Borrowing Power

Generally, no matter what kind of loan you are borrowing against your future payments, not the collateral. The bank wants your payments, not your apartment.

Understood. But why would someone with enough cash in the bank to cover a purchase price be considered more of a risk than someone with no cash and a high salary? How is one any more likely to disappear than the other?

Fk you you're fired!

have you been able to maintain the high salrey job for more than 3 years? Banks would rather know that you can consistantly produce income for the life of the loan as opposed to having some money in the bank. Maybe the $$$ in the bank are from your Bar Mitzvah...not planing on being 13 again are you?

If you have all that money in the bank, but still want to borrow money rather than use it to buy a house, that tells the bank that you need it for something else, and it won't be there if they need recourse to it.

It also totally depends on the type of income, career, and career history. As someone who had a hell of a time going the private banking route, I can tell you that the underwriting departments of two of our largest banks have no ability to decipher k-1s. They both basically decided to ignore income that was routinely received, and not a bonus, but that was a profit reconciliation made at the end of the fiscal year. We still qualified easily, but I can't tell you the hassles we went through. Both banks read the k-1s erroneously, thinking that they indicated that my husband owned more than 25% of one of the largest law firms. I wish.

There is additional reason: over the last 50 years lenders have had access to the consumer credit bureau data and become very comfortable with it. This data allows one to make a pretty good guess at how much a person spends and earns. On the other hand, banks are totally blind to assets and so they have never been used in underwriting modeling. Banks are starting to test assets as predictive but there are two challenges: 1. fair lending laws and 2. an automated reliable source.

nyc & Bernie - thanks for good answers.

I'm still not certain that I see the logic behind lenders viewing money in the bank as less indicative of producing income and/or having reserves for the life of the loan as opposed to drawing a current high salary. What about checking balances over the past ten years as indication of how a person saves/spends? What about guarantors? How is it that cash is of such little consequence in borrowing?

@Tpushbkln: You raise good points. I am an underwriter at a big bank in UNSECURED lending and I would love to have access to assets and many of the other items you mention above to examine for predicting default. But we just don't have access to that data. I cannot speak to the details of mortgage underwriting but I would guess assets are a positive indicator i.e., make you more likely to be approved. Obviously the lender will have access to your assets (and a DNA sample these days). But the intution - and again I have never seen data to prove this -- is of course that you can spend all of your money so the bank doesn't see it has "real collateral" while the future income streams cannot be spent before you earn them (and that's assuming you aren't fired or quit!).

Also how would a lender differentiate between a big trust fund inheritance (could be risky) and cash that has been saved slow and steady (suggesting low risk). I guess you could provide W2's for 10 years...

Bernie, wouldn't you still wonder why someone in this situation would borrow money and pay interest if they weren't planning to invest the pile of cash in risky assets?

"Also how would a lender differentiate between a big trust fund inheritance (could be risky) and cash that has been saved slow and steady (suggesting low risk). I guess you could provide W2's for 10 years..."

They'd be able to easily determine slow, steady savings if you had been depositing your salary directly into that bank for many years, and hadn't taken it out.

(Of course, that itself is a gamble, because you can only really have one bank that you can give such special treatment to.)

One thing that that savings history would also do would be to show a lending bank that you can comfortably handle a DTI ratio of over the normal limit. If a bank has a hard limit of, say, 38%, and you've been saving a huge percentage of your salary, and can also produce rent receipts (if you've been renting), you've got concrete proof of your ability to devote more money to housing than the average person, should you so desire.

I'm hanging onto all my bank passbooks for this very reason. It certainly can't *hurt* to have hard-copy proof of an exemplary saving record. I'd really like banks to incorporate past savings history into their lending calculations somehow.

Pay cash, if you have it.

Truth, when NYC RE declines to the point where non-one-percenters like myself can afford to pay cash, I'll very gladly pay cash!

@TPush - BTW, hopefully it's obvious already, but my "if you had been" in my first paragraph doesn't refer to *you* directly; it means "people in general".

O.K., Trip!

"I will gladly pay you Tuesday,
for a hamburger today."

1800's. all re 100 % equity deals. 2007 100 % debt deals at 8% with 10% down. 2012 100% debt deals at 0% down us govt only buyer of mortgage debt. 2.5% 15 yr fixed.

I see drowning dead re ppl. I see them buy iPad minis. But they are dead.

@Triple zero: banks would love to have access to past savings habits -- both to approve and give more favorable terms to more low risk people (nice banks!) and decline or give less favorable terms to more high risk people (bad banks!). However, getting new data into legacy technology would be a huge $$$ outlay when costs containment is top priority. And again lending so highly regulated... it would take a whole bunch of lawyers to see if the underwriters could that data in light of Fair Lending laws. Might be able to use positively but but in any negative action.