THERE ARE A GREAT many terrible problems. Having too much cash typically isn’t seen as one of them. Yet that’s where we are. Following our move back to the U.S. from Spain, we found ourselves with an abundance of cash sitting in our brokerage account. And these days, with interest rates the way they are, that cash doesn’t do much more than sit.
The upshot: We decided to purchase some rental properties. We have one rental unit already—our former home—but we plan to make it our home once again. With the help of our property manager, Jeannette, who is also a realtor, we searched for and found one property we liked, and with a price that was already reasonable but which we hoped to negotiate lower. We thought we could jump to the front of the buyer’s queue by offering cash. Jeannette said we would need to show the seller proof of sufficient cash on hand.
That’s when the problems arose.
We didn’t want to just show our Vanguard Group brokerage statement, because that would tip the seller as to how much cash we had available, likely making her hold firm on the price and reject our request to pay for improvements in the heating and air conditioning system. Jiab called Vanguard to inquire if the folks there would issue a “line of credit” letter for the amount we wished to offer.
We had more than enough cash to buy the property three times over and we could have borrowed the necessary sum using a margin loan—and yet they declined. They didn’t want to take the risk of backing us, despite the cash they were so graciously holding for us.
Not to be thwarted, Jiab called around to see if we could quickly qualify for an investment loan for the amount we wished to offer. We didn’t need the loan, but we could use a preapproval letter to show the seller our ability to pay.
We didn’t qualify, even with our 800-plus credit scores.
Apparently, real estate loan systems are set in formulaic stone, where the key factor is the loan-to-income ratio. As retirees, our income is low. Wealth—as in cash on hand—apparently doesn’t factor into the formula. Our sons, who are just starting out in the work world and so have a solid income but no accumulated wealth, could better qualify for a loan than we could. It seems you could win a $1 billion lottery, but—if you then quit your job—you might nix your ability to get a loan.
Why didn’t we simply open a financial account elsewhere and move part of our cash into that account, shielding it from the seller’s view? That would have taken longer than our five-day option period.
Don’t get us wrong. We’re not advocating going back to the purely subjective It’s a Wonderful Life days when George Bailey gave a loan to his friend Ernie because he believed him to be good for it. In that sort of world, totally inappropriate factors—such as race and gender—became systematically factored in. We must continue to guard against such biases in lending and, when we do see them, address and eliminate them.
On the other hand, the cold, formulaic real estate lending analysis of today seems geared solely toward people who want to leverage their income into accruing debt to gain housing. Jiab spent years in credit risk management for a major bank. She, of course, looked at debt-to-income ratios to assess risk, but she also considered other mitigating factors, including wealth and credit scores. Such factors should be included as well.
Jiab found another lender who was willing to give us a preapproval letter, but it took time and searching on her part. Evidently, this second company did factor in credit scores and assets into its loan approval logic. Meanwhile, our realtor also suggested depositing the money with the title company as a neutral third party to verify we had the funds. This could have triggered more fees, plus it would have locked away the money prematurely before closing.
In the end, we showed the seller an email confirming a wire transfer from Vanguard to our bank account for the amount of the asking price. This seemed to satisfy the seller and her realtor.
There are more and more retirees who, by luck or hard work, rely less on income and more on the nest egg they’ve built over the years. Maybe the lending system should stop punishing them for finishing the rat race early.