Asset Rich, Low Income: Why It’s Hard to Get a Mortgage

December 19, 2016

You’d think it would be easy to get a mortgage if you have a large amount of money sitting in the bank.

The reality is that it isn’t that easy at all.

When deciding to give you a mortgage, lenders are interested in whether or not you can make regular payments. While it’s nice to know you’re asset rich and can cover the cost of the home (or most of the cost of the home), what lenders really want to know is that you can make regular payments.

The Lender’s Money is on the Line

It’s important to understand that the lender’s money is on the line when you get a mortgage. Many wealthy, asset-rich folks like to keep their money liquid. Using a big chunk of change to buy a home ties it up in an asset that isn’t very liquid. Getting access to that money later can be challenging and requires hoops. On top of that, you might be able to invest the money at higher returns than what you see if the money is in a home.

For many wealthy people, buying a home with a mortgage makes sense. The interest rate is low, and they can make better returns by putting their money elsewhere.

However, the lender doesn’t see it entirely that way. The lender is fronting the money for the home purchase. If you are asset rich, but you don’t have an income, that worries a lender. If you retired early, or if you are living off the interest from your investments, your income might not be as high as a lender wants to see. What happens if you suddenly lose a large amount of your money? You don’t have the regular income from a job to make your mortgage payments.

Because the lender’s money is on the line in a mortgage transaction, not yours, it makes underwriters nervous. If you don’t have a regular income from a regular job, there’s no telling what could happen to stop the payments, even if you have a lot of money in an account somewhere.

What Happens If You Suffer a Setback?

You might have a lot of assets now, but what happens if they lose value? If you have a large investment portfolio and the market crashes, suddenly your value on paper drops dramatically. Selling your investments at a low point in order to make sure the mortgage is still being paid probably isn’t your idea of a smart play. Lenders know that and worry that asset losses could impact your repayment ability.

Another concern is what happens if you feel overly confident about your finances and go on a spending spree. Perhaps you feel good about your assets, so you decide to buy a lot of expensive things. You might not pay attention to how fast your account value is dropping. Suddenly, you have a bunch of stuff, your account is depleted, and paying your mortgage from that account doesn’t feel like a good idea.

Anyone can suffer a financial setback or be impacted by the markets. However, if you have a steady job, your income has a greater chance of remaining stable, even during these times. A lender considers this when trying to decide if you should have a mortgage. Someone who might have fewer assets, but a regular income, can be more attractive to a lender. That person is likely to continue making mortgage payments no matter what happens.

Higher Costs

If you’re asset rich but have a low (or no) regular income, there is a chance that you will pay higher costs for your mortgage. You will probably be required to pay a higher interest rate. You might need to make a bigger down payment as well. These are moves designed to limit risk for the lender since your income can’t be counted on.

In the end, you need to decide what makes the most sense for you. For some wealthy people, it’s still worth it to get a mortgage because it keeps resources accessible. For others, it makes more sense to just buy the home with cash and be done with the process. Before you make the decision, carefully consider your situation and consult with a professional.

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