My Attempt at Home-Ownership in Graduate School

Last year while I was working on my physical therapy student shtick, I attempted to be approved for a mortgage along with a buddy of mine. Two single bros trying to get a mortgage in grad school without jobs and increasing amounts of student loans? Crazy! So crazy it just might w-….it didn’t. I did feel as though there were some reasonably priced homes and I wanted to hop on the still historically low interest rates. I was ready to begin building my empire. I had this vision for a PT house with a reasonable rent close to campus, but we can’t have it all.

What follows is a modified letter I sent to a couple banks after their rejections failures to make reasonable business decisions. Personal banking is a myth.


I am writing this to you in pursuit of a mortgage. A mortgage that will serve as leverage to help financially propel my current self and my future self. I want you to know that I appreciate that as a representative of a financial institution you have to protect your business from unwarranted risk. Here I will do my best to make my point that any application I fill out will not provide a full picture and deserves further attention.

First, my financial partner and I are looking for a 3 bedroom house. This of course means that one room will be available for rent. This room could easily be rented for $250-$300. I propose that a signed rent contract be a stipulation of mortgage approval. Basic costs for monthly payments, taxes and insurance come out to about $600. This renter’s contract effectively cuts these basic costs in half.

Second, and this requires more unpacking, your tools and models do not fully convey true risk in our scenario. I write this in the hope for a more personal banking experience that I so often hear advertised.

Let us look at the demographics of foreclosure from The Great Recession.

Our first series is less specific to us, but provides interesting insight straight from the Bureau of Labor Statistics about foreclosure rates from what should be a more stable demographic.

BLS.Mortgage

BLS.Mortgage.1

Boy-howdy, look at all those arrows! Based on the data pulled from the BLS my financial partner and I are in the lowest risk groups across the board. That is, we are non-black, non-Hispanic, college-educated males that have never married. This lower risk was maintained for this demographic in statuses of delinquency all the way to a lost home due to foreclosure. Never married males was interesting. Great for restoring our confidence…. Carry on

Now approval for mortgages is largely dependent on income. As long as someone hasn’t completely shot themselves in the foot with a damning credit history, they will likely get approved for a mortgage if their income is high enough. Are these practices supported by unquestionable evidence? Let’s take a look.

Foreclosure vs income

In Figure 6 we see information provided by the Center for Responsible Lending based on loan foreclosures with loans that originated from 2004-2008. You see that huge difference between foreclosures in those with lower-income and those with higher-income? Yeah, me neither. The only area even moderately more severe for lower-income is the percentage of actually completed foreclosure. But if we look at the actual number of foreclosures (Figure 3), the number was in fact much higher in “higher-income” borrowers, as we see below.1

Foreclosure number vs income

Income clearly isn’t the gold standard it is made out to be. Why could this be? I will offer my answer once again. It doesn’t necessarily matter how much one makes. It matters how much one spends. To get a general idea of how much Americans spend, let’s look at how much Americans save. Based on data from GoBankingRates using Google Consumer Survey, 21% of Americans don’t even have a savings account and 28% have nothing in savings.2 Mother of God. Nearly half have no savings. And how about that generation X (35-54) crowd? A demographic most lenders wouldn’t hesitate to lend to. Only 16% report a savings of $10,000 or more. Who’s the irresponsible one again?

To hammer this home without belaboring the point (oh, I’ll belabor it all day), the Economic Policy Institute reports the median retirement savings for all families in the U.S. is a mere $5,000 and Metlife reports that 52% of employees live paycheck to paycheck.3,4 I invite you to review our savings.

Finally, I’d like to make a case for myself and financial partner. We are both in physical therapy school right now and when we graduate, our lender will have two sources of income to rely on payments. Let’s see what the outlook is like for physical therapists. We will be graduates of UCA. Data provided from the school for the graduating classes of 2012-2014 show a 99.4% pass rate for the NPTE, the licensure exam. Not surprisingly, the employment rate of these graduates is 100%. From the BLS, the median pay in 2015 of PTs was $84,000/year, and the job outlook is “much faster than average.” The annual mean wage for Arkansas specifically was $73,000 and our neighbors in Texas make $97,000 on average. Now you might say that as a new graduate I won’t be making that. I would agree, but there has also been an ongoing shift in the roles of physical therapists. Within the last couple years physical therapy education has progressed to purely Doctor of Physical Therapy programs instead of Master’s. With this, PTs have earned a larger role in the healthcare field and patients now have some level of direct access to a PT in all 50 states. Because of this, the discrepancy in pay for a new graduate isn’t as much as one may think. If the pair of us come out making 15% less than the mean in Arkansas in our very first year out of college, our combined income will be $124,000, 41% more than the $88,000 loan amount we are asking for, giving us an incredibly low debt-to-income ratio. The loan we request now would almost certainly be given if just one of were to request it in the future.  How many mortgages are dispersed for double a household’s income?5 Which scenario is truly more risky?

I welcome feedback. It is my hope that I have made a compelling argument to look at more than just the current models for assessing risk in the mortgage business. My financial partner and I have the means to pay for housing now and for the duration we are in school. This, combined with our savings, and high earning potential make us worthy of developing a banking relationship with. We would, of course, immensely appreciate the benefit from historically low interest rates.

30 year mortgage rates

And our lender would benefit for years to come.

30 year mortgage payments

Adjudge as you see fit. Thank you, Italian Stallion


Seemed convincing to me, but wasn’t enough for them I suppose. Should have gone with the scathing rebuke. For the record, we were going to go splitsies on a 20% down payment and we really did have enough extra money saved up to cover the rest of the mortgage payment for the duration we were in school. Finally there’s always loan payments if manure really hits the rotating blades. I had one banker ask me, “what if they stop handing out student loans?” If they do that, then we have even bigger problems than having a celebrity as president. So here I stay, stuck in my pedantic and blessed student life. Empire will strike back in a few years time.

Ramble on,

Sam

 

 

References:

1) http://www.responsiblelending.org/mortgage-lending/research-analysis/Lost-Ground-2011.pdf

2) https://www.gobankingrates.com/savings-account/62-percent-americans-under-1000-savings-survey-finds/

3) http://www.cnbc.com/2016/09/12/heres-how-much-the-average-american-family-has-saved-for-retirement.html

4) https://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf

5) http://www.bls.gov/oes/current/oes291123.htm#st

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