If Your Loan Falls Through

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"What do I do when the loan falls through"

That depends upon when it falls through and what situation you're in. If you're in a refinance situation, you generally keep making payments on your old loan until and unless you can find a refinance that is better that you qualify for. There is one exception to this: balloon loans. Balloon loans must be paid off in full on thus and such a date. These dates are known at least five years in advance, but some people insist upon leaving it to the last possible instant.

If you're unable to refinance your balloon in time, lenders whom you ask for forbearance will generally will give you at least some time in extension of the old loan, but at a higher interest rate. This is very kind of the lenders because they don't have to give you an extra minute. The agreement ran out last week and you didn't pay them; they are entitled to foreclose if they want to. Good thing that the lender usually doesn't want to.

If you're doing a purchase, and the loan falls out any time with more than two weeks to go in escrow, that's usually time to rush a purchase through, although you won't be able to shop the new loan as much, and it's unlikely to be as good. See why I tell you to apply for a back up? I've gotten purchase money loans done in two business days - loan approved, and documents in the hand of the notary.

However, loan providers will generally not admit that loans fell apart before the last minute, even if they were rejected out of hand back on day three. Actually, that's a trick they pull quite often; tell you about loan A intending to deliver loan B, and then at the last minute tell you that you don't qualify for A but you can have B. This keeps you from having time to shop around after you discover what a rotten loan they really have for you. They knew about what loan you would and would not qualify for within a week unless they are hopelessly incompetent, but their percentage lies in keeping mum until you have no choice but to accept loan B. In another amazing coincidence, loan B usually has a long prepayment penalty, and buying it off - if you can - costs two percent on the rate, and they'd have to send it all the way back to underwriting to see in you qualify, and that will take weeks, so why don't you just sign for this loan right now. They may even say, "We'll fix it later." Yes, they will volunteer to get paid again after you've spent several thousand dollars on that prepayment penalty. I had a guy come to me quite recently, trying to fix one of those after the original company failed to do so. Unfortunately, the coals he'd been raked over, and with his credit score, there was nothing I could do and he lost the property.

So it's now day thirty-one of a thirty day escrow, you've got a $10,000 deposit on the line, as your loan contingency expired back on day eighteen. Aren't you glad you applied for a back up loan? You didn't? Well, the situation isn't necessarily lost.

First, call your seller, or have your agent call their agent, and find out if they'll extend escrow. If it's a hot seller's market and they won't, you're hosed, but in a buyer's market like this, they will if they're smart. Most sellers, even in this market, will want you to pay extension fees and that is to be expected. The reason escrows are usually limited to thirty days is so they don't have to keep spending money on you if you can't qualify, and they do spend money on the transaction. This may cost you an extra $100 per day for up to ten days, but when the alternative is losing $10,000, that's very worthwhile.

Purchase money loans can be done fast if you are in fact qualified and your loan officer knows what they're doing. Forty eight hours is often very doable. Three to four days is much easier. Ten days is a long time in this sort of situation. The loan provider will charge more of a margin than you usually would, but this guy is likely putting everything else on hold in order to deal with your problem. That's reasonable. Perhaps this time you'll heed me when I tell you to apply for a backup loan?

Loan providers who admit in the first week after you've given them standard qualifying information that you're not going to qualify for the loan they initially told you about are probably honest, and likely thought you really would qualify. But the longer it goes, the less likely it is they intended to deliver the original loan. I might believe someone like that in the second week - but I wouldn't believe that story from anyone in the third week after applying, even if they were backed up by everyone from Diogenes to George Washington.

Loans fall apart all the time. Locally, the percentage of escrows that fall apart because the buyer cannot in fact qualify for the necessary financing is edging up towards forty percent. So take precautions to make certain that situation does not happen to you.

Caveat Emptor


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This page contains a single entry by Dan Melson published on September 15, 2006 10:01 AM.

The Mechanics of Inheriting Real Estate was the previous entry in this blog.

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