4 ms·

In Summary - The Author, due to having recently switched from being a full-time to a freelance worker, cannot prove that he has the ability to pay the mortgage

by elemeno 13y ago

In Summary - The Author, due to having recently switched from being a full-time to a freelance worker, cannot prove that he has the ability to pay the mortgage he's applying for and thus his application was denied. The rest of the article being about how he owns several properties outright (that he rents out) and apparently has money in the bank is somewhat immaterial since the part that a lender cares about most is "can you continue to pay your debt from your sustainable income stream" - not your rental business which can be volatile and unpredictable income wise. That lending rules have been tightened is surely a good thing even if it does mean the some people will find it harder to own property. Borrowing money to own a home is nobodies right, but something you should have to prove you're able to do - as the swathe of sub-prime mortgages that subsequently went underwater only a few years ago shows.

anthonycerra 13y ago
Can't one argue that income from rental properties is more predictable than the income from full-time employment? In the former, there are binding contracts between the landlord and tenant that guarantee the landlord income (similar to the relationship between a homeowner and a bank, which seems hypocritical on the bank's part). In the case of full-time employment the employee is not guaranteed to have a job as an employer can fire someone at any time for any reason.
- deleted 13y ago
  [deleted]
- pavel_lishin 13y ago
  Leases almost always have a provision for breaking them, typically with 2 months payment as a penalty fee. So you're guaranteed some income, but all of your tenants can leave at any point.
  - jedrek 13y ago
    As opposed to full time jobs, that can fire you at will and you might get two weeks termination pay?
    - georgemcbay 13y ago
      That's the real kicker for me, the idea that being currently employed under a W2 means anything for future earnings. That is a very outdated concept, IMO.
      - sliverstorm 13y ago
        It's not as strong of an indicator as it was in the past, but if you have years of track record with your employer you probably will keep getting that paycheck in the future- and if you get fired, you can probably find a new job. Not a perfect signal, but it's not like there actually is a perfect signal to be had.
- ohazi 13y ago
  There's also stuff that breaks unexpectedly that you're on the hook for repairing immediately, at whatever the cost. It can sometimes be difficult to fill vacancies, and in many instances those "binding contracts" aren't worth peanuts. If a tennant leaves or destroys the apartment, you could either go after them in court (expensive, time consuming, and you aren't likely to recoup very much very easily, and you certainly can't compel them to continue to pay you if they're broke), or live with keeping their security deposit (again, peanuts).
- drcode 13y ago
  > Can't one argue that income from rental properties is more predictable than the income from full-time employment? Sure, in an open market for lenders some may agree it's in their interest to risk their capital, or they may not, if the numbers don't add up.
  - j2d3 13y ago
    And op's point is that we do not have an open market due to ill conceived regulations like dodd frank.
- x0x0 13y ago
  1 - If a tenant loses a job and can't pay the rent, that contract isn't worth the paper its written on. You can't practically collect money someone doesn't have. Even if you collect a judgement, and sell it, you'll be lucky to get 20 cents on the dollar. Not even mentioning your time, court costs, and legal costs. Those may be recoverable, again, but practically speaking they're gone. The number of tenants who actually have the ability to pay and don't is, in my experience, very small. Few people wish to fuck with their housing situation. 