What Do I Do If My 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. Don't do this. If you have a balloon loan, start the the refinance process at least sixty days in advance of the balloon date.

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 much higher interest rate. This is very kind of the lenders because they don't have to give you an extra minute under any terms. 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, loans are taking 45 to 60 days now. Minimum. That's just a fact of life. The agent who writes a purchase contract for less than 60 days in escrow is not your friend if there is a loan involved.

However, I also need to say that if purchase money loans fall apart, it's a real good idea to re-confirm that you can afford this with some independent expert. It's not a red flag, precisely, but it is definitely a yellow caution signal. Ask "Why did the loan fall through?" Make certain it isn't something to do with basic affordability or needing cash you don't have. Loans do fall through for stupid reasons (I had a loan I had to move from one lender to another not too long ago because they first lender wouldn't give them the usual credit for 3/4 of the rent because the tenant in their rental property had paid the deposit in cash despite the tenant having been there for nearly a year, showing rental checks, etc, and without that rental income, my client's other income fell short of qualification). Loans also fall through because the basic checks show you cannot afford the property. Loan qualification is there for your protection as well as the lender's

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 advantage 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. What now? I used to tell people to apply for a back up loan, but nobody can do them any more. 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, they will if they're smart. Most sellers, even in a buyer's market, will want you to pay extension fees and that is to be expected. The reason escrows are usually limited 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.

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 almost certainly honest, and likely thought you really would qualify. Because they could have put off telling you, but didn't, I would bet serious money they're honest, and it's worth giving them another shot. 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 affidavits from everyone from Diogenes to George Washington.

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

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on March 1, 2014 8:00 AM.

Transferring Ownership of Inherited Property was the previous entry in this blog.

Asking Price Versus Sales Price is the next entry in this blog.

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