Vail Daily column: Why is it so hard to qualify for a mortgage?
It seems no two people can agree on who would be the best pick for president, but you’d be hard pressed to find two people who disagree it’s harder than ever to get a mortgage loan.
Since the mortgage meltdown of 2008, lenders — or more correctly, the federal government — have continued to fiddle with qualification guidelines making the bar for credit, income, assets, down payments and appraisals more difficult.
One thing few people understand is that these rules from the government are often hundreds of pages long, poorly written and are often contradictory between agencies.
The Consumer Finance Protection Bureau is one of the worst bullies on the block and has become notorious for telling lenders to go figure out what a particular 200 page regulation means and hope they get it right.
Imagine if the law was to obey the speed limit because there is one, but the cops painted over the speed limit signs and made motorists guess the speed limit and those who got it wrong had their cars confiscated — but to be fair, they got to keep the tires to take home. That example is similar to the regulatory environment where lenders find themselves.
Ability to repay
One of the regulations that stops more deals in their tracks, particularly around areas such as the Vail Valley is the ability to repay. The Dodd Frank Act, which created the CFPB and hundreds of other rules, requires lenders to establish that borrowers have the ability to repay money lent to them.
Dodd Frank and other laws also require lenders to make a loan to anyone who meets the lenders minimum requirements and dictates a uniform set of standards must be used to measure credit worthiness. This is to insure fair lending for all regardless of race, gender, marital status and the ilk. On the surface, these ideas may sound reasonable, but they are, in fact, keeping many extremely credit-worthy people from getting loans.
First, the ability to repay requires lenders to determine a debt to income ratio test. But many sources of income or cash flow are not allowed to be included. These include roommate income, income from newly-acquired part-time jobs and tax free distribution of capital from a business investment or oil and gas partnership. In many cases, capital gains income is exempt as well and income from dividends and interest is difficult, but not impossible to include.
As a result, the borrower has very substantial liquid assets and a low loan to value are generally held to the same standards as someone with minimal assets and a high loan to value.
The main issue is that the ability to repay law allows that if a consumer is lent money that he has trouble repaying and if the lender did not properly follow prudent guidelines for determining the borrower should have been able to repay the loan, then the borrower can cry victim and sue the lender.
Fair lending laws
The second part of the problem is fair lending laws. If a wealthy person gets a loan based upon the fact that he or she has liquid assets and equity but can’t meet the ability to repay measure because he or she is living off of drawing assets instead of making a steady W-2 income, while a borrower with few assets gets turned down because he does not meet the required income guidelines, then the guy who got turned down can, in theory, sue the lender by saying he was discriminated against because the lender did not apply the same debt to income rules in both cases. And in America, you are entitled to a jury of your peers and in many instances they guy suing because he got turned down did get exactly that.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.