I remember when I bought my first home I had saved up 20% down and I was 23 years old. definitely wet behind the ears. I went to the bank to get a loan. They ran my credit and they said I had no credit. I said that’s impossible. I pulled out my wallet and put all the “cards on the table”. And so they asked me when was the last time I used the cards and I said… never. I don’t want to be in debt.
So because I didn’t have any credit, I wasn’t on the radar and had no track record of payment history so they couldn’t give me a fannie mae loan. They had to do a “portfolio” loan which meant that it was an adjustable rate mortgage at 4.95% start rate and could go up from there.
You can imagine that if I didn’t like debt I certainly didn’t like the idea that my payment would go up. I thought I had excellent credit but blank credit is not excellent. Then again fixed rates were almost 10% so the adjustable rate wasn’t all bad. it was also based on 11th District Cost of Funds, an index that hardly ever went up. So not as bad as I imagined.
I was able to refinance 2 years later when I had charged on 2 cards and had a car loan paid off (of course I paid it in 12 months cause I couldn’t stand to have the payment)
This was a shock that my non-use of credit made it hard to get a loan but I was 23 it was my first house and I learned something that I share with every young hopeful homebuyer that comes into my office.
The 2nd memorable “qualifying far worse” one was fast forward 4 years and I was buying my first multi-family property.
A 14 unit building. It was half empty, mismanaged and I was only putting 15% down and I got the seller to carry back (finance) 10%. All those are risk factors to a commercial lender, though I didn’t know it at the time. also was on my honeymoon when the bank was underwriting the file.
I came back from my trip to find out that the bank would not fund me because I had no management experience. They viewed me a risk because I was a first time investor with no property management experience.
I explained to them that I had owned and managed a mortgage company for 5 years and had to handle rent, salaries etc being a business owner takes much more planning than budgeting on 14 units.
I also pointed out that the building could be filled in a matter of months and have so much more income than expense that they would be safe ($1200 mortgage payment with a gross of $4800 per month). After 2 weeks of battling I got them to give me the loan but at a slightly higher rate.
But again who would have thought with my great credit now, the property having potential and the fact that I was a mortgage company owner-operator that they would doubt me and turn me down.. not me for sure… I even mentioned that I felt discriminated against because I thought maybe it’s my age (I was 27 at the time almost 28).
Now I share this with all my mortgage clients, and at the outset tell them to pick a strong property manager so that they don’t run the risk of getting turned down on their commercial loan.
Anyway, those are the instances that standout where I thought I was a slam dunk borrower and the banks thought differently.