Why Does the Bank Want to Know Everything About Me Except Whether I'm Any Good?

Why Does the Bank Want to Know Everything About Me Except Whether I'm Any Good?

New to Real Estate · Miami, FL · Member since 2024 · 1k+ posts · 478 votes

I've always found it fascinating how much a lender can know about a borrower without necessarily knowing whether the guy is any good at what he does.

We want tax returns, bank statements, credit reports, income history, and enough documentation to reconstruct his financial life since kindergarten. But here's something those documents don't necessarily tell us. Almost everybody starts a business strong and confident. Full of ambition, enthusiasm, and the absolute conviction that he's going to conquer the world. Fine. But will he still be standing fifteen years later?

I'm not suggesting he'll inevitably turn into some cynical French caricature, cigarette butt hanging from his mouth, shrugging and muttering, "What does it matter?" But not everybody is built for the long haul.

I suspect the first ten years are the hardest. If you've survived a decade in the same business, you've probably learned something more valuable than enthusiasm: realism. You've discovered that customers disappear, markets change, good employees leave, and occasionally the entire universe seems personally offended by your business plan. And you're still there.

Now consider two borrowers. One is a young entrepreneur, three years into a rapidly growing business. Energetic, ambitious, making excellent money. He might be exactly the guy to bet on right now. The other has been running a modest contracting business for twenty years. His income fluctuates, but he's survived recessions, difficult customers, and enough unpleasant surprises to stop being surprised. He's not particularly exciting. He doesn't promise to revolutionize plumbing. He just keeps showing up.

Which one is the better credit risk? Well, that depends on what we're actually financing.

There's an ancient Greek figure called Kairos, the personification of the right moment. Sometimes the opportunity is precisely that young entrepreneur's extraordinary momentum. If he's genuinely competent and not completely full of ****, there may be excellent reasons to take advantage of that energy while it lasts. But a thirty-year mortgage isn't a bet on somebody having a spectacular Tuesday. It's a bet on his ability to keep earning through thousands of ordinary Tuesdays, including the miserable ones.

Of course, longevity doesn't guarantee competence, and enthusiasm isn't evidence of irresponsibility. A twenty-year veteran can be complacent, while a newcomer can be exceptionally disciplined. And lenders need documented repayment capacity, not amateur psychological evaluations.

Still, I wonder whether we're asking two different questions without noticing. Are we financing the opportunity in front of us, where timing and momentum matter? Or are we financing someone's ability to survive the long haul, where experience and resilience may matter more?

Because the borrower who's perfect for one might be completely wrong for the other. And perhaps the real mistake isn't choosing the energetic newcomer over the boring veteran, or vice versa. It's forgetting to ask how long we need the qualities we're betting on to last.

1Reply
489 views

Most Popular Reply

James JonesPro Member
Investor · Collierville, TN 38017 · Member since 2017 · 934 posts · 638 votes
1w

Drago, you just described why a lot of us stopped underwriting ourselves and started underwriting the house.

On a conventional loan, the bank lends on you — your income, your job, your history — so it asks about everything except the thing that will actually pay it back. On a DSCR loan the order flips: the rent has to cover the payment, taxes and insurance, and the property carries the loan. I run DSCR at 70 to 80% LTV against ARVs of $180K to $265K, and the deals that work are the ones where the numbers worked before anyone asked my name.

So which borrower is the better risk? On the paper the bank can file, the steady one. In the real world, the one whose tenants pay on the first, every month. The bank is not ignoring competence because it is stupid. It is ignoring it because competence does not fit in the file it has to sell.

See this reply in the discussion

4 Replies

Jump to latestLatest
  • James JonesPro Member
    Investor · Collierville, TN 38017 · Member since 2017 · 934 posts · 638 votes
    1w

    Drago, you just described why a lot of us stopped underwriting ourselves and started underwriting the house.

    On a conventional loan, the bank lends on you — your income, your job, your history — so it asks about everything except the thing that will actually pay it back. On a DSCR loan the order flips: the rent has to cover the payment, taxes and insurance, and the property carries the loan. I run DSCR at 70 to 80% LTV against ARVs of $180K to $265K, and the deals that work are the ones where the numbers worked before anyone asked my name.

    So which borrower is the better risk? On the paper the bank can file, the steady one. In the real world, the one whose tenants pay on the first, every month. The bank is not ignoring competence because it is stupid. It is ignoring it because competence does not fit in the file it has to sell.

  • Noah WrightBusiness Member
    USA, Nationwide · Member since 2024 · 322 posts · 119 votes
    1w

    Business-purpose lenders do try to answer that question, just with proxies instead of a read on someone's character. Your instinct is a sound one, and the file catches more of it than people think. Reserves are the big one. Most DSCR lenders want a set number of months of payments sitting in the bank after closing, which is a bet on whether you can ride out a bad stretch without missing a payment. Mortgage history is another, since a clean record of paying through vacancies and repairs says a lot about staying power. On bridge and fix-and-flip loans, most programs count your completed deals in a recent window and give the experienced borrower better terms. None of it measures grit directly. It measures what grit leaves behind: cash kept back, bills paid on time, and projects finished.

  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    1w

    Yeah its an interesting way to frame it - on the DSCR side we kind of sidestep the whole question since the loan is underwritten primarily based on the property rather than personal income or tax returns, so the "bet" is really on whether the rental keeps cash flowing through all those ordinary Tuesdays, not on how good the guy is at his day job. Experience still shows up a bit (a lot of DSCR Lenders will tighten LTV or want more reserves for first-time investors) but theres no real way to underwrite "will this person still be grinding in 15 years" with a 30-year note anyway. Curious if you think lenders should be weighting time in business more than they do now?

  • Lender · Boynton Beach, FL · Member since 2026 · 121 posts · 55 votes
    1w

    @Drago Stanimirovic — Miami — this is the best framing I've seen for why my first 3 deals died and my last one might live.

    I started pulling lists in Delray 33446 — 10 pulls, 8 of 10 were waste — looked good on paper: equity, absentee, out-of-state — but I was financing the "spectacular Tuesday" — motivated on paper, but no real distress, just retail MLS at 4-5% equity — banks loved the docs, but there was no Kairos — no moment.

    What survived 10 years in your example — the contractor who keeps showing up — I saw same in my filter — 7873 Monarch Ct, seller since 1999, 26 years — tax paid current, $0.00 delinquent, no open permits — boring on paper, but he kept showing up and paying — that's longevity — when I ran same 28-column stack, that one was 57.5% all-in vs 78% for the shiny ones.

    Made me realize what you said — 30-year mortgage isn't bet on Tuesday — it's bet on thousands of ordinary Tuesdays — my early filter was betting on enthusiasm (young entrepreneur 3 years in), my current filter is betting on survival (20-year contractor) — different questions.

    For lending, I now ask what you said at end — how long do I need the quality to last? If I'm doing 14-day assignment, I want momentum. If I'm doing 12-month bridge, I want realism — the guy who knows customers disappear, markets change, employees leave, and still there.

    Still learning to tell which is which without a 10-year track record to look at — how do you read that in a borrower who only has 3 years of returns? What tells you he's the one who will still be there on miserable Tuesday?

    Appreciate the post — saving this one.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.