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October 11, 1999
"My fiancee is a dentist
and his salary goes up every year. Is he a good risk?"
As potential husbands,
dentists rank above lawyers but below finance professors. As borrowers, however,
they are generally viewed as good risks.
"I am a very successful
student looking to buy a house with a few friends. While we don't work, there is
plenty of money in our families. Our SATs average 1450, so that ought to count
for something� Suggestions?"
Sorry, your high SATs
won't cut it with loan underwriters, since they have no bearing on the
willingness to repay, and are only loosely connected to the ability to repay.
Without having one or more of your parents on the note, the only loan you could
get would be one that ignores income, called a "no-ratio" loan, and it
would require a cash down payment of at least 40% of the same price.
"My girlfriend moved here
from Hong Kong 4 years ago to go to college. After graduating and getting a job,
she is ready to buy a house, and is prepared to put 20% down. A loan officer
told her, however, that she will have to pay a rate about 1% above that paid by
residents. Is this normal practice or is she entitled to the same rate as
everyone else?"
As of now, your
friend is a "non-permanent resident alien", a category viewed as
carrying a special (if modest) risk. The risk is that she might be obliged to
leave the country. The typical lender reaction, however, is to require a larger
down payment rather than a higher rate. Your friend should shop the market with
this in mind.
She might want to wait until she gets
her green card. At that point, she would become a "permanent resident
alien" and would be treated like everyone else.
December 18, 2000
"I
retired recently, at least for awhile, to enjoy my stock market winnings, and
decided to use some of it to buy a house. Since
I�m willing to put 25% down on an $800,000 house, and will have plenty of cash
left over, I figured I was the kind of borrower lenders drool over.
To my surprise, the mortgage broker quoted me a rate well above those I
see quoted in the newspapers. When
I asked her why, she told me that because I was unemployed, I qualified only for
a �no ratio� loan where income is disregarded and the interest rate is very
high. Hey, I�m a millionaire,
doesn�t that count for something?�
You might be
surprised at how many deadbeat millionaires there are.
With no secure
source of income, the lender is looking at the property as his primary
protection. But on an $800,000
property, 25% down is viewed as only marginally adequate.
Expensive properties can fluctuate greatly in value. If you borrowed
$600,000 and the value of your house dropped to $500,000, the lender would
expect that you might mail in the key rather than continue making payments.
Millionaires have been known to do that.
It might be a
different story if you could show that earnings from your stock market portfolio
over each of the last two years were large enough to support the payments on
your new home. The lender might
then have accepted your investment income, and you would have qualified for the
lower interest rates paid by working stiffs.
The remainder of
your wealth provides little comfort to the lender.
In most cases, he gets his marching orders on pricing from the investors
who will end up holding the mortgage. These
investors have recently watched a bear market in technology stocks create a
large class of �former millionaires.� Even
if you were willing to keep up the payments in the face of a drastic drop in
property value, the investors are not going to bet that in a crunch you will
still have the means to follow through.
Copyright Jack
Guttentag 2002
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