If you think getting a loan secured by your home, either a home equity or first mortgage is a piece of cake it might be time to think again.
Over the past several months I have run into several client scenarios where the assumption was that getting mortgage financing for a new home, or to refinance an older mortgage, was a no-brainer. In two recent cases loans were denied where there was significant income (i.e. north of $250,000 per year) and plenty of liquid assets (i.e. well over $2 million); one client is a senior executive at a major technology company.
You might be saying, huh?
Well, in the brave new world of banking, it is more prevalent than you might believe. To get the bottom of the story and why it is happening with increased frequency, I contacted my good friend Robert Wuflestad, who is a very experienced mortgage banker, for some answers.
So, Robert, what is going on right now in the banking world that’s causing so many wealth creators grief?
The simple answer to this question is the industry is still in recovery. The fed is propping up conforming and government loans, but the mortgage crisis virtually wiped out the secondary market for Jumbo mortgages and non-conforming mortgages. Without this secondary market, there is little choice or competition and borrowers are limited to the institutions that have money to lend. Since many of these institutions are still trying to recover from their own problems, they are only willing to lend if they are certain there is little risk AND they are going to make a profit. This gets rather silly at times especially with the big banks because they can be extremely rigid in what they will allow. Competition is emerging and there are some attractive programs available through institutions other than the big national banks, but borrowers must still be able to document income and assets, common sense has been abandoned. Credit scoring can be challenging and you must manage this prior to entering the market.
It appears to me that high levels of assets, even if they are liquid, no longer matter. Is that right?
To get the best rates, if you have the required minimum of assets, generally it doesn’t matter how much more you have. You still must meet the required income, credit and property requirements. The idea of “common sense” guidelines have died, may it RIP.
There are a few regional banks that will lend on the strength of the borrower, but rates may be a bit higher, but even they have to be concerned about new regulations designed to protect borrowers from predatory lending and putting borrowers in position where their income cannot support their debt.
How is credit score playing into the equation like never before?
Credit scoring is considered a huge predictor of the loan risk and the industry has embraced this heavily. The challenge is that it can be highly arbitrary and because most of us don’t really think about it much, it can really be a surprise. I am working with a high net worth client right now who has a below average score because there isn’t enough credit. I have run into situations where clients were completely surprised due to high balances on credit cards, parking tickets, fraud, missed payments, etc… Borrowers are protected by legislation if items show up inaccurately, but when something is legitimate it will cost you. Know your score before you even consider something.
Can you still get jumbo loan financing (i.e. loans over $1 million)?
There are some really compelling programs available for loans up to $5 million. The higher the loan, plan that the guidelines will probably require a bigger down payment, more reserves, and a higher credit score. Since the collateral is so important, lenders will also expect multiple appraisals which will be scrutinized heavily.
What can someone do to avoid being surprised by a loan decline?
Now, more than ever, it is important to prepare a plan in advance. Before you get seduced, know what you are trying to do AND that you have the documented income, qualified assets, and credit score that the process requires. I have found working with executives and high net worth clients that life creates twists, or accountants are smarter at avoiding taxes than the guidelines allow, or they can have complicated situations that need to be simplified for an underwriter to understand. Some of these things can be managed in advance but get really difficult if you are in the middle of a transaction and emotions get ramped up.
The larger banks are using the marketing strategy of requiring custody of assets to access killer financing rates. How does it work and what are the pitfalls for the wealth creator?
Cross selling is a huge strategy to get a bigger “wallet share” of the client. Tying assets to loans and liabilities is a great way to leverage relationships. It can work in a variety of ways depending on the situation, but normally it can look like a low rate on a loan in exchange for collateralization of assets. Essentially, the bank is eliminating their risk and tying up your assets, it is a bit of a shell game. Generally that requires moving the assets to them as the custodian, and sometimes they will make up for the discounted loan for increased fees on the assets. One pitfall is that the assets can be collateralized like a margin loan and your flexibility is quite limited, not to mention that the emotional cost of working within a bureaucracy can be quite high. While the low rate can be rather seductive, Peter Drucker used to repeatedly say, “There ain’t such thing as a good deal, you get exactly what you pay for.”
Is there a difference between banks (i.e. large, regional, credit unions) when looking for financing? Is rate the only consideration?
Competitive rates are important, however that is not the first thing to consider. I mentioned it before, but the most important consideration is your plan and what you intend to do. If you have coordinated your plan with Highland and know what is important, then choosing an individual that can help you do that becomes easier. The large banks have some competitive advantages because of the abilities to lend money, but they are screwed up internally. The regional banks have more flexibility to do things more tailored to a region, but they don’t always have the scale to offer the best rates. Credit Unions are emerging as significant mortgage lenders, but tend to be quite limited. Mortgage Banks will underwrite, fund the loan, and will offer competitive choices from multiple banks, but they do not have a capacity to service the loan. Mortgage Brokers can offer the best rates, but don’t underwrite or fund the loan, so they can be really limited in the capabilities to get things done smoothly. The choice of the institution is more based on who you will work with and their ability to add value to your plan.
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