Mortgages: September 2006 Archives

>broker incurred 19 inquires in 1 week dropping my score.



B.S.



I'd go the full Penn and Teller on this one if I wasn't trying to stay family friendly. The law is clear on this one, and practice is fully compliant with the law. I've seen thousands of credit reports, sometimes with dozens of recent mortgage inquiries. It could be 1, 19 or 19,000 inquiries. As long as they are all mortgage inquiries, all inquiries within thirty days count as one one inquiry. And the credit reporters and credit modelers I'm familiar with all comply.



Now, the best and the worst loan officers are brokers, who shop your loan around to multiple lenders. But you don't even have to stick with one broker, and you are silly to do so. Shop your loan with half a dozen at least, and apply for two or more. As long as you control the appraisal, the most you