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How are people with a subprime score even getting a loan? When I took out a mortgage in 2015 and then again in 2017 they scrutinized my entire life. I have no i

How are people with a subprime score even getting a loan? When I took out a mortgage in 2015 and then again in 2017 they scrutinized my entire life. I have no idea how we’ve regressed back to 2008 after years of very strict regulations.

giantg2 4y ago
The scrutiny may be higher, but the amounts they are approving people for is insane. Like who thinks it's a good idea to approve someone with an $80k income for a $450k mortgage?
- scarface74 4y ago
  I’m not aware of any mortgages that allow that debt to income ratio for a mortgage. Unless it’s a rental and then the down payment requirements are insane.
  - NovemberWhiskey 4y ago
    A little while ago, when 3% loans were still a thing, a $450K loan over 30 years was a $1,900/month expense. An income of $80K with a $1,900/month in debt is a 29% DTI which is comfortably below the DTI limits for a conforming loan (43-45%). Even at 5.5%, it's still "only" 38% DTI ratio.
    - scarface74 4y ago
      - No one making $80K is going to have money for a $90K down payment so you have to add PMI - $300/month. - you’re also ignoring property taxes and insurance. I pay another $400 a month for that in a relatively low cost of living state and I have a $5K deductible. That 1900 adds up to $2800/month real quickly.
      - deleted 4y ago
        [deleted]
- fshbbdssbbgdd 4y ago
  The relevant ratio for mortgage underwriting is monthly income to monthly payment obligations. This means that the highest available mortgage amount depends on the interest rate. You get a very different answer if rates are 2.5% instead of 5.0%. That means a person with $80k is getting approved for a much smaller loan today than six months ago. Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate.
  - avs733 4y ago
    those numbers have also been in use for quite a while and have not adjusted for the inflation of other parts of basic living expenses.
    - lazide 4y ago
      Also, do the math on what happens if interest rates do anything but go down - it instantly means a huge swath of buyers can't anymore and the market dries up.
  - giantg2 4y ago
    "Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate." They're fine as a rule of thumb. The individual should still run their own numbers to see if their limit is higher or lower. Even at 2.5% interest, I have a hard time seeing anyone being able to responsibly buy a $450k house on $80k income. They might be able to swing it, but they'll be screwed as soon as a large unexpected expense comes up. Even a 2% property tax will eat close to 10% of their gross income. There's no way they could save for an emergency fund or properly fund a retirement account.
    - lotsofpulp 4y ago
      >There's no way they could save for an emergency fund or properly fund a retirement account. I assume that is simply the way 80%+ of people in the US expect to live since it has been their reality for decades.
- babypuncher 4y ago
  I was making $80k when I bought my house and was shocked when my bank told me I could buy a $450k home. I bought something for $260k instead.
  - giantg2 4y ago
    That was my situation as well.
  - TuringNYC 4y ago
    This doesnt tell the whole picture and it isnt that simple. The lender is looking at your total carry costs for the home (property taxes, insurance, debt service), your non-home recurring costs (e.g., student loans, medical debt on monthly payment schemes, car payments) and your total income. They dont usually care about wealth, they care about cashflows in vs out.
    - babypuncher 4y ago
      I had no other debt apart from a $15k auto loan and <$500 balance on my credit card, and $450k still felt like an enormous stretch. I was also only going in with 3% down.
carabiner 4y ago
Margin loans. They let you bypass mortgage borrower requirements and are behind many "cash offers" on houses. Borrow and spend $400k in 45 minutes: https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/ https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-.... Can't find a link to it, but someone on WSB wrote a long report on how margin loans will be behind the next housing crash.
tootie 4y ago
I got denied a mortgage despite have assets in excess of the value of the house I wanted due to insufficient income (wasn't working at the time).
- panda88888 4y ago
  Did you provide the assets as collateral for the loan? I imagine a traditional mortgage may not have this as an option, but a different kind of loan may have been possible. However, you can probably only borrow up to a portion of the collateral value.
- tcamp 4y ago
  Same thing happened to me. I got denied because as a founder/owner holding more than 25% of a company they consider the P&L of the company as your personal income(loss). Credit score impacts interest rate but debt to income ratio that is above 50% can completely disqualify you from a mortgage. Thats where the founder ownership can skew your personal DTI. You can go to asset based lenders who evaluate and secure the loan against your existing assets (cash, etc) rather than based on your W2 income and DTI.
- chubbyFIREthrwy 4y ago
  Same, kinda. Wasn't denied, but would have to pay a huge risk premium over conventional, regardless of how much I put up as a down payment, like the home's collateral value didn't matter. Earlier post: https://news.ycombinator.com/item?id=31000286 https://news.ycombinator.com/item?id=31000286
tedd4u 4y ago
I think subprime just means you just get offered a higher mortgage rate. You still have all the documentation mandates. No more NINA or NINJA[1] loans. [1] https://corporatefinanceinstitute.com/resources/knowledge/credit/ninja-loan/ https://corporatefinanceinstitute.com/resources/knowledge/cr...
- jrumbut 4y ago
  The amounts that mortgage originators will hand out are still pretty incredible. I bought a house a few months ago. The mortgage payment is right around what the more conservative rules of thumb suggest is affordable. After the lender had all my information I asked, out of curiosity, what was the maximum they'd lend me. They came back with a number that was more than triple what I ended up borrowing and suggested there was room to go higher if that was something I was interested in. Perhaps subprime borrowers face lower limits but it's still possible to take a risk stretching your budget to buy a house. That may be OK or even good but I'm concerned the perception is that lenders won't approve a mortgage that will be very difficult to keep up with when they absolutely will.
- imtringued 4y ago
  I got 0% financing (first x months) on my kitchen. They checked absolutely nothing on a 5k€ purchase.
yardie 4y ago
From the article: car loans, credit, and person loans (payday loans). Mortgages are highly regulated since 2008's financial crisis. Those subprime lenders exited the mortgage business and jumped into high interest used car loans. And I'm right there with you on the anal probing I had to practically get to qualify for a mortgage.
- pueblito 4y ago
  Only 28% of sales are to first time buys, and 25% of sales are all-cash. Sales of affordable houses under $250k are down 30% YoY
  - thebean11 4y ago
    > Sales of affordable houses under $250k are down 30% YoY ..because those houses are selling for over $250k now?
    - arcticbull 4y ago
      In part because of continued pressure on prices because of zoning, and in part because people commit chart crimes not adjusting for inflation.
- nimbius 4y ago
  worth mentioning: the auto lending market in the US is a 1.6 trillion dollar time bomb and has been ever since Cash for Clunkers saw two rounds of federal funding. the average period for an auto loan in the US is over 64 months. any disruption to the paycheck-to-paycheck living of 64% of americans could have a catastrophic effect on the ability to service this debt.
  - zamadatix 4y ago
    I'll bite, what does 3 billion in federal funding for car loans from more than two 64 month cycles ago have to do with it?
MAGZine 4y ago
Part of Dodd-Frank, which was created in response to the 2008 financial crisis, was repealed in 2018. https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Relief_and_Consumer_Protection_Act https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Re...
- vlozko 4y ago
  I'm not sure how that's directly related to the issue of subprime borrowers but in my recollection this was a good change. It was a regulation that was costly and difficult for smaller banks to constantly adhere to while larger banks already had the capability to do this. Much like how the mortgage moratorium policy ended up forcing smaller landlords to sell to larger property holding companies, this particular bit of regulation was causing many smaller banks to sell themselves to larger ones.
deleted 4y ago
[deleted]
bregma 4y ago
Because there is money to be made.
gernb 4y ago
If you want to be depressed, go to Los Angeles and tune into a radio station that caters to people living in poor neighborhoods. Every 3rd or 4th ad is for a loan shark.