2 - we just went through a rather unexpected bout of widespread unemployment 3 - the author appears to not have verifiable income streams (ex rent) with which to service the mortgage. If you are unaware, at least in markets I'm familiar with (and I have some familiarity with this), newly purchased rental properties rarely cover the mortgage + taxes + maintenance. You often expect them to be cash flow negative for some period. Which doesn't even begin to mention the risk of not finding tenants. Or the tenants not paying. And even in the latter situation, depending on where you are, it can take many months to forcibly remove them. 4 - basically, the author just switched from w2 to self-employed and therefore has no history with which to demonstrate his self employment is anything but a fantasy. If he had a year of demonstrable self-employment history, he probably would have been fine. His complaint, in general, seems overwrought. 5 - and again, in case anyone has forgotten, we just went through a bout of systemic risk due to banks selling mortgages people couldn't service combined with people overestimating their ability to pay. Therefore, even if he is stuck in the cracks, this is the price of insuring a lack of systemic risk to the system (for which the US taxpayer is on the hook), particularly when banks just demonstrated you can't trust them to properly underwrite mortgages. 6 - credit != ability to pay. You can get very good credit simply by taking small loans and paying them on time. In my experience, those two things aren't well related at all. Note you also may make $250k/year, forget to pay a small medical bill (which is easy to do), get sent to collections, and have a credit score in the 600s. 7 - in the history of tenants we've had to evict (thankfully very few, and not all for nonpayment of rent), several have had very good credit
- sliverstorm 13y ago
  Income from rental properties is only as predictable as your tenants.
pstack 13y ago
Hell, it is difficult even if you have sustained work (not freelancing or self-employment). That's just the way things are. And, frankly, I can't blame anyone. If I were going to lend you a half million dollars, you better believe I'm going to be all up in your business and highly questionable of everything. When I bought my house about four years ago, I had everything going for me. Consistent employment history with the same employer at around six figures the entire time (starting a little under that and ending a little over that). I had the 20% to put down on the home. I had perfect credit. I had no debt and no history of debt problems. Additionally, the home I was buying was in a blue-collar neighborhood at a price of about half of what I could afford (I don't need a half million dollar home and wanted the lee-way of knowing I could have massive negative life changes in the future without worrying about the capacity to continue paying my mortgage). It took them the full time of the loan, constant mailing back and forth of many hundreds of pages of documents, many phone calls, a lot of explanation, and it took until the very final day for it all to come together. As difficult as it was for me, I imagined it must be unbelievably so for those with less stable work history or a lower income or a history of some debt problems or carrying even a little existing debt. It's unfortunate, but at the same time . . . this is the way I feel they should have been questioning every potential loan for the past couple of decades, instead of just the last few years. As you say, if they had, we wouldn't be in this mess to begin with. This also informs my opinion of people wanting to look into your facebook and twitter history (if you have one; I don't). While I instinctively want to cry foul, because of privacy and because the internet should be as much a place of unhindered open thought and exploration as it can, I also think asking to see your last six months of facebook posts and analyzing your circle of friends is not too ridiculous if I'm lending you a huge sum of money. Don't get me wrong - I don't like it. It still feels . . . uncomfortable . . . to me. But I understand it.
ddp 13y ago
Agreed. We really don't need a repeat of this: https://en.wikipedia.org/wiki/Casey_Serin https://en.wikipedia.org/wiki/Casey_Serin

