As regulators crack down on shady lending practices, banks and lending institutions are getting more and more rigid with loan qualifications. In fact, a recent New York Times article detailed one retiree’s struggle to obtain a mortgage even with excellent credit history and healthy retirement and brokerage accounts. In addition to demands for the usual debt standards, lenders also ask for consistent monthly income.
The retiree spotlighted in the article had applied for a $174,000 loan to finance the purchase of an apartment. His brokerage accounts exceed $1 million; he receives monthly Social Security checks and dividend distributions, and he has a credit score of 822. Able to make a 40% down payment, Sanford Evans thought he wouldn’t confront any problems qualifying for the loan. In fact, he would’ve paid all cash if interest rates weren’t so low. It made more financial sense for him to apply for a low-interest loan.
Nevertheless, after being assured by his loan officer that Evans, who was moving from a condo in Boston, would easily qualify, the process dragged on for months. Ultimately, the lender told him there was a problem with his income. Evans supplemented his monthly earnings with a part-time medical writing job for a Boston area hospital. The lender wouldn’t count this as income since he was moving out of Boston. This angered Evans. With more than enough money in the bank, the writing job seemed inconsequential. Evans’ financial security was clear as day on paper.
While most lenders measure income in similar ways, sometimes there are various differences with regard to lender interpretation of income. For “income-deficient, asset-rich” retirees, lenders are starting to use a process known as asset depletion. A fraction of assets are amortized and then applied as income. Ultimately, the process of asset depletion is what qualified Evans for the loan (after several exasperating months). However, by then he had already taken his business elsewhere, to a lender who interpreted his income differently given that he planned to work remotely for the Boston employer.
It’s easy to make assumptions about your own debt-to-income ratio, however, it’s important to understand that various lenders may interpret your borrower profile differently. Ask questions, and clarify lender definitions of income, taxable income, assets, debt, and everything else that a lender plans to evaluate.
And if you’re confronting a loan modification process or want help holding on to your home, please call us at McFarlin LLP. We’re always here to help.
Timothy McFarlin, McFarlin LLP