Almost Got Rejected On A Mortgage Because I Tried To Be Debt Free

[Singuy]

I was just recently proven wrong..paying off your debt in this culture is just a bad idea.

My Story.

Bought a 370k house, now worth about 350k. I paid double to triple the amount allowed on a 15 year mortgage and got it down to 19k in 6 years.

Recently we won an auction on a lakefront property that cost 381k. My wife, with 1.5 years of employment as an optometrist making 170k/year and myself making 120k a year almost got rejected for the new loan.

Reason: 1. Wife needs more than 2 years of employment in order for her income to count, also she switched jobs the last 8 months..even though her take home almost doubled..but who cares..denied!
2. Because I still have a mortgage and that it's a 15 year mortgage, having TWO mortgages will exceed my debt to income ratio since my wife's income doesn't count. I was like "wtf?..you do realise I have 19k LEFT ON MY FIRST MORTGAGE?! right?".

Yes, we do have enough for 20% down.

Well, the only way to obtain the loan was for me to pay off mortgage #1. Putting house #1 on the market doesn't even count. Having perfect credit doesn't mean crap. This is just BS.

I know how to take care of my finances, don't need the financial institutions to hold my hand.

[HappySaver]

You were rejected because of

1. Insufficient work history for your wife
2. Insufficient debt to income ratio (probably they are counting only your income due #1)

The bank is not penalizing you for paying down your first loan. Based on the income they're accepting, you can't afford both loans. You can choose to pay off the first loan and remove that debt, which is an option that many don't have. Of course, that may eat into your downpayment and you may have to wait a little longer to have the full 20% again.

If you had been less aggressive in paying down the mortgage you would have more cash on hand, and you'd need to borrow less, and therefore might be approved. I guess that's where you feel like you're being penalized? But really, that's the risk you took by funneling funds into a non-liquid asset (your home) when you should have kept it liquid.

[disneysteve]

1. Insufficient work history for your wife

This is the one that really makes no sense. I bet if you had asked for manual underwriting, as opposed to them plugging data into a computer program that spits out an answer, you would have been approved with no problem.

You've got a medical professional making $170,000/year and the lender is saying her income doesn't count because she's only been working for 1.5 years. So what? That should be even more reason to approve it with a "starting" salary that high she has clearly demonstrated her ability to earn money.

[JulieAlbright]

I'm not sure what you are saying either. Is it because you paid off other debt instead of the last $19k on your mortgage and the first mortgage payment plus your added mortgage would be too high of payments in regards to your income?

If you had paid off the first mortgage instead of an auto loan or whatever would your total monthly payments have been low enough to qualify just on your salary???

But no, you didn't get rejected because you tried to be debt free. You aren't debt free. If you were debt free and had no first mortgage, then you would have been approved.

[snafu]

Singuy, like you, I find some decisions loans officers make are weird. It can help to discuss the problems encounter with the branch manager who has authority to override staff decisions. Given your specifics I'd suggest asking for 'bids' from a major bank, local bank and Credit Union to see who wanted you and DW as clients and gave the best rate, terms and conditions.

I understand the bank could be disappointed that you'd chosen to pay off a huge amount of your mortgage denying them the huge front load interest, their profit, on your current home. You likely pay CC balances by due date so no profit stream there either.

[Singuy]

I've learned my lesson. My fault for trying to pay off the house early, transforming my liquid assest into non-liquid assests. I did this to save myself from paying the banks interest. This is the cost of leaving my assest liquid, I actually have to pay interest on the money I've earned BECAUSE I could be paying off the house.

I never carry a CC balance and I live a very cheap life so I can be so aggressive on my mortgage. I needed a debt to income ratio of 47% in order for the banks to determine myself as a safe borrower. I guess they expect most people to live paycheck to paycheck so for me to live on 1500/month is probably going to get me to default on my loans. The truth is, I've been living on 1500/month ever since I got graduated from college 7 years ago.

It's just a matter of banks looking at a flowsheet and determined that I am a wasteful bastard like everyone else..who will eventually foreclose on the second mortgage.