Why does it take a few hours to finance a $100k auto loan, but 30+ days to finance a $100k mortgage?
In: Economics
30 year note with an asset that can’t be picked up in a trailer versus a 5ish year note collateralized by something you can take back over night so less risk on a vehicle. Plus no appraisal, inspection, title work, survey, 3rd party closing on a car note.
I think your numbers are off. A car loan is typically less than $40k and houses (at least in LA) are multiple hundreds of thousands of dollars. Expensive areas can be $800k.
The people selling the car and the people making the loan have already worked out much of the deal before you even walk into the dealership. The lender knows the value of the car and exactly what condition it’s in.
Should you stop paying, they can legally repossess the car pretty quickly – or report it stolen if you take off.
In a home sale, the bank is a third party that knows nothing about the property and will get stuck in a lengthy foreclosure/eviction process if you stop paying.
It doesn’t take 30 days to clear the loan, but it does take longer while they appraise the property and investigate your credit worthiness. It’s a much greater risk for the lender even though the face value is the same.
When you finance a car, you pretty much have to be rich enough they lender can easily get their money back without relying on the car as collateral. Car’s get wrecked or stolen, and their value depreciates quickly. The bar is higher to get a loan, and since you can almost always get a cheaper car, it is not worth the effort to jump through a lot of hoops to work the system, easier to just say “no, get something different”. Especially with a $100K car.
Also, sometimes the car loan does take a few days. The dealer lets you take the car anyway, with stipulations in the contract that you have to give it back and pay various fees if the loan doesn’t go through.
With a house, it is completely different. Many people who buy a house can barely afford it and are borrowing right on the margins of what they can qualify for. The house serves as collateral, which extends borrowing power, but every house is different and has to be inspected and appraised. On top of that, you have tax breaks, government projects, and a wide variety of loan products to choose from, there are a lot of moving parts, and choosing the right combination can be the difference in qualifying or not.
Finally, comparing a $100K car loan and a $100K home loan is completely specious. If you are trying to buy a $100K, you are pretty rich and the bank knows if push comes to shove, they can squeeze that money out of you. $100K is a pretty cheap house, if that is all you can afford, $100K is a lot of money to you, so the lender needs to be a lot more careful about how they are going to get that money back.
A couple of big factors are average costs of loan, time frame of loan and, credit worthiness of buyer, standardization of asset being borrowed against.
First off, vehicles are standardized. Even at $100k price point, a new BMW 7-series is a BMW 7-series with a known MSRP/value, doesn’t matter what city you buy it in, or state, etc. A house is basically a one-off asset, so an appraiser needs to determine the actual value of the property based on location, land, house size, age, etc. and compare it to other nearby recent sales to tell the bank its actual value.
Secondly, the amount of paperwork, requirements, are different because of average costs. The average new car is 30k. The average home sale is $300k, so that’s 10x the value associated, on average. Sure, there are times where each might cost about the same but the $100k car buyer is likely going to be in stellar financial shape while the $100k home buyer is probably not in great financial shape.
And lastly, there are aspects to the time length of the loan. A car loans usually 3-6 years, vs 30 for a home loan. Because of time frames, and again because homes are one-off assets, banks have lots of requirement to make mortgages as uniform as possible in order to sell them easily (mortgage backed securities). This requires more extensive verification of borrower in addition to the already mentioned appraisal.
You can get mortgages quicker than that. I did. Mortgage in principle, found a house I liked, they booked a survey, about 2 weeks later (ASAP for the survey), we had the house.
It’s just a matter of having the right people and going through the process. It takes seconds to evaluate if a car is worth the money/insurance, especially if it’s brand new. It only takes one structural fault to render a million $ house worthless.
In addition to what /u/Lithium and /u/Vikkunen have said, cars are different from houses because they’re way easier to value, especially new cars. While there will always be a little variation, two cars of the same make/model/year in similar condition will sell for similar amounts, even in different markets, and their change in value over time is pretty predictable. So when the bank decides to finance the car, they can predict the value they can get out of it if the buyer can’t pay off the loan.
The value of a house is a lot more variable. Similar houses in the same neighborhood could vary by tens of thousands of dollars depending on even small variations in condition, amenities, and so on. Similar houses across the street from each other can vary by even more if that street is the dividing line between towns or school districts. Location makes a huge difference in house value. A basic sedan will cost you roughly $20k anywhere in the country, but a house comparable to [this one](https://www.realtor.com/realestateandhomes-detail/5775-Zaffre-Ridge-St_Boise_ID_83716_M98930-86944?view=qv) in Boise would easily cost seven or even eight figures in the Bay Area. And the change over time isn’t as easily predicted either-interest rates, the economy in general, and the growth or shrinking of individual towns all have an impact. All that makes it hard to just slap a value on a house, so a big part of the mortgage financing process is the appraisal. Someone from the bank will look at the house, at other similar houses nearby that have sold recently, and analyze the market to see if the value of the house is reasonable-you don’t have to do that for a car.
Finally, its a lot easier to move a car than a house. If somebody doesn’t pay their loan, the bank repossess the car. It probably gets towed to a lot, transported to an auction house, and sold, easy peasy. A house can sit on the market for weeks before getting an offer, during which time the bank has to pay for basic maintenance, taxes, at least some basic utilities (gotta keep the heat on or pipes might burst!) and so on. Even if there’s an offer immediately, the home selling process costs a lot more time and money than auctioning a car.
So in short, even if the loans are for similar amounts, a house is a lot harder to value and to move, so the bank does a little more diligence to make sure they’re going to make their money off the deal.
Much more paperwork with insurances and taxes plus you need inspections and appraisals on a house.
Much of it also has to do with the complexity of underwriting. As somebody mentioned, an auto loan is typically five years and far easier to repossess. With mortgages, lenders have to have some idea of your income from all sources, how likely those streams of income will stay stable (or at least not decrease) over the life of the loan, and do their due diligence to comply with the more specific federal regulations, particularly post-crash.
The number of disclosures that must be provided to a customer even if the slightest thing had changed for the note/contract of a mortgage can significantly delay processing times. Moreover, it can also depend if the mortgage is a first mortgage or a refinance or a second lien of some sort. There are more layers of risk and the lender has to cover its ass.
And honestly, a $100k mortgage may close faster than a $500k mortgage depending on how complex the borrower’s income is (a single W2 or multiple 1099-Rs, social security, pension, beneficiary payouts, RMD…). Somebody seeking a $100k is more likely to have simpler income to prove with regards to ability to repay.
It’s a whole bunch of factors depending on those factors applying to the borrower, lender, collateral, and also the relationships between all of the above.
If the mortgage loan processor, appraiser, and underwriter aren’t working on any other transactions it can go more quickly. But they are usually juggling a lot at one time a day they have to work your loan into the schedule with everyone else’s.
Also, buyers pay for the appraisal even if the deal doesn’t close, so we like to wait until after repair negotiations have been resolved before ordering the appraisal.
We like to set the closing date about 30 days out, but if you needed to close in 21 days it’s often possible to do so if the lender isn’t backed up.
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