Getting a Loan Provider to Agree to be a Backup Loan

NOTE: With the changes in the mortgage market, there are no backup loans any more. I won't do them and I don't know anyone else who will. The costs have ballooned too much; not only in the form of costs that don't get reimbursed if the loan doesn't fund, but in the form of higher rates the lenders charge me and all my future clients when I lock loans that don't fund

I have repeatedly advised my readers to sign up for a back-up loan if they can find somebody willing. So every once in a while, I get email like this:

Hi! Would you be willing to do my backup loan? I'm already signed up with my brother-in-law but you tell people to get a backup loan so I'm asking you.

No loan officer with any sanity is going to agree to that request. You've already made up your mind who is doing your loan. You are not honestly shopping your loan, and you're kidding yourself if you think you are. You're not likely to evaluate your brother-in-law's loan critically when it comes to final signing, you're just going to sign on the dotted line. So the back-up loan officer is going to spend hundreds of dollars and a lot of time pushing your loan through for zero prospect of getting paid. Suppose your asked you to work through the weekend, and maybe a couple extra nights, spend about a week's worth of your own pay, but that you wouldn't be paid, you wouldn't get a bonus, and it wouldn't be considered at your next review. That's essentially what you're asking them to agree to with the above scenario. There is no carrot whatsoever in the case of loan officers, because (unlike employers) you're not paying them at any other time, either. Quite frankly, I'd rather spend the time trying to find another client, or with my family, or doing anything else. I'm not interested in wasting my time on backup loans like that, and neither is any other loan officer.

The first thing you have to do if you're hoping for someone to agree to be a backup loan provider is give them an honest chance at being the primary loan. You have to shop them before you have signed up with anyone. You have to have the whole loan officer conversation with several loan officers: what you've got, where you want to get to, your situation, etcetera. Don't forget to ask the Questions You Should Ask Prospective Loan Providers. They go out and price the loan, and get back to you with what they can do. If you are actually signed up with someone else prior to this point, you have not honestly shopped your loan, and no loan officer in the world is going to agree to provide a backup, not to mention that you have placed yourself completely at the mercy of the loan officer you signed up with. There never was any real chance that other loan officers could actually earn your business. It's like going to an auto dealer and asking them to special order a car for you, despite the fact that you've already paid another dealer, are not going to put down a deposit, and indeed, really want to do business with the other dealer, but hey, you want them to do this for you on the chance that other dealer cannot deliver. If you have any doubts, why did you order with the other dealer, or more precisely, why did you sign up with your brother in law for the loan? Especially prior to checking with anyone else? And if you have any doubts about your brother in law, why are you waiting until now to shop your loan?

So after honestly shopping your loan, you obviously need to make a choice. Now the reason I advise people to get a back-up loan is because everything you are told when you make that choice could very well be a lie. With the majority of loan companies, either the federal Good Faith Estimate or the California MLDS are subject to all kinds of misrepresentation, intentional misquoting, etcetera. If this were not the case, there would be no need to sign up for a back up loan. The purpose of signing up for a back up loan is to give yourself another option if, when you go to sign final documents, the loan they actually offer you a contract for is different from the loan they dangled to get you to sign up, that they have been talking about all this time but at the moment of truth they don't really have it. Whether it's a different rate, has closing costs thousands of dollars higher, thousands of dollars added to your loan amount that they conveniently "forgot" to tell you about, has a pre-payment penalty when they told you it didn't, is a completely different kind of loan than they told you about in the first place, or even all of the above, the loan isn't what got you to sign up. In some cases, they don't have a loan at all, and are stringing you along in hopes that they will have a loan Real Soon Now. If you only have one loan ready to go, your options are limited to "sign on the dotted line or don't." If you've made a substantial deposit on a property you are buying and all of a sudden you don't have a loan, guess what? You will probably lose that deposit. So people will sign on the dotted line, even for refinances, when it's not the same loan they were led to believe they were getting in the first place. Hence, my advice to sign up for a back-up loan. That gives you the option of signing the other loan officer's loan contract, and the mere fact that someone else also has a loan ready to go is much better leverage than anything else you can do to get them to produce the loan they said they had in the first place. You can use the first loan officer's loan as a club for your back-up, too, if need be.

