending standards, then banks reject mortgage applications and the same folks are up in arms that they didn't just approve on the spot.
I don't follow. What is humorous about saying loans should do verification and that this guy has enough income demonstrated over multiple years to qualify for a loan? There is no contradiction there.
He got rejected because banks cater to certain types of customers. If his income was all W2 statements and clearly 100% salary he'd be fine. But it's not.
Hell, even trying to get a loan based on an AGI where 50% is a performance based bonus can be hard. That will be discounted heavily since there is no guarantee you'll make that much money next year.
Claim A is that they're being too strict about type of income. Claim B was that they were being too loose about amount of income. It's rational to believe both claims at the same time.
It's a spectrum, so it doesn't matter what a particular level is called. Claim A wants a reduction in one type of strictness, Claim B wants an increase in a different type.
> which is logically the solution to Claim A "too loose with lending standards".
The idea, for someone making both claims, is that they are being strict about the wrong things.
Being strict about income source is NOT a solution to being loose about income amount.
The mortgage crisis wasn't caused by giving too many loans to high-income contractors.
>[Mortgages are easy to get in the US] Only if you're employed. Most mortgage lenders here are middlemen who sell your mortgage to Fannie and Freddie, and they have pretty strict guidelines on what they'll buy.
That is, most lenders don't actually use their own judgment about what counts as high risk or what is an appropriate interest rate to charge, but are simply planning to resell to Fannie/Freddie, and thus copy-paste their standards.
This ... was a shock to me. I had always assumed "banks are happy to lend to anyone who doesn't need the money". Then I retired on crypto gains and tried to get a mortgage (mid-late 2020), where I saw the very same disconnect -- even with liquid assets more than twice enough to buy the place outright, it didn't matter. Nor did arbitrarily increasing the down payment. Anything above 50% down didn't affect the rate, and even then I'd pay above 5% interest, when conventionals were getting under 3%.
To show you how absurd it is, the FatFIRE[3] people advocate getting around this by setting up a trust that pays your own assets right back to you.[2] Apparently, if the trust would live for 3 years, and you've already taken two months of this "income", Fannie considers that just as good as a super-reliable W2 income, and will treat it as conventional. Then, you dissolve it after buying and invest the money like you would have before.
I ended up just paying cash for the place, which has its own advantages: you can beat out tenuously-financed offers with a lower bid, and you avoid some of the closing costs and mortgage expenses. It still would have been nice to lock in 30 years of 2.8% interest to apparently-clueless banks.
Final note: This guy should be able to get a loan, since, even with the income fluctuations, it's consistently high, but yeah, it wouldn't be conventional with the absurdly low 30-year-fixed rates.
[1] https://twitter.com/AzazelAyers/status/1513784320225206272
[2] https://www.reddit.com/r/fatFIRE/comments/ojs18l/obtaining_a...
[3] FIRE = financially independent and retired early
(Throwaway because of personal details.)
Others can help you, but you won't be able to access the typical residential mortgage market.
Depends on what your model is. If your model is, "banks want easy money, and will lend to low-credit risk people" then it is surprising, because the same risk should get the same rate. Finding out that the market is dominated by an entity with artificial constraints on its lending standards, and which doesn't care about long-term interest rate risk, is then a surprise.
>Others can help you,
Not really. The other alternatives get a loan, but not at the Fannie-subsidized sub-3% rate.
Well, yes, banks _do_ want easy money. And lending to someone with 10 years consistent employment history is much easier than lending to someone with a complex self-employment situation; the former is likely largely a case of looking up risk tables, whereas the latter likely involves significant work by a human specialist.
Like, maybe the person in the tweet _does_ have the same risk as, say, the average person earning the same average income, but there's no way for the bank, or the tweet reader, to know that without substantial work.
Even in countries which doesn't have a Fannie Mae equivalent, self-employed mortgage lending is generally treated specially.
They should be going to a specialised lender.
But that doesn't explain my situation, where the 30 years of mortgage payments are already there, with no need to validate income history.[1] And before you argue, "but you could go to Vegas and bet it all on black", a) that wouldn't explain why Fannie suddenly becomes okay with it if you set up that artificial trust, and b) the conventional mortgagee has at least the same risks to being able to keep up that income.
>Like, maybe the person in the tweet _does_ have the same risk as, say, the average person earning the same average income, but there's no way for the bank, or the tweet reader, to know that without substantial work.
I addressed that -- even if he increased the down payment to get risk parity, he would still pay a huge interest rate premium over conventional.
>Even in countries which doesn't have a Fannie Mae equivalent, self-employed mortgage lending is generally treated specially.
Other countries don't have a Fannie equivalent, in the sense of "lender that makes artificially-low-interest, 30-year-fixed mortgage loans". In those countries, I (or the tweet author) would establish that my loan has risk parity with the lowest-risk mortgages and would get the lowest rates. But in the US, even if this guy worked with a bank, who validated that he was such a low risk, they wouldn't be able to sell it to Fannie, and he'd have that huge (or variable) risk premium.
>They should be going to a specialised lender.
On that point, agreed, but it wouldn't change the core insight about Fannie being a "stupid" lender that can get people artificially good terms for stupid reasons.
[1] And, in case it matters, Fannie only looks at about 2 years of history, from whence they conclude that you'll definitely earn that much more for 30 years.
As such they need a buyer for those mortgages and the buyer wants mortgages that conform to a standard so they can be packaged into bonds and sold off.
Despite you being a good credit risk, you're just not the "right" customer for them. In your words, you're not "easy money" for them because easy money is originating the loan then selling it off to make it someone else's job.
This is very common for stock-rich-income-poor workers who have long term stock comp. Of course, doing that encumbers the stock/asset rather than the house, which isnt exactly the same, but you still get the money to buy a home.
Just get a job for 6 months and then get the loan. After you close, put your 2 weeks in.
Do you understand the cost to them for something like this?
I agree with claytongulick's point too, I'd feel bad about applying anywhere with this intent.
As an employee I am struggling to get a small mortgage (1/4) for a house abroad in my home country. Having more than half of the house price doesn't matter :(
Then we had a mortgage crisis where too many people were defaulting…
Started issuing myself paychecks and taking taxes out, and three months later I went back to another bank and they were happy to give me a 30 year fixed conventional.
I’m sure the poster will be able to obtain a mortgage, just perhaps not by direct application to banks.
Some of the situations I’m seeing in the threads below seem like no-brained, low risk loans that would be free money to a bank.
If it’s a question of modeling risk, is it purely a function of banks not having the tools to model non-W2 earnings?
The whole thing seems absurd, but there has to be a reason for it. Regulation? Past financial crisis? Fat and happy banks loaning to W2’s? Wealthier people not needing mortgages?