Don't Allow Yourself To Become A Victim of Bad Real Estate Practice

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This woman made herself a victim


stayed in a hotel for 7 weeks looking for my "Dream Home." And, when I found it, even though it wasn't in my price range, I knew I would do anything I could to get it. I was vulnerable, emotional and became a victim.

Actually, that is not quite accurate - I made myself a victim.

First mistake: shopping outside your price range. Assuming that you get it, the bottom line is that you are going to have to make the payments, every month, from here on out. I can get you the loan, any competent loan officer can get you the loan (or at least we could when the article was originally written), but I would not even look at any home not in my price range. First, it's a useless exercise. You can't afford it. Why torture or tempt yourself? Second, the reason it's outside your price range is because it has something extra. So it's going to be more attractive to the average buyer than the ones you should be looking at. Many agents will capitalize on this by showing you such a property, knowing that a large percentage will fall in love with the property right there, and bingo, they've got a higher commission for an easy sale. Despite their highly touted "code of ethics" the proportion of Realtors® who do this is every bit as high as non-realtor agents. Ditto (if not worse) for every highly advertised national chain. "Well, it's just a little bit. I can handle the extra." Demand to know the asking price before you agree to view the property, and if it is outside your range, refuse to go. Fire any agent who suggests this to you more than once. I'd fire them the first time, myself.

Being self-employed, (actually at the time, I was on disability from hand surgery), the only loan I could qualify for was a Stated Income Loan. That's where you just tell them what you make, and it is not verified except through two years old tax records and your FICO score

This is not correct. You do sign an IRS 4506 form, but the whole idea behind a stated income loan is that the bank agrees not to verify your income. Maybe the lender wanted her to feel psychologically more comfortable, or something, but if you can show the income on current tax returns that's not a stated income loan - it's full documentation. And the lenders don't care what you made four years ago - they want documentation for what your making to be as current as possible - starting now and going back maybe two years. For Stated Income loans (no longer available anywhere I'm aware of at this update), they verify only that you have a source of income, and the amount you claim you make must be reasonable for someone in your profession in your area. If you can show income via two years of tax returns, that is a full documentation loan, and you get better rates (See this for information on documenting income). However, documenting income via tax returns is tougher because whereas the bank loves doing it, the number they will accept is the number that is after all the write-offs, often a significantly lower number. This is the reason for the stated income loan in the first place. Many business people, particularly small business people, are earning a heck of a good living but they find legal ways to pay for most of it with before tax dollars that they then are actually able to deduct. So they're living as if they make $10,000 per month, which they do, but the tax return only shows $3000 per month. Stated Income is intended to serve this niche, not the niche of people on weekly paychecks who don't really make enough money to justify this loan. Stated Income loans have, since the article was originally written, been essentially banned - something that's really hurting a lot of self-employed businessfolk.

six months later, when the interest rate changed, my payment went up. But I still had some disability money, so I didn't think about it - I just knew work would come.

What she is saying here is that she had to accept a short-term adjustable rate mortgage in order to get a rate low enough to qualify. Or that she was sold one on the basis of "low payment" and she didn't bother to check the fine print.

There are loan officers and real estate agents and realtors out there who make one heck of a living off the fact that people buy loans (and homes) on the basis of payment. They have short-term "interest only" and even negative amortization loans out there. During the Era of Make Believe Loans, some agents and loan officers were doing 75% or more of their business in negative amortization loans. You should never buy a home with a negative amortization loan; it's a good way to get yourself in serious trouble. Of all the home loans I've done (and I've done a lot of loans) I've never seen a situation where I would recommend it on a purchase and the only negative amortization refinance I tried the loan was turned down by five lenders even though it met the written guidelines.

Look for terms that are going to be stable for at least a couple of years, preferably five, particularly if this is your first time in a home or the payments are going to be near the upper edge of what you're comfortable with.

I:

• Did not shop lenders (I felt I wasn't in a position to).

• Did not tell the truth about my income.

• Took the first loan they offered me.

• Didn't read the fine print.

• Did not fix a budget and stick to it.

• Bought way too much house.


Fact: If anybody tells you not to shop lenders, what they are really telling you is that their loans are not competitive and that they are afraid of the competition. The National Association of Mortgage Brokers got a law through congress a few years ago that all the mortgage inquiries within a thirty day period count as one inquiry on your credit report, so it no longer hurts your credit score to shop around.

There are issues out there with loan providers who will tell you with a Good Faith Estimate or, in California, Mortgage Loan Disclosure Statement, that they can do the loan on a given set of terms when they have no intention of and no ability to actually deliver those terms. Certainly the HUD 1 form at the end of the loan process is nothing like the earlier form. Furthermore, many loan providers cannot or will not deliver within a stated time frame, which is critical when you're buying, and still important when you are refinancing. So look for someone who's going to stand behind their quote with something that says they mean it.

(It's hard for anyone you'll actually be able to talk to to use the word "guarantee" with regards to a loan. It's not just loan providers who pull unethical tricks. People attempt fraud regularly. Furthermore, there are "nobody's fault" impediments that happen regularly, and they always change the transaction. That property doesn't appraise for enough value is probably the most common. Only an underwriter can give a loan commitment, you as a loan applicant will never talk to your underwriter, and until you've got that commitment, there is no guarantee it can be done at all. So the real guarantees from a loan officer are always conditional).

Here is a List of Red Flags, real estate and loan practices that should have you running away, and here is a list of Questions to You Should Ask Prospective Loan Providers. Those who are doing business honestly should be happy to answer these sorts of questions - it gives us assurance that we're not going to be competing with somebody blowing sunshine and wet sloppy kisses at you. Because the fact that you're asking the questions means you're not going to do business with those who give you unsatisfactory answers. Finally, here is an article on What to look for at Closing, to make certain all of your due diligence paid off.

Caveat Emptor

(and I'm always happy to get suggestions for additions to the lists)

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About this Entry

This page contains a single entry by Dan Melson published on February 9, 2021 7:00 AM.

Real Estate: General Education versus Specific Expertise was the previous entry in this blog.

Games Lenders Play, Part VII - Selling Mortgage Accelerator Programs is the next entry in this blog.

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