Loan officer asking why I am downgrading?

Question

Hi BP friends!

I will appreciate some feedback on the following scenario: I applied for a loan with my bank to buy a townhouse (asking 185k) which will be my primary residence. I currently live in a single-family home (450k). Since I will move to that property, the loan officer requested an explanation of why I am "downgrading." He said that it is usually or expected to "upgrade" but not downgrade. My strategy is to rent the current property and save a lot more money (1/4 of taxes, expenses..) to keep escalating on investments. I assume the question is trying to uncover if I am downgrading because of financial issues? Any advice on how should answer that question will be much appreciated.

Thank you!! Javier G.

Russell Brazil · Answer

They are asking to see if you are going to commit mortgage fraud. They want to make sure your new primary isnt really an investment property.

Chris Mason · Answer

You're not "downgrading." The new house has some killer feature specific to your family that your last home lacks. The extra bathroom for the kid entering their teenage years (1 hour per morning in the bathroom = needs own bathroom), shorter commute for your wife (happy wife = happy life), bigger yard for your dog, you get the idea. List all those things out. There's more to a home's value than sticker price, detail this home's value-adds to your family and lifestyle.

Jim K. · Answer

Hey, Javier!

That's where we're at as a society -- hyperconsumerism mind control has gone so thoroughly in that the idea of figuring out how to get the jackboot of financial dependency off your neck frightens loan officers. Who would CHOOSE to live more cheaply if they didn't absolutely have to?

I'd tell him the truth and draw him a chart. The numbers will make perfect sense, because the math of financial independence always makes sense. It's the mind control disseminated by the profiteers of hyperconsumerism that make the narrative sound strange to people.

Thanks for sharing.

Javier G. · Answer

Thank you all for your advice! Learning something new every day.

regards, Javier

Kyle J. · Answer

It's exactly as @Russell Brazil said.  Since it sounds like you're keeping the more expensive house, some people might assume you're just claiming that you're going to live in the much less expensive house to get the better rate, but then turn around and rent it out.  Sounds like the loan officer just wants to make sure that's not what you're going to do. He probably also knows the underwriter is going to ask for the explanation at some point anyway and is trying to get everything in order up front.

Not sure about your market but in my market most $450k single family houses don't make good rentals, so it would be a little suspicious for someone to do this.  Not to say someone couldn't do it, it would just raise some eyebrows that's all.

As for how to answer it, all you can do is answer it truthfully and do your best to explain why you want to do what you're trying to do.  Perhaps it would also help if you show that you've already done your market research and determined what you can rent your current house out for to show that it makes financial sense to do this too.

Javier G. · Answer

@Jim K. I see your point. As an engineer, I overthink everything! I spent all my afternoon making calculations about what I should respond.

@Russell Brazil He actually told me that I'd need to sign a letter stating that I will live on the new property, and I said of course!. Downgrading will allow me to keep growing and save more money for the next properties. Thank you both for your feedback.

Javier G.

Loan officer asking why I am downgrading?

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