In today’s lending environment, even our richest clients are not necessarily guaranteed that qualifying for a loan will be easy! Income is just one of many factors needed when a bank evaluates the credit worthiness of any individual. In fact, many successful people can have a harder time qualifying for a loan than the average person.
Here are the top 4 reasons why rich people can’t qualify for a home loan:
1. Not Enough Documented Income filed with the IRS
Regular people earning a paycheck have little control over how much taxes they pay. Business owners have the luxury of managing how much income they pay themselves and therefore manage the amount of taxes being paid to the IRS. For example, it is perfectly legal not to pay yourself and keep the money in your company in order to avoid paying taxes on that money. No one is arguing this is a great way to save on taxes, but it can be a detriment when it comes time to qualifying for a mortgage. Lenders qualify home buyers based on their adjusted gross income, i.e. income one pays taxes on. If ones business grossed $1,000,000 but $990,000 was expensed that year, the income earned that year, as far as the lender is concerned, was only $10,000.
2. Lack of Credit
One must have a history of credit established to qualify for a home loan. A 2-year history showing 3 active accounts are needed on average, which includes car loans, credit cards, student loans, to name just a few. A bank or investor wants to see that one has the ability to borrow money and pay it back on time. Rich people have the ability to pay as you go and don’t always have car loans, student loans, or have a need for multiple credit cards—they may not even have ever had a need for a credit card! When it comes time to apply for financing, not having a credit history can be as limited as having a bad credit history, and sometimes it’s even more limiting!
3. Bad Credit
Rich people can afford to pay less attention to their credit than the average person. Paying a bill late is not necessarily considered a big deal in the eyes of someone making a ton of cash, yet too many late payments or collection accounts reported on one’s credit report is damaging regardless of how much money you make!
4. Too Much Debt
We all know it takes money to make money. Sometimes that money comes in the form of credit and rich people oftentimes are not afraid of taking on debt. High car payments, other mortgages and high credit card debt ads up quickly. If you’re the successful one in the family, you may have co-signed for a car or student loan for one or multiple family members. Co-signing is a very nice thing to do for someone, but it can bite you in the butt when it’s time for you to qualify for a new home loan.
Yes, being rich tends to be an advantage, of course. Rich people with large cash assets do have the ability to leverage this money in their favor. Lending institution are starting to offer loan programs with much more lenient guidelines for people who are making large down payments when financing a property. For example, standard waiting periods for short sales and foreclosures are sometimes waived entirely when buyers make a 30%-40% down payment. In general, regardless of how much money you make, keep your credit clean, pay all bills on time, manage your debt, and use your credit frequently to ensure a high FICO score. In the end, it pays to have excellent credit regardless of how successful you are.
