Why Getting a Loan is an E.P.I.C. Proposition
“All happy families are alike; each unhappy family is unhappy in its own way.”
Leo Tolstoy in Anna Karenina.
Why am I quoting 19th-century Russian literature in a mortgage newsletter? Because I like to draw parallels (and because the topic can otherwise be a little dry).
Tolstoy meant that families and couples are happy when they are compatible in all aspects of life, from their philosophical beliefs to their daily habits. Others are unhappy because they may be incompatible in only one of a hundred potential points of contention.
Let’s say you’ve found the perfect life partner. You like the same books, movies, and television shows. You have the same interests, hobbies, you even agree on politics. But what about music? Could you keep a happy household when one of you likes Adele and the other prefers Nicki Manaj?
When it comes to getting a loan, there are many dozens of points on which you and the lender must be compatible. You could be in agreement on 99 of them, but if you run afoul of the 100th, the deal may be off. Even if it’s as trivial as Adele vs. Nicki.
Whenever I counsel first-time homebuyers, I introduce the word “EPIC” to help them remember the four pillars of loan qualification:
EQUITY: How much of your own hard-earned money are you putting at stake? This is called “skin in the game”, The more down payment or equity you have, the safer the bank feels. And where did the money come from? Did you save it (good), or borrow it(bad)?
PROPERTY: Banks dislike unique houses, remote properties, and condominiums with legal entanglements. They also don’t like it if you hold title to your home in trust or business entity. From their perspective, the ideal property is a 3-bedroom, 2-bath tract home that’s just like every other home in the neighborhood – one they could easily sell to someone else if they ever were forced to foreclose on you.
INCOME: Do you have enough income, and is it reliable? They don’t want you to spend more than 43% of your gross income on expenses, and they want to make sure your income is consistent, reliable, and likely to continue. They are particularly hard on self- employed and retired borrowers. Having millions of dollars in reserve no longer overcomes a perceived lack of a steady income.
CREDIT: Have you established a track record of paying your bills on time? How many credit references do you have? How long have you had them? What’s your credit score? Are you maxing out your credit cards? And try to wrap your brain around this: Bad credit is better than no credit!
This is not to suggest that there aren’t other potential points on which you and the bank may be at odds, but these are the big ones. Make the lender happy on all four, and you’re likely to have a good relationship.