Have you ever slowed down and really looked around at the goings-on of the simplest things around you? I was out this past weekend with my wife and decided to do just that, and some of the things I observed just did not make sense to me. For example, have you ever been in front of a movie theater where young people are trying to get you to see a particular movie that is going to be screened. While that in itself is not strange, have they ever began their approach to ask you to see one of their movies only to suddenly change direction completely and walk away without asking?
This past weekend I was the object of that exact scenario so I decided to question them about it. Their response was just short of alarming: they said it’s because I am too old and that is the reason they completely aborted the original plan in mid-approach. What exactly does that mean? Are they afraid I am going to sleep through the movie because I have been doing that since my early 30's and see no reason to stop now. Am I passed the age of reason because I am eligible for social security? If so, we have a serious problem in Washington.
Well, no need to spend any more of our precious time on incidentals when there are so many stranger things going on. I have recently found that most people think they know the secret to getting a home loan and that the whole process boils down to the money they make. The amazing part of that assumption is that out of the four factors for qualifying, earnings is actually the least important. I still find, however, that most borrowers always lead off their conversations with the fact that they make "way more" than is needed to qualify. Please remember the old saying when trying to understand how decisions in the mortgage industry are made: "Just because you can, doesn't mean you will”.
I cannot tell you how many people with a large income have poor credit. It always makes me wonder what’s going on. Two types of people who shouldn’t ever have bad credit are those with a large excess of earnings over debts and those who own a house with decent equity. Yes, both groups are guilty of having poor credit in numbers too large to be believed, and I am always baffled. While that might lead you to think that credit is the important factor, I would again have to say that it is not so. Credit is either second or third out of the four needed parts. In my judgment, it ranks third.
What in the world could be better than good credit? Lets look at it the way a lender would, and it will become a little more obvious. Lenders wish to grant loans and even more than that, they wish to be paid back and hopefully on time. Let’s look at my old saying (“Just because you want doesn’t mean you can”) in a different way. Good credit generally dictates a strong desire to do it the right way. However, if you simply don’t have the where with all, you can’t do it. In other words, you need sufficient reserves to meet any crisis that can occur and still continue with you financial life.
This brings us to the number one factor in getting a home loan which leads the other three factors in importance by an overwhelming margin. Lenders are a skeptical breed who believe every thing you tell them but only to a point. You make good money, your credit is good, and you have a nice amount of cash reserves, but as far as they are concerned, lenders consider that things can and do happen to all of us. When things do happen, everything goes out the window, so to speak, and no matter how well prepared you are on paper, lenders consider the impact a potential calamity can have on your ability to repay the loan. So in summation, they are looking for an ace in the hole that will allow them to sleep better at night, and that ace is Equity in Your Property.
If you want a loan that will leave 35% equity left in the property after the loan funds, the lenders are as happy as they could ever be. Many lenders will reduce the rate by 1/8 of a percent just because you have the equity that will assure them that they are covered should something happen and you default on the loan. Your equity than becomes the proverbial cake with the other three factors listed as the icing.
When you understand how the mortgage industry looks at their customers, it makes it easier for you to prepare to get the best possible loan you can get. You also can be in a position to get through any of the smooth talking that might be thrown at you by some in the industry. Just tell them you understand how lenders thinks and that you not only know the four majors factors needed to qualify for the loan, but you also know the order of importance.
Now if you could help me understand how people drive in carpool lanes, I would really be most appreciative. I truly believe that those who drive with enough company to qualify for the privilege see it as a reward for good behavior. They also feel that it gives them freedom to do any or all the following: carry on a long conversation on their cell phone, put on makeup, reduce the speed limit for those in the lane or partake in a picnic lunch with their passengers. The result is a race to the exit to go around them and get back into the lane before the double lines re-appear only to the face problem all over again.
Let me know if you have an answer to that one…