Even with $1M in net worth, I would have been denied a mortgage
Yep. You read that right.
If I wanted to go in today, and get a mortgage for a rental property or something, they wouldn’t give it to me.
Why? Because banks look at your EARNED income via your T4/W2 statements, meaning a salary.
To banks, salaries = steady income because no one ever got laid off from a job for reasons not of their own making /sarcasm
As someone who takes dividends from her company and earns passive income on the side, I am a huge red flag, a massive risk to banks because .. OMG.. what if she can’t make her bills the next month because she doesn’t have a contract!
Dividends, also do not count – what if all of these companies you’re invested in stop paying the dividend all at once, en masse or went bankrupt over night? You’d have zero income, all of it completely wiped out overnight. Again, COMPLETELY realistic. /sarcasm
I could of course use my current paid off home as collateral against a future mortgage, but strictly speaking, no matter how much money I would have saved at a certain point in my life, they would look at my salary or my T4.
Again, unrealistic but that is how banks function as they have these systems built back in the days when everyone had a job and worked at the same company until they retired.
So, even though you can show you have prodigious savings, a solid work ethic, excellently low expenses and a high income (when you work), you cannot obtain mortgages from the bank based off of feelings.
The only thing, is if you get to know a banker. So, when I went in to ask about a mortgage when I wanted to buy my home, my banker told me she would personally get me a mortgage of $600K.
She took into account my age, my high net worth (at the time I was 33 with half a million in the bank because I was looking at buying a house, and at that time, had a paid off $10K car), my savings rate, my expenses, and my income.
All of it pointed to – very low risk of defaulting.
She was dying to get me a mortgage because she knew it would be easy money for them. I ended up wrinkling my nose at the interest rate and told her I’d just pay cash and be done with it.
A banker who didn’t know me, would not have given me jack squat.
So there you have it. I personally think banks should now take other things into consideration, perhaps whether or not you can provide historical net worth and budgets from the past few years, how much you have saved, invested, etc… rather than just looking at one thing — your salary on a piece of paper.
In a way, it was good. I just paid my house in cash and forgot all about them and their approvals.
I got an idea of what banks think of me as an individual, and now I find it extremely funny they’re tripping over themselves to offer me loans, money up the wazoo and to try and woo me over to their side for my investments.
8 Comments
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Sherry of Save. Spend. Splurge.
It is a huge blow to see all of it happen, and you can’t do anything. I feel for your mom.
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Financial Orchid
I remember being 7 yo sitting on the stage in the school gymnasium in the morning before school started. It was just her n myself there n she asked me, “should Mommy go back to work?”
I was so used to having her all to myself.
I miss her every day.
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Sherry of Save. Spend. Splurge.
Awwww…. that is so sweet. We have the same sort of bond, my son and I. He loves having me 24/7. He cannot imagine anything better.
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Susan Tan
If you’re very determined to buy more rentals or houses, you can use a HELOC on your current home to buy more properties. Or, use your parter’s credit to get title on more properties.
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Sherry of Save. Spend. Splurge.
I can’t use his credit either, he is a freelancer as well and has technically, $0 income
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SP
We are doing a refinance right now to lock in a lower rate, and they insisted on employment verification both at the beginning of the process AND within 3 days of closing… just to be sure we didn’t lose our jobs in the meantime? Weird, but I get the impression that is a COVID related thing since the economy is nuts right now.
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Financial Orchid
Awww this post really hits home. I remember my mom a stay at home mom while I was in elementary school fomo ing hard as she watched interest rates free fall, her early retirement getting pumulled by falling bond yields, n wanting to look for a job again as I started school.
Basically, inflation n low interest rates eroded her savings n slowly killing her “early” retirement plans really.
I remember the time she told me she was denied a mortgage because she didn’t have 2 years of continued employment while watching employed folks greedily jumped on rising asset prices with lower borrowing costs.
In hindsight, it’s a blow to anyone’s self esteem at first . Let alone a parent.
All of that , along with family reasons , made her crave to return to the workforce again after being out of work for 12 years. 7 of the 12 years were self employment so didn’t qualify for mortgage either.
Now as a grown working adult myself, balancing how much cheap credit to take on is the tricky part. When u see amplified returns with leverage it’s really hard not to take on too much like … drugs basically.