home loans that are surprisingly small

sheilajoyce_gwOctober 8, 2012

Our two sons have applied for pre approval for a new to them home mortgage over the past couple of years. Our youngest just got back a pre approval for a $300,000 loan for New York City. He makes well into the 6 figures annually as a base pay, and the only debt he has is school loans for graduate and law school. He has been making payments on them for the past 5 years since he graduated.

What is with these impossibly small loans?

I did hear half of a radio interview with financier Zandi who said, if I remember correctly, that banks currently prefer to lend to other institutions where they make more money than to individual home buyers who will have 30 year loans at record low interest rates.

It is a vicious circle. The new home buyer cannot get into the market. The economy's recovery needs home buyers. Any advice?

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"that banks currently prefer to lend to other institutions where they make more money than to individual home buyers who will have 30 year loans at record low interest rates. "

Very few lenders hold the loans they make.

The vast majority end up sold into the secondary market.

Sounds like you picked banks that are not interested in trying to make money originating loans.

You are also in NYC, home of lots of stupid banks that are only interested in quick profits without dosing any work.

A $300,000 mortgage in NYC is pitifully small, and not likely to make any lender very much money (even when sold).

How much did they ask for?

    Bookmark   October 8, 2012 at 6:34PM
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Does he have savings? What if he lost his job, how would he pay the mortgage? Does he have 20%+ for a downpayment? Maybe at this time your son has a high income, but not enough saved to make the bank comfortable.

The pedulum has swung from one end to the other. A few years ago they gave mortgages and home equity loans to anyone - that didn't work out too well for the economy or the taxpayers. I would rather see this return to tighter lending requirements than the crazy stuff of the bubble years. What is wrong with cutting back and saving every penny for a few years? This is how we used to do it not too long ago ...

    Bookmark   October 8, 2012 at 7:17PM
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He would like to buy a 2 bedroom condo or house in Brooklyn. That means about $1 million. He does not have the 20% down now but he will in the next year. He makes a very good salary, and no, he cannot afford to live well and not work as he is NOT a trust fund baby or anything like that. He has been paying on his student loans and investing the maximum for his retirement in an IRA. It is just odd to me that this major bank, which works with his firm, is willing to lend such a small mortgage.

    Bookmark   October 8, 2012 at 7:53PM
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I believe it may be low because he doesn't have a downpayment for a higher priced house.
Most banks want to loan no more than 80%, if he doesn't have $200k, the bank will approve him for his level of qualification.
At $800k, he is looking at jumbo, I think the limit for conforming is $729K.
He should apply when he has a good financial app.

    Bookmark   October 8, 2012 at 8:55PM
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Banks not only take into account the salary, they also consider the debt of the person applying for the loan. In your son's case, his student loans count as debt. I've attached a link to a mortgage lending debt to income ratio guide so you can see why your son qualified for what he did. Most banks want to see up to 33% of monthly income used for all debts - mortgage, interest, taxes, and in your son's case, his student loans. A million dollar purchase price, with 20% down leaves a balance of 800k, not to mention closing costs, title fees, insurance, etc. Just for argument's sake, we'll use the 800k. An 800k mortgage at 3.75% interest, not counting taxes, insurance, etc is 3704.92 per month, or $44,459.04 per year. Given this example, with fuzzy math, in order to get a 800k mortgage, he would need to make $133,377.12 to just cover principal and interest. The closer to this amount he makes, the less of a loan he would be approved for because he also has to figure taxes, insurance and all the other goodies in with the loan PLUS he has those student loans. My guess is that the student loans are what's affecting him. He can always ask the mortgage lender what he could do to get a higher amount. Does it make more sense now?

Here is a link that might be useful: Mortgage guidelines

    Bookmark   October 8, 2012 at 9:45PM
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So, he doesn't have enough for a 20% downpayment ... Why should he get a higher loan when he can't afford it yet? When did things change and make people so entitled? Instant gratification for everything!

We had no debts, good previous buy/sell history, savings, salary, top credit, etc, etc and the banks expected no less than 35% down from us when we bought last year. We then made major additions/improvements with cash. Why should it be any different for your son? He needs to sacrifice a bit and make saving for a house his main priority. As a young guy making a good salary in NYC, I'm sure he spend plenty on having fun ... time to set priorities and be an adult.