giantg2 4y ago

The scrutiny may be higher, but the amounts they are approving people for is insane. Like who thinks it's a good idea to approve someone with an $80k income for a $450k mortgage?

scarface74 4y ago
I’m not aware of any mortgages that allow that debt to income ratio for a mortgage. Unless it’s a rental and then the down payment requirements are insane.
- NovemberWhiskey 4y ago
  A little while ago, when 3% loans were still a thing, a $450K loan over 30 years was a $1,900/month expense. An income of $80K with a $1,900/month in debt is a 29% DTI which is comfortably below the DTI limits for a conforming loan (43-45%). Even at 5.5%, it's still "only" 38% DTI ratio.
  - scarface74 4y ago
    - No one making $80K is going to have money for a $90K down payment so you have to add PMI - $300/month. - you’re also ignoring property taxes and insurance. I pay another $400 a month for that in a relatively low cost of living state and I have a $5K deductible. That 1900 adds up to $2800/month real quickly.
    - deleted 4y ago
      [deleted]
fshbbdssbbgdd 4y ago
The relevant ratio for mortgage underwriting is monthly income to monthly payment obligations. This means that the highest available mortgage amount depends on the interest rate. You get a very different answer if rates are 2.5% instead of 5.0%. That means a person with $80k is getting approved for a much smaller loan today than six months ago. Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate.
- avs733 4y ago
  those numbers have also been in use for quite a while and have not adjusted for the inflation of other parts of basic living expenses.
  - lazide 4y ago
    Also, do the math on what happens if interest rates do anything but go down - it instantly means a huge swath of buyers can't anymore and the market dries up.
- giantg2 4y ago
  "Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate." They're fine as a rule of thumb. The individual should still run their own numbers to see if their limit is higher or lower. Even at 2.5% interest, I have a hard time seeing anyone being able to responsibly buy a $450k house on $80k income. They might be able to swing it, but they'll be screwed as soon as a large unexpected expense comes up. Even a 2% property tax will eat close to 10% of their gross income. There's no way they could save for an emergency fund or properly fund a retirement account.
  - lotsofpulp 4y ago
    >There's no way they could save for an emergency fund or properly fund a retirement account. I assume that is simply the way 80%+ of people in the US expect to live since it has been their reality for decades.
babypuncher 4y ago
I was making $80k when I bought my house and was shocked when my bank told me I could buy a $450k home. I bought something for $260k instead.
- giantg2 4y ago
  That was my situation as well.
- TuringNYC 4y ago
  This doesnt tell the whole picture and it isnt that simple. The lender is looking at your total carry costs for the home (property taxes, insurance, debt service), your non-home recurring costs (e.g., student loans, medical debt on monthly payment schemes, car payments) and your total income. They dont usually care about wealth, they care about cashflows in vs out.
  - babypuncher 4y ago
    I had no other debt apart from a $15k auto loan and <$500 balance on my credit card, and $450k still felt like an enormous stretch. I was also only going in with 3% down.

