An ex-loan officer shares what you need to get a loan and an amazing insight into living within your means.
Today’s PeerStory is from Grant Harrison, a friend of mine here in Colombia and an ex-loan officer. Grant had a backstage view during one of the toughest times in American credit and saw one very interesting flaw in nearly everyone applying for a loan – people can’t seem to live within their means.
As a personal finance blogger, I get questions constantly about the secret to living within your means and saving more money. There’s all kinds of rules you can follow, from keeping to the stock market basics to finding ways to make money from home but it really comes down to not spending money you don’t have.
Grant’s story reminded me of one of my favorite sketches on Saturday Night Live. Check it out then read his story.
Post-2008: Tough times Getting a Loan
I have previously worked as a loan officer, and although the profession lost a lot of respect as a whole after the financial and lending crisis of recent years, due to unscrupulous lending practices, those who work in that field have a unique insight into the finances of millions of Americans.
As the crisis hit and the lending regulations tightened, it became increasingly difficult for an applicant to qualify for a mortgage. The loan officer's role quickly transitioned from salesman to pre-qualification expert. You had to cut to the chase and figure out who actually qualified, or at least who had a chance, so you didn't waste your time selling a loan to an applicant that the underwriter would just reject after you got the client on board.
In pre-qualifying a potential mortgage applicant, we analyzed their Income, Property, Assets, and Credit, or IPAC as we called it. With the IPAC, you could understand their entire financial situation. You could see everything, from the type of car they owned and their monthly payment, to what they had saved for retirement or a kid's college tuition.
I was surprised at the depth and detail behind getting a loan. I thought it was as simple as improving your credit score and filling out an application. Grant reveals that it’s not just that three-digit number but a list of items. Look at your whole financial situation before getting a loan and ask yourself if any on this list could be improved. If you're struggling with bad credit and don't know why, check out these credit score factors to improve your score.
Trouble living within your means? You’re not Alone.
The most astonishing aspect of it all was the debt-to-income ratio. It was amazing. I was young and naive and thought that if you made a lot of money then you were rich and wealthy. Wrong. The people who earned more also spent more, much more. Though I never did an analysis, the average debt-to-income ratio seemed to be the same across all income brackets.
If you were a surgeon, then instead of having a huge cushion for your bills each month, you were making car payments on a Mercedes, a Lexus, and a BMW, paying private school tuition for your 8-year old, and having a mortgage on a second home. It was absolutely incredible. No one could be content. Everyone was trying to keep up with the Joneses. Everything was proportional and it was never enough.
I remember an attorney requesting a home equity loan because he wanted to pay off credit card debt for what seemed like about 10 different credit cards that had been maxed out. One of the reasons they were maxed out was that he and his wife had a group of friends with whom they traveled to Europe with every summer. It was a big traveling group and they went to new destinations every year. He told me how they were excited to go to Budapest the coming summer, like he had no concept that what he was doing was disastrous.
How could he miss the annual trip? What would he tell them? What non-financial excuse could he come up with? Miss out on a Rhine River Cruise? Oh, the humanity.
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I was fortunate to have that job when I was young and before I owned any real estate. When I was ready to buy my first home, I was determined not to be in the same situation as every client on my phone.
People don't need a finance degree, they need will power to control their spending and self esteem and self worth that doesn't stem from finances and possessions. Spend less than what you earn. It's not complicated.
There it is, the whole of personal finance boiled down to one (simple?) rule: spend less than what you earn and live within your means.
Need help budgeting? Check out this post on setting realistic financial goals and a budget you can keep!
I like the piece towards the end, “self worth that doesn’t stem from finances and possessions.” It took me a long time to figure that one out and I still struggle every once in a while. You don’t have to be a monk but spend a little time thinking about what you have and maybe back to a time when you didn’t have all that stuff. Most of the time, people living outside their means could be avoided with a little self reflection.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.