Why is proof of income requested for certain loans but not others?

Question

I have over 100K in credit available, and have NEVER been asked for proof of income. In fact, my income is far below 1/8th of my credit line. I can probably buy a Rolls Royce with credit, which is the same value as many properties. When I first applied for my credit card ever I was instantly approved for $2,000.00 and was never asked for any proof that I earned even a single cent.

I now have 9 credit cards with a total of over $100,000.00 in credit and an excellent credit score.

That's all wonderful and all, but then I go and apply for a down payment loan on a home and get bombarded with proof of income requests for $8,000.00. What? I have gotten approved for credit cards higher than that with no request of income proof -- and I've manually asked for various credit limit increases without request for proof of income either. Why would a lender for a down payment want proof of income for a house when a credit card issuer gave me more and doesn't care?

There would be less risk since it's less money. That's like a guy asking for evidence that I can repay $2 when another guy just happily hands over $20. Why the hell would the $2 guy want proof? Where does he get off asking for it? If someone else is giving me more and not requiring that I prove I can repay it (stated-income loan), what reasoning would one have to get proof for less?

Could I use this argument as a basis that they have no reasoning to request proof of income, if another lender (credit card company) would give me more without proof of repayment?

Should I borrow a home loan from a credit card company then? Or what's the catch here?

Answer 1

Why don't you just put your down payment on one of your credit cards?

(Note: I'm not actually suggesting that you do this. Please read on.)

There are a few reasons why you wouldn't (or couldn't) do this:

1. The interest rates on the cards you have are very high.

2. You don't have enough of a credit limit on any one of your cards for the down payment.

These two reasons highlight the answer to your question.

Credit card companies charge very high interest rates. These high rates allow them to make money even when some of their customers default. They know that not everyone will pay them back, so they make sure to make a hefty profit on those who do.

Secondly, credit card limits are often much lower than the amounts of car and home loans. This limits the risk to the credit card company. Sure, you have $100,000 in total credit limit, but this is split among nine different companies.

When a bank offers a traditional loan for a large sum of money at relatively low interest, they need to be able to limit their risk somehow. They do this by ensuring that their customers actually have the ability to pay them back.

Answer 2

The two things are materially different.

Point number 1. With a credit card, the bank (and card network) earn a fee every time you spend on your card. You swipe a $100 dinner, the credit card company makes about $3. You pay it back, they may not make any interest but they've made their $3. Additionally, if you have a $1,000,000 credit limit, you've only actually borrowed $100; which brings me to point number 2.

Point number 2. A credit limit of $X is not in any way the same as a loan for $X. When you seek a personal loan, the lender hands you money in equal amount to your loan, less any origination fees that may apply. Your loan for $8,000 results in $8,000 being wired to your account. Your credit limit is only a loan when you actually charge something. Until then its a simple (adjustable) risk limit set by the bank's underwriters.

Point number 3. Your credit report contains no income information. It's up to the lender to determine what sort of risk they're willing to take. Some personal lenders are just fine with stated income and employer contact information. Some lenders want to see some pay-stubs. Some lenders will lend $X on stated income but won't lend $X+1 without income verification. Some will lend the money at a lower interest rate if you do prove your income and employment. It's all lender specific. Credit card issuers are clearly lax on the income verification piece of the equation because of points number 1 and 2.

Point number 4. If you're getting a loan for your required mortgage down-payment you are a much bigger repayment risk than you realize.

Answer 3

Why would a lender for a down payment want proof of income for a house when a credit card issuer gave me more and doesn't care?

The risk profile and rate of interest are different.

Could I use this argument as a basis that they have no reasoning to request proof of income, if another lender (credit card company) would give me more without proof of repayment?

You could argue anything, but it does not mean the other company will agree with your argument.

Should I borrow a home loan from a credit card company then? Or what's the catch here?

You can. Check the rate of interest and penal fees; you would realize how much you will end up paying. Depending on the country, the difference could be in the region of 10-15%.

Answer 4

Is this for a home loan in the United States?

In the US, ever since the Dodd-Frank act, lenders are required to verify "ability to repay" if the loan is to meet the requirements to be a qualified mortgage. If a loan meets the ability to repay and other requirements as a qualified mortgage it receives some specific protections from liability depending on the category of qualified mortgage. Qualified mortgages are also easier to sell on the secondary marketing. The upshot here is that the lender is very motivated to originate loans per the Dodd-Frank requirements which include among other things ability to repay. Note that this verification of income is not needed for the down payment but instead applies to the expected ongoing monthly payment.

So even if you make $1M a month, have $10M in the bank, and six figures of open lines, your home loan lender is going to ask for verification of income for even the smallest home loan (outside of a few specific loan programs). Otherwise they are taking on additional liability.

What about down payments, then? Most guidelines also call for verification of source of funds for the down payment. There it is not at all a matter of income, instead more of a question of who exactly is putting up the money for the down payment, i.e., the source of funds. Pretty much everyone's guidelines--Freddie, Fannie, Ginnie, VA, FHA, RHS-- all have very specific requirements for source of funds. Even if that was not the case, there are various types of fraud (strawman buyers, etc.) that are easier if no questions are asked about source of funds, so lenders are likely to ask even for custom or non-conforming lending situations.

Answer 5

It is completely in the realm of each lender what they request. Some lenders always want to see proof of income, and others have decided to look only at other things. Their decision has nothing to do with you, your situation, your income, or your credit history.

You are of course free to go to another lender that does not want proof of income.

Answer 6

It varies from bank to bank. Some lenders would ask for proof for income and some won't. Apart from income proof, there are other such criteria a bank may consider such as your credit report, credit score, debt to income ratio, repayment history, etc.

Answer 7

Also - the more credit facilities you have, the risikier you get. Say Company A lends you $8.000 for a down-payment - let's say you then go out and max out your other 100k facilities - you now have debt of 108k. What guarantee does the Company A have of repayment?

Fewer credit facilities = better chance of getting a new loan.