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This Is You. This Is You On Paper (And You Just Got Shredded)

Remember the old TV commercial that went like this:

This is your brain. This is your brain on drugs.

For those of you too young to remember this anti-drug TV spot, your brain on drugs is supposed to look like a fried egg on the sidewalk (not so subtle message of "you can fry your brains out if you take drugs").

But here's a newer version for you:

This is YOU: Good person. Good credit. Hard worker. Pays the bills. Pays taxes. Contributing member of society. Needs a mortgage.

This is YOU ON PAPER: Loser. Application declined. Next stop? Paper shredder.

How can you NOT take this personally?

Sometimes we forget this important fact: When the lender looks at your credit application, he only sees the PAPER YOU.

Not the REAL YOU.

It is distressing to me, that increasingly, the 2 "YOU's" are miles apart. Once stated income went away, all those holes in the lending world that stated income supposedly plugged, are gaping open again.

YOU: Are a respected, self employed business owner for 20 years. You make plenty of money to pay your bills and pay your mortgage. Your credit has been perfect your entire adult life. You are able to write off business expenses and losses against your business.

YOU ON PAPER: Don't show enough income to qualify.

YOU: Always have plenty of cash on hand to buy your friends a round of drinks. That's because you get much of your income from TIPS, and very little from your wages.

YOU ON PAPER: Have an income way too low to qualify.

YOU: Are the savior of your family. You take care of grandpa and in exchange, he makes your house payment and writes you a check for a small salary. You don't work because you take care of Grandpa.

YOU ON PAPER: Are unemployed.

YOU: Are a caring parent who lovingly co-signed to get your kid a car. Johnny was too embarrassed to tell you he was late on his payments 6 out of 12 months last year.

YOU ON PAPER: Have bad credit.

There is zero tolerance for lack of income and poor credit when making an application for a mortgage. As you do your taxes, and make financial decisions, remember this:

This is YOU. But the bank only cares about the YOU ON PAPER.

You don't want to fry your brains out just trying to get a mortgage.

Or in the shredder because you can't.

Written by Janet Guilbault, Mortgage Lending Specialist Based Out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 02/27/2009 06:54 PM

Comments (76)

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76 Comments on This Is You. This Is You On Paper (And You Just Got Shredded)

FEB

I love it! And how true all of it really it!

Janet - WOW! We must have telepathy or something. If it's ok, I'd like to add another example that just happened to me yesterday!

Donne: It is always okay with me for you to share your experiences! Please let us all know.

Dana: Yesterday my friends and I went out to lunch. As the mortgage broker in the group they were all complaining to me about how they were upstanding citizens who simply could not get qualified, and how it was so unfair.'

I am not sure what was on my mind, but after a glass of wine I simply blurted out:

This is YOU! This is YOU ON PAPER. It ain't the same, folks!

Naturally we all laughed, and thus, the inspiration was hatched for this post.

Janet, Well stated in black and white (along with interesting pics!) Very true, sadly true, but there it is.

I enjoyed that post Janet, you make some very good points and I appreciate the humor!

Amy: Actually, I probably could have written about 10 more of these circumstances for my readers because it is happening all the time.

My point is this: Not only have people been frozen out by lack of equity. They also simply cannot get approved with so much emphasis only on credit scores and income.

Jared: I am glad you enjoyed. We need a little lighter reading because it is Friday! I hope everyone who is doing there taxes pays attention. But more than that,

please, let there be stated income again!

Janet, I love the way you explained it. It is just a shame what is going on as we continue to give them our money to help people. I just am sick about the folks who on paper don't qualify.

Some of my best clients do not look pretty on paper!

Hmm, we are hard working (and look good on paper), but we are finding it very difficult these days to get financing for investment properties. We have always had a 800+ credit scores, and we did well last year, so if we are having troubles finding financing then I cannot imagine how folks find credit who have less than perfect credit

Interesting blog. I still have buyers who, for the life of me, I cannot see just how they got financing, yet I hear of others who it seems should have no problems yet they do.

Having lived through the depression, my in-laws, only believed in buying things for cash. They bought their cars for cash and when they retired, they bought their condo for cash. On paper, they looked terrible. They never established a good credit rating. If they were alive, today, they probably wouldn't qualify for a credit card, much less, a mortgage.

Great post about what the bank will and won't do anymore.

Boy no kidding.... makes you wonder how all the peole who really didn't qualify got their loans over the past few years, because the scenarios you described are so true!

Janet--This is a wonderful step-by-step logical explanation for why some people are denied for a mortgage. When consumers understand this, they can make changes to avoid the shredder!