carabiner 4y ago

Margin loans. They let you bypass mortgage borrower requirements and are behind many "cash offers" on houses. Borrow and spend $400k in 45 minutes: https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/ https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-.... Can't find a link to it, but someone on WSB wrote a long report on how margin loans will be behind the next housing crash.

tootie 4y ago

I got denied a mortgage despite have assets in excess of the value of the house I wanted due to insufficient income (wasn't working at the time).

panda88888 4y ago
Did you provide the assets as collateral for the loan? I imagine a traditional mortgage may not have this as an option, but a different kind of loan may have been possible. However, you can probably only borrow up to a portion of the collateral value.
tcamp 4y ago
Same thing happened to me. I got denied because as a founder/owner holding more than 25% of a company they consider the P&L of the company as your personal income(loss). Credit score impacts interest rate but debt to income ratio that is above 50% can completely disqualify you from a mortgage. Thats where the founder ownership can skew your personal DTI. You can go to asset based lenders who evaluate and secure the loan against your existing assets (cash, etc) rather than based on your W2 income and DTI.
chubbyFIREthrwy 4y ago
Same, kinda. Wasn't denied, but would have to pay a huge risk premium over conventional, regardless of how much I put up as a down payment, like the home's collateral value didn't matter. Earlier post: https://news.ycombinator.com/item?id=31000286 https://news.ycombinator.com/item?id=31000286

tedd4u 4y ago

I think subprime just means you just get offered a higher mortgage rate. You still have all the documentation mandates. No more NINA or NINJA[1] loans. [1] https://corporatefinanceinstitute.com/resources/knowledge/credit/ninja-loan/ https://corporatefinanceinstitute.com/resources/knowledge/cr...

jrumbut 4y ago
The amounts that mortgage originators will hand out are still pretty incredible. I bought a house a few months ago. The mortgage payment is right around what the more conservative rules of thumb suggest is affordable. After the lender had all my information I asked, out of curiosity, what was the maximum they'd lend me. They came back with a number that was more than triple what I ended up borrowing and suggested there was room to go higher if that was something I was interested in. Perhaps subprime borrowers face lower limits but it's still possible to take a risk stretching your budget to buy a house. That may be OK or even good but I'm concerned the perception is that lenders won't approve a mortgage that will be very difficult to keep up with when they absolutely will.
imtringued 4y ago
I got 0% financing (first x months) on my kitchen. They checked absolutely nothing on a 5k€ purchase.

yardie 4y ago

From the article: car loans, credit, and person loans (payday loans). Mortgages are highly regulated since 2008's financial crisis. Those subprime lenders exited the mortgage business and jumped into high interest used car loans. And I'm right there with you on the anal probing I had to practically get to qualify for a mortgage.

pueblito 4y ago
Only 28% of sales are to first time buys, and 25% of sales are all-cash. Sales of affordable houses under $250k are down 30% YoY
- thebean11 4y ago
  > Sales of affordable houses under $250k are down 30% YoY ..because those houses are selling for over $250k now?
  - arcticbull 4y ago
    In part because of continued pressure on prices because of zoning, and in part because people commit chart crimes not adjusting for inflation.
nimbius 4y ago
worth mentioning: the auto lending market in the US is a 1.6 trillion dollar time bomb and has been ever since Cash for Clunkers saw two rounds of federal funding. the average period for an auto loan in the US is over 64 months. any disruption to the paycheck-to-paycheck living of 64% of americans could have a catastrophic effect on the ability to service this debt.
- zamadatix 4y ago
  I'll bite, what does 3 billion in federal funding for car loans from more than two 64 month cycles ago have to do with it?

MAGZine 4y ago

Part of Dodd-Frank, which was created in response to the 2008 financial crisis, was repealed in 2018. https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Relief_and_Consumer_Protection_Act https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Re...

vlozko 4y ago
I'm not sure how that's directly related to the issue of subprime borrowers but in my recollection this was a good change. It was a regulation that was costly and difficult for smaller banks to constantly adhere to while larger banks already had the capability to do this. Much like how the mortgage moratorium policy ended up forcing smaller landlords to sell to larger property holding companies, this particular bit of regulation was causing many smaller banks to sell themselves to larger ones.

deleted 4y ago

[deleted]

bregma 4y ago

Because there is money to be made.

gernb 4y ago

If you want to be depressed, go to Los Angeles and tune into a radio station that caters to people living in poor neighborhoods. Every 3rd or 4th ad is for a loan shark.