by elemeno 13y ago

anthonycerra 13y ago

Can't one argue that income from rental properties is more predictable than the income from full-time employment? In the former, there are binding contracts between the landlord and tenant that guarantee the landlord income (similar to the relationship between a homeowner and a bank, which seems hypocritical on the bank's part). In the case of full-time employment the employee is not guaranteed to have a job as an employer can fire someone at any time for any reason.

deleted 13y ago
[deleted]
pavel_lishin 13y ago
Leases almost always have a provision for breaking them, typically with 2 months payment as a penalty fee. So you're guaranteed some income, but all of your tenants can leave at any point.
- jedrek 13y ago
  As opposed to full time jobs, that can fire you at will and you might get two weeks termination pay?
  - georgemcbay 13y ago
    That's the real kicker for me, the idea that being currently employed under a W2 means anything for future earnings. That is a very outdated concept, IMO.
    - sliverstorm 13y ago
      It's not as strong of an indicator as it was in the past, but if you have years of track record with your employer you probably will keep getting that paycheck in the future- and if you get fired, you can probably find a new job. Not a perfect signal, but it's not like there actually is a perfect signal to be had.
ohazi 13y ago
There's also stuff that breaks unexpectedly that you're on the hook for repairing immediately, at whatever the cost. It can sometimes be difficult to fill vacancies, and in many instances those "binding contracts" aren't worth peanuts. If a tennant leaves or destroys the apartment, you could either go after them in court (expensive, time consuming, and you aren't likely to recoup very much very easily, and you certainly can't compel them to continue to pay you if they're broke), or live with keeping their security deposit (again, peanuts).
drcode 13y ago
> Can't one argue that income from rental properties is more predictable than the income from full-time employment? Sure, in an open market for lenders some may agree it's in their interest to risk their capital, or they may not, if the numbers don't add up.
- j2d3 13y ago
  And op's point is that we do not have an open market due to ill conceived regulations like dodd frank.
x0x0 13y ago
1 - If a tenant loses a job and can't pay the rent, that contract isn't worth the paper its written on. You can't practically collect money someone doesn't have. Even if you collect a judgement, and sell it, you'll be lucky to get 20 cents on the dollar. Not even mentioning your time, court costs, and legal costs. Those may be recoverable, again, but practically speaking they're gone. The number of tenants who actually have the ability to pay and don't is, in my experience, very small. Few people wish to fuck with their housing situation. 2 - we just went through a rather unexpected bout of widespread unemployment 3 - the author appears to not have verifiable income streams (ex rent) with which to service the mortgage. If you are unaware, at least in markets I'm familiar with (and I have some familiarity with this), newly purchased rental properties rarely cover the mortgage + taxes + maintenance. You often expect them to be cash flow negative for some period. Which doesn't even begin to mention the risk of not finding tenants. Or the tenants not paying. And even in the latter situation, depending on where you are, it can take many months to forcibly remove them. 4 - basically, the author just switched from w2 to self-employed and therefore has no history with which to demonstrate his self employment is anything but a fantasy. If he had a year of demonstrable self-employment history, he probably would have been fine. His complaint, in general, seems overwrought. 5 - and again, in case anyone has forgotten, we just went through a bout of systemic risk due to banks selling mortgages people couldn't service combined with people overestimating their ability to pay. Therefore, even if he is stuck in the cracks, this is the price of insuring a lack of systemic risk to the system (for which the US taxpayer is on the hook), particularly when banks just demonstrated you can't trust them to properly underwrite mortgages. 6 - credit != ability to pay. You can get very good credit simply by taking small loans and paying them on time. In my experience, those two things aren't well related at all. Note you also may make $250k/year, forget to pay a small medical bill (which is easy to do), get sent to collections, and have a credit score in the 600s. 7 - in the history of tenants we've had to evict (thankfully very few, and not all for nonpayment of rent), several have had very good credit
sliverstorm 13y ago
Income from rental properties is only as predictable as your tenants.

pstack 13y ago

Hell, it is difficult even if you have sustained work (not freelancing or self-employment). That's just the way things are. And, frankly, I can't blame anyone. If I were going to lend you a half million dollars, you better believe I'm going to be all up in your business and highly questionable of everything. When I bought my house about four years ago, I had everything going for me. Consistent employment history with the same employer at around six figures the entire time (starting a little under that and ending a little over that). I had the 20% to put down on the home. I had perfect credit. I had no debt and no history of debt problems. Additionally, the home I was buying was in a blue-collar neighborhood at a price of about half of what I could afford (I don't need a half million dollar home and wanted the lee-way of knowing I could have massive negative life changes in the future without worrying about the capacity to continue paying my mortgage). It took them the full time of the loan, constant mailing back and forth of many hundreds of pages of documents, many phone calls, a lot of explanation, and it took until the very final day for it all to come together. As difficult as it was for me, I imagined it must be unbelievably so for those with less stable work history or a lower income or a history of some debt problems or carrying even a little existing debt. It's unfortunate, but at the same time . . . this is the way I feel they should have been questioning every potential loan for the past couple of decades, instead of just the last few years. As you say, if they had, we wouldn't be in this mess to begin with. This also informs my opinion of people wanting to look into your facebook and twitter history (if you have one; I don't). While I instinctively want to cry foul, because of privacy and because the internet should be as much a place of unhindered open thought and exploration as it can, I also think asking to see your last six months of facebook posts and analyzing your circle of friends is not too ridiculous if I'm lending you a huge sum of money. Don't get me wrong - I don't like it. It still feels . . . uncomfortable . . . to me. But I understand it.

ddp 13y ago

Agreed. We really don't need a repeat of this: https://en.wikipedia.org/wiki/Casey_Serin https://en.wikipedia.org/wiki/Casey_Serin