Missy: I honestly think we in the mortgage industry will be the very first ones to know that the sun has broken through, and the recession is going away.

It will be when the banks finally lighten up a little bit. So far, no signs of this happening. Many lenders just raised credit score requirements. Ouch, that really hurts FHA.

Norma: Some of my best clients are pretty in person and ugly on paper. I always shake my head because there is so much more to a person than what is on the tax return and the credit reports.

Very good post Janet!! That's an entertaining way to lay out the lending industry, but you're 100% right on!!

Dan

Colleen and Joe: You look good in your picture too. Too bad they won't qualify you on good looks. LOL

You are right to say banks are not investor friendly. They not only limit the number of properties you can own, they also only all 75% of the income from the property to count towards income. If you are already slightly negative, and own several properties, that really hurts.

Steven: When my millionaire clients with good credit are kicked to the curb and the first time buyer with a 625 score (including credit blemishes) get a loan, you have to wonder.

You would think if someone is 50 years old and paid everything on time his whole life, he probably is gonna keep paying.

Marilyn: I have had clients just like that. They want to give me pages of "hard" assets that they aquired via cash. They own properties free and clear.

Yet none of this helps you unless those assets produce income, or they are cash in the bank.

Russ: Glad you liked this.

Sally, I would agree with you that there is a very strange irony going on with this. We have lots of people that should have never been qualified. And lots of people who should qualify but can't.

It was a huge deal when stated income loans went away...because they were used the wrong way.

Teri: I have been trying to educate my own clients since it is tax season. It is cheaper to pay more tax than to be stuck in an adjustable rate mortgage, or unable to buy when prices and rates are this low.

Dan: Makes it kinda human, doesn't it? People take it very personally...they wonder what was the point of trying to do everything right?

Evening Janet, By the time the loan app gets to a decision maker it totally lacks the human element !

Janet - Great post ! Is so true that sooo many good folks are out in left field due to being self employed. The old programs were there for a good reason... is a shame that many of them are no longer available.

Hi Janet -- Agents will be well served to remind themselves of these principles so as to properly refer our clients to exceptional and knowledgeable agents like you!

Chirs, Why, thank you!

C& S: Maybe we should stop using tax returns to qualify people. Instead of ABILITY to pay from income, why shouldn't WILLINGNESS to pay from history count for something?

Fantastic post Janet! May I add that sometimes the "this is you " is as follows:

You are a hard working Real Estate professional who works tirelessly to help your clients reach their dreams. You have built a great client base and are considered successful, but your income fluctuates from months the month and year to year. Translation: you are unstable. Isn't it ironic that some of us are now the hardest to qualify? lol

Very well written post though, loved it!

Responsible lending requirements do not work well for commissioned salespeople. This has always been a problem and the stated income loans were a good tool. The abuse of these loans is what has ruined it for all of us.

Very interesting angle on this. Liked the read. Good job.

Sometimes I get caught up with the paper you version of people. If I can't get them a loan to buy a house and I don't have anything for them to rent then I have no choice but to put them in the trash.

Most banks are just big machines without thoughts or feelings beyond looking at their criteria... but they have to base their decisions on some objective factors... unfortunately... the good news is that credit can be rebuilt... we do get second chances.

Janet,

The question is how does the bank determine if you are qualified to pay a loan if it doesn't go by what is on paper?

With the exception of the self-employed individual, who I agree has a legitmate disadvantage because his taxable income will always be lower than the real income, I wouldn't make the case for the other examples necessarily being deserving of getting a loan.

1) Paid in tips. Doesn't matter, that income is supposed to be claimed on your taxes.

2) co-signing for a car. doesn't matter if it's not your car. you are still responsible

3) Taking care of grandpa. Obviously he has income, put him on the loan.

I do think there is a legitmate need for stated income loans, however they are open to so much abuse. We have all heard stories of pizza men claiming to make $100,000 a year in unreported tips and people collecting phantom rent money from people who never lived in the home, in order to qualify for a loan. Where do we draw the line?

Michelle

All I can say is WOW!

I remember quite a few years ago when I bought a car, and my own bank financed it without any problems. During the 3 years I had the car, I was never late on a payment and had great credit that only got better and better. But when I decided to buy a new car, my bank wouldn't finance it for me. During those 3 years, the personal touch was lost. Everything had been computerized, and apparently the computer didn't think I was good enough. So I went elsewhere and got a great rate and a really good loan, with no problems at all. I never did figure that one out.