But if you're not going to evaluate your primary loan officer's loan critically, if you're not going to go through the paperwork and make sure that rate, terms, and costs is indeed, as described, that back-up loan officer has just wasted all of their work, and all of their money. Excuse them if they are less than enthusiastic about doing that when there is no prospect of getting paid. It's not like they are being paid an hourly wage. If that loan doesn't close, they get nothing for all that time and effort. People work to earn money, even if they really do like their job. What you need to do is give them reason to believe that you are going to end up signing for their loan. The best way to convince them of this is if the prospective backup loan officer is certain themselves that the primary loan isn't really going to be able to deliver the loan they're promising you.

So what you've got to do, preferably before you make a final choice for your primary, is ask your number two prospect about your number one prospect's loan. Does loan officer number two think offer number one is deliverable? I assure you that good loan officers know what is and isn't really deliverable. Whether the answer is "Yes" or "No", you've got some useful information. If the answer is "Yes," you know that what the low bid is talking about is possible. Whether they will actually deliver it or not is a different question. The way to bet is that they will not, unless they are willing to offer you a written Loan Quote Guarantees. If you ask for a Loan Quote Guarantee, most lenders and loan officers will not give you one. Instead, they will try to distract you with BS about how they are thus and such reputable company, and they honor their commitments. This is nonsense. Neither the Good Faith Estimate, Mortgage Loan Disclosure Statement, Truth In Lending form, or any of the other standard forms that you get at loan sign up, is in any way a commitment or a guarantee. They are only estimates, and they may be accurate estimates or they may be the biggest lie since the invention of the one night stand. Furthermore, loan officers don't write loan commitments. That is the exclusive province of underwriters, whom you will never communicate with directly. The most that loan officers can promise is that if the underwriter approves it, the loan will be on a given set of terms, and that is the sort of Loan Quote Guarantee you should look for.

Now, if the second lowest loan provider says "no," that the lowest's rate is not deliverable, that is your opening. "Well, tell you what, Mr. Loan Officer," you say, "If you're certain that loan quote is not deliverable, and that yours is, how about you agree to be my back-up loan provider? If they don't deliver on those terms, as you say they won't, and you do deliver on yours, I'll take your loan. What do you say?"

What they are most likely going to do, of course, is try and talk you into being the primary, and to forget this nonsense about back-up loans. After all, he (or she) is a sales person. If you do what they want, this puts them in the cat-bird seat thirty days down the line instead of your number one choice. And you know, if they are willing to give a Loan Quote Guarantee and the number one choice isn't, I'd probably make them my primary. Ask anyone who's dealt with construction contractors if they'd rather take a bid of $X that is just an estimate, or $X plus 5% that has good solid guarantees behind it? Same principle here. The one that's willing to guarantee their work gets the business, or at least first crack at it.

Now suppose number two won't agree to provide a back-up? Then ask number three. Suppose number one is going to try to hinder your back up loan? You need to explain that you fully intend to go with them, and that if they provide the loan on the terms they told you about, they are going to get the business, but you're providing yourself with an insurance policy, just in case they won't, and their attempts to sabotage that insurance policy are likely to force you to cancel your loan with them. Tell them that if they are really going to deliver what they said they would, their loan will be better than the competition's, so there will be no reason to choose the other loan, so their attempts to obstruct or sabotage the other loan have you thinking that maybe you should cancel their loan, because their actions are indicative of being nervous about their own loan. Be blunt, be truthful, and carry through on your threat to cancel if they keep being an obstacle to the back up. If they need to obstruct a worse loan, it's because they have no intention of delivering the better one. Carry through on your promise to cancel - and then go find yourself a new insurance policy, aka backup loan provider.

Signing up for a back up loan is the cheapest, smartest thing you can do to protect yourself in one of the largest dollar value transactions of your life. But if there isn't a real possibility of getting the business, no loan officer in the world is going to agree to be your back up. You need to demonstrate to them that there is a real possibility of their loan being the one you actually sign the loan contract for at the end of the process, or they are not going to be interested. The type of email that is referenced at the top of the article isn't to protect yourself. It's to mollify your conscience, because you know you didn't really shop your loan around, and you know you're going to pay more than you need to, unless you get struck by pure dumb luck. The point of reading the consumer education here is that you don't want to rely on pure dumb luck.

Caveat Emptor

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