    Bookmark   October 8, 2012 at 11:31PM
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Actually, he works very long days and long weeks. He saves, invests, and also has a down payment account he is building for the 20% he was told to expect to have on hand. He does have student loans he is paying on and has been doing so since he finished law school years ago. He was making an initial inquiry about a loan to see what he could expect to get in the way of a mortgage when he finally has his $200,000 down payment set aside. He is not using his savings or retirement for that down payment so he will still have backup funds for any other needs. Perhaps he did not make that clear to the loan officer, I don't know. He is not a man who feels entitled and he works hard for what he has. He has a great job and makes a good salary and there is nothing instant about his earning power or his career. He has worked very hard, Chispa. I don't know where you get the idea that he feels entitled. Your story of needing 35% down, however, is an eye opener to me. I hope he doesn't run into that too.

    Bookmark   October 9, 2012 at 1:47AM
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Your son may very well be the most wonderful son ever born to parents, he may very well work hard and work long hours (who doesn't these days???). those admirable features don't mean squat when applying for long term debt. Other outstanding debt, stability of work history are what matters. earning potential doesn't matter....how many unemployed lawyers have there been these last few yrs???

As previously mentioned, banks sell the loans. 30 yrs, 15 yrs. ... Doesn't make a bit of difference. There is a market.

    Bookmark   October 9, 2012 at 7:13AM
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Could part of it be that he doesn't have the credit? 6 figures and only student loans. Is/are there other things like credit cards, rent, cars, etc. that he has used to establish a decent credit score?

    Bookmark   October 9, 2012 at 8:21AM
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Your numbers are NOT adding up.

20% down on a 1,000,000 is $200,000.

That leaves him with an $800,000 mortgage.

That is up in jumbo mortgage territory, we over the conforming limit for Fannie or Freddie.

The loan is not generally salable in the secondary market since it is 'non-conforming.'

The $30,000 is conforming, but not large enough to attract many lenders.

The origination costs are going to eat much of any profit even when they sell it into the secondary market (and recover most of their cash).

Tell him to set his sights lower for his first house.

You rarely get the golden ring the first time around.

    Bookmark   October 9, 2012 at 8:42AM
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Hi again Sheila. Maybe your son should look at it another way. My husband and I made into the 6 figures last year but we had other bills - a car payment, a few small credit card bills, etc. While we were approved for more than your son, we decided to buy a house just based off of my husband's income, so if anything were to happen, either of us could cover the bills. I'm sure your son is great at what he does but with the economy being what it is these days, he has no guarantee that he will have the same high paying job tomorrow. If God forbid he lost his job, how would he pay for that million dollar mortgage? The bank approved him for what they feel is going to work for him. If he would've qualified for more, he would have gotten more. I think he needs to set his sights a little lower, maybe get a studio or one bedroom and move up a little later on in life. By choosing a condo or apartment, the HOA dues or apt fees will also affect what he can spend on his home, though. He'll need to keep that in mind. He chose one of the most expensive cities to buy in - it's not the lender's fault that he might not be able to afford it. I think people have become accustomed to banks giving freely with no basis for what they're giving out. This is what got us into the mess we are in now. Think of it as a good thing that the banks are being cautious now and lending what we can actually afford. Hopefully it'll help to prevent this from happening again and is also a safety net for your son should anything happen down the road.

    Bookmark   October 9, 2012 at 11:53AM
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I agree, Shed, and I guess he will be renting a lot longer than he hoped. He pays off his credit cards monthly, and he has used them for years, so he does have something of a credit history. It wasn't so long ago that the real estate columns for NYC touted a philosophy of not buying -- ever. He will have plenty of time to save for a larger down payment and be able to rent for many years before buying, if he ever does decide to buy.

    Bookmark   October 9, 2012 at 2:35PM
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Sheila, the mortgage officer should be able to tell him why his pre approval is so low. It doesnt seem to add up to me. If he's making six figures and has a credit history, perhaps the debt to income ratio is off. Perhaps he has more bills than you know about?

    Bookmark   October 9, 2012 at 7:21PM
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"six figures" can be anywhere from $100,000 to $999,999. It would help to know where the son fits in here.

I was never very comfortable with debt, and the most we had was twice our gross income.

    Bookmark   October 9, 2012 at 8:55PM
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My guess is it is the debt to income ratio. Also, even though he pays off his credit cards every month, the credit report will show what was charged the last month along with the minimum payment for that month as part of his debt. So if he charges everything every month, the credit report may show he has credit card debt of $5,000 or whatever.

    Bookmark   October 9, 2012 at 9:53PM
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In addition to Debt to Income ratio, is it possible cost of living in NYC also is a factor of the equation?

Low 6 figures in NYC definitely is not high income. Our younger one graduated from B-school recently, it seems his classmates working in NYC each makes low 6 figures base salary. He is renting a tiny apt., working grueling hours, living frugally to pay back student loan. We joked as a "working poor", he would have to wait for 10 years before buying his first place. It is the reality he is facing when lives in the most expensive city in the U.S.

    Bookmark   October 10, 2012 at 2:59AM
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