Janet, no question the industry is needing to determine another way of analyzing the self employed borrower. Managing financial reporting for taxes and mortgage application are worlds apart. Later probably rather than sooner it will be dealt with.

Jay

so true, looking to refi right now. no luck because we don't do those loans anymore.

All those examples are so true-- and none of these people are really bad

Janet: This is a great post.. looks like you covered the bases well.

Being self-employed has its benefits, but qualifying for a loan is not one of them!

FEB

Janet - This is exactly why most of our loans are going FHA these days. Common sense underwriting at it's best!

Good job here! Maryellen

LOL - that was great!

Thanks for the chuckle!

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Janet - The rules have changed and there's a new game out there! I suppose the ones who look the best on paper are the folks who make a lot of money and carry a lot of credit. Those who owe no money are having their credit cards canceled. Go figure!

Brandy: I was wondering when someone would make a comment about those of us in the industry. Let's face it. Even though they cannot really say: we view you as unstable because of the kind of job you have, they can use this in the process to make their decision....and they do. I remember when ING came out and said no real estate agent or mortgage broker was allowed to do stated income.

Anyway, my thoughts are this: People are losing their jobs right and left that have salaries. At least we are not going to be fired the week after the mortgage closes.

Don't you love the way they qualify based on what MIGHT happen...even if it never has? LOL

Simon: What made stated income loans have the ability to be abused was because guidelines to GET the loan were loosened.

Stated income loans should ONLY go to self employed people, with excellent credit, and a long history of success in their business.

NOT to the hardware store clerk who says he makes $6500 a month. Naturally when they opened up the door to the chicken coop, in came the foxes.

Justin: My job as a mortgage broker is to make the paper version of every client appear appealing to the bank. I do this by writing a cover letter explaining the human angle. Having said that, the cases above don't even stand a chance....

Craig: Glad you enjoyed

Brian: And I do believe that credit re-building will be a growth industry as we head into the next decade. Good observation.

Michelle: As always, I use real examples:

1) Paid in tips. Doesn't matter, that income is supposed to be claimed on your taxes.

I agree, but the reality is most people do not claim all of their tips. If you are saying they deserve to be denied because of this: the point of this post is to tell them to start claiming their tips if they want to buy a house.

2) co-signing for a car. doesn't matter if it's not your car. you are still responsible

Again, I agree. Unfortunately (and I know this from 20 years in the car business) parents and schools do not take the time to educate young people about credit and the importance of making payments on time.

Many parents don't give a second thought to co-signing because they are so focused on helping their kid.

They have no idea the payments are being paid late, because they go to the child's address.

I used to give stern lectures to both parents and kids when they signed for their car. (Because this happens so often...and there really isn't away to repair this credit problem)

3) Taking care of grandpa. Obviously he has income, put him on the loan.

Good solution! But since grandpa is 90, putting him on the loan also puts him on the title of their house. If grandpa dies, the estate then has a claim on their house. Clients thought that would be too messy.

Janet - as I mentioned, the other day I spoke to a couple who also couldn't get pre-approved for a loan. Their scenario is as follows:

Clients: After 40+ years living and working back east, clients move to SoCA last year to live out their lives in warmer climates closer to their kids and grandkids. Before leaving to come to SoCA, they hire a property management firm to manage their two rental properties that have been fully leased with excellent tenants with both showing profitable net margins.

Initially, they lease a home until they decide where they want to purchase. They maintain their positions with their respective employers that they have both been with for many years with no change in employment status and/or income. Additionally, their median credit scores are in the 790's and they have more than six months PITI and 10% to put down.

Clients on Paper: client's don't show enough income to qualify for a home.

David: Hope that is a good wow.

Lisa: And I think all banks are headed in the direction of a less personal touch. I am glad you got that car financed and would love to understand WHY you were denied.

Jay at Countrywide: I am not even certain TAX RETURNS are a good indication of a person's ability to make future payments anyway! The are just a snapshot of what happened the past couple of years. We need a better way of proving willingness and ability to pay.

For example: if you had a foreclosure, you defaulted. To me, the guy who didn't default is a better credit risk because he remained committed. That might be harsh, but you cannot believe the number of people I see that filed bankruptcy more than once.

Donne: Why? Because they could only claim 75% of rental income? Did the amount they paid the property managers count against them? Were they penalized for payment shock? What happened?

Michael: Many of us in this industry are in the same boat as you! I hope you have a decent loan to ride this out.

B&C: All these people are really great and display no reason they would NOT pay for their mortgage. Yet the bank thinks they are RISKY/ Huh?

Roland: Thank you!

MaryEllen: I would agree that FHA in many ways has underwriting guidelines that make sense. Maybe if non-FHA loans charged mortgage insurance, no matter what, they could also take more risks. What do you think?

Bruce and Mary: Yeah, I find the whole credit card thing really interesting too. You pay through the nose to carry a balance. You finally pay it down or pay it off and they freeze it, or cancel it. Makes you wonder. I think the credit card companies could be the next big thing that the lending world will tackle. They totally take advantgage of consumers.

Janet, Great Post The lenders needed us yesterday, today they don't, tomorrow they will.

It all comes around its just bad for those wh are caught in the middle.

Excellent post, banks are so impersonal these days and what you spell out above is what truly happens. It's tough and getting tougher for hardworking people to get a loan. There has to be some solution...

Janet, Wonderful post. It is sad, most people these days do not look good on paper, especially self-employed no doc realtors!!! Hopefully things will get better again for everyone.

This is great! i love the analogy. Its a very easy way to explain something that is hard to understand to clients. I am sure i will be using this.

Aaron Poling

Long & Foster

Janet - you are a great writer! I like how easily you laid out your points in the post that made it very easy to understand. Congrats on a well deserved feature!

I really enjoyed your post. It was right on target and great graphics too. I must say I've worked with several young buyers in the recent past who are very aware of the 2 U's thought process. I think a lot parents are teaching the children better. So maybe there is hope after all. Thanks so much for sharing.

Janet,

I fear that underwriting may get even more challenging if Obama's housing plan becomes law.

There is a relationship between risk and the access to and cost of a mortgage.

If bk judges can start writing down principal and loan servicers can start modifying loans, the risk will go up.

For stated income..

Look, income would all show up on the tax return SOMEWHERE if they were being truthful. But the point is many small businesses are hiding income and so they don't get the mortgage.

Either you pay your taxes and get the benefits of society, or you don't and you don't... Would YOU lender money to someone you knew cheating on their taxes?

That is the dirty secret of all this. There are some (retail now because it was so abused) lenders who will allow a certain % of revenue as defined by the tax returns as opposed to the salary being made (so all the writeoffs won't matter). Unless you fit in a full doc box it is becoming a niche lending space served by retail operations with relationships with the client. For brokers this is a bad thing but not the end of the world for borrowers, they just have to be informed where to go to get closed.

It is a myth that SIVA and SISA doesn't exist, It just doesn't exist through brokers.

FYI:

YOU: Always have plenty of cash on hand to buy your friends a round of drinks. That's because you get much of your income from TIPS, and very little from your wages.

YOU ON PAPER: Aren't declaring income and are cheating on your taxes.

YOU: Are the savior of your family. You take care of grandpa and in exchange, he makes your house payment and writes you a check for a small salary. You don't work because you take care of Grandpa.

YOU ON PAPER: Aren't declaring income and are cheating on your taxes.

YOU: Are a caring parent who lovingly co-signed to get your kid a car. Johnny was too embarrassed to tell you he was late on his payments 6 out of 12 months last year.

YOU ON PAPER: And? You are liable for the car and it isn't getting paid for. You pay for the car and have Johnny pay you so you know if the payment is late, otherwise don't co-sign and risk your credit.

YOU: Are a respected, self employed business owner for 20 years. You make plenty of money to pay your bills and pay your mortgage. Your credit has been perfect your entire adult life. You are able to write off business expenses and losses against your business.

YOU ON PAPER: If you aren't showing enough income to qualify it is probably because you are cheating on your taxes. There are some special cases where this isn't true and those are served by the retail space now.

There are brokers who think a 4506-T killed lending, I find that line of thinking amazing. If YOU want a MILLION DOLLARS from ME, YOU have to PROVE you can pay it back. This isn't that complicated, Brokers just don't like it because it killed

Really like your writing style!

What's really interesting is all the "orphaned" borrowers created when FNMA/FHLMC terminated their stated/NIV programs. Those people can't refi now!

Another pet peeve of mine with the GSE's is that Schedule C filers are double hit for deducted car expenses. They lower their income by writing off AND we still have to hit them with the car payment in their debt ratio! Only way around it is to have 12 months of cancelled checks showing your business pays for, but most sole proprieters don't have that set up.

It doesn't matter how I look on paper. The rules don't apply to me because I'm sooooooooooo good looking :)

Janet, Well written and very thought provoking. Good blog.

Janet,

So true your post resounds with many a buyer today! There are all kinds of variables that can affect an individual's credit, not everyone thinks of it at the time they are applying for a mortgage loan. Terrific post and happy blogging to you!

Janet, most people who are employees cannot seem to understand the predicament of self-employed business people!

Join my new AR group and post your blog at http://activerain.com/groups/virtualoffice

MAR

Janet, great post. I find it interesting that when credit card companies and banks need us, they jump through hoops, to gets to borrow money. I am wondering, after this is over, are people going to have more of a post depression attitude, like our parents and grandparents had. Also, not only do I remember that commercial, I actually worked on that commercial in the late 80's.

JohnP

great post - but do not forget, borrowed too much and knew upfront I could not afford it, buy all kids of cool stuff for the kids and family, do not pay mortgage, gov't steps in and reduced your interest and makes everything all better

After going through the savings and loan crises where we saw this same reality.....it will, in time, go back to the ways of old.....sort of. The system is in a panic state, and when the panic subsides, so will the restrictions.....save our lovely government..

MAR

Janet - Regarding the couple I referred to, they are both 1099 independent contractors and one of them has operated a remote satellite office for years. Unfortunately, their combined AGI wasn't enough to qualify them to purchase a home with a comparable monthly mortgage to what they are currently paying in lease.

Look, income would all show up on the tax return SOMEWHERE if they were being truthful.

If someone has ownership in an S corp, the company could have suffered a single year where they had a big loss.

You however, take a salary from that company, and have other sources of income.

But the loss that the company took "passed through" to your tax return and it looks like you lost $20k.

You actually had the same income you have every year.

Unless you fit in a full doc box it is becoming a niche lending space served by retail operations with relationships with the client. For brokers this is a bad thing but not the end of the world for borrowers, they just have to be informed where to go to get closed.

I agree with this statement. If someonw clearly does not have enough income, but has plenty of assets with their personal bank, bank will often accept the loan, and hold in its own portfolio.

Bryant: You may be very handsome, but Berta has a better credit score

MAR

"If someone has ownership in an S corp, the company could have suffered a single year where they had a big loss.

You however, take a salary from that company, and have other sources of income.

But the loss that the company took "passed through" to your tax return and it looks like you lost $20k.

You actually had the same income you have every year"

I'm part of an S Corp and had the profits and losses fall through to my tax return for 8 years. An underwriter isn't just going to look at the AGI for these type of borrowers. You look at the sources of income (THAT CAN BE DOCUMENTED) and the source of the losses (Deductions, losses on the K-1, etc).

Stated income was a license to lie about your income OR cheat on your taxes. Now all the tax cheats are facing a choice of paying taxes or not getting loans. This is not a bad thing.

Stated income was abused by allowing the guidelines to include W-2 employees, bad credit or a combo of the 2. That does not mean the original concept was bad.

To think that all tax cheats used stated income loans, or all of those who took stated income loans are tax cheats is a ridiculous generalization and just not true.

Stated income loans did not cause the crisis. Guidelines that were way too loose for ALL loans did.

Look at your examples that involve income problems not credit problems. 2 of the 3 were undeclared income. And I would think any business owner of 20 years may be smart about deductions but can still PROVE cash flow.

I wouldn't want to loan to tax cheats (2 of your 3 examples), would you?

For the third, I would look into the tax return and ignore things like depreciation.

But what people want is a loan to not show the money is being claimed on taxes. It's a dodge.

I'm glad stated income is going back to a niche product for the retail side , it was never meant to be anything but that.

Janet,

Sorry it has taken me a while to get back to your post here. In regards to your question to me:

"Maybe if non-FHA loans charged mortgage insurance, no matter what, they could also take more risks. What do you think?"

I think it's quite possible. But, at least in my market, it's the MI companies that are steering the underwriting process when it comes to loans over 80%. So, if lenders wanted to require MI on loans below 80% (for certain "grey" areas like you list here in your post), that might loosen some guidelines. But, I have a feeling the MI companies would pull rank.

You've got my wheels a turnin'!

Maryellen

Janet - in the case of the couple I was referring to, they did qualify for a loan but not for enough to purchase a comparable home to what they are currently leasing (3bd/2ba, sfr).

The payment for the amount they qualified for was less than what they are currently paying in rent for their leased home. They were hoping to qualify for an amount where the payment was at least equal to their rent so that they could get a half way decent sfr.

The amount that they qualified for wasn't enough for a small, dumpy condo so they are going to continue leasing.

MAR

Gosh, I wish I was as good looking as BB. But since I'm not, I will have to just look better on paper. Fortunately, I passed, since I just refinanced.

This was incredibly creative and very, very true. Great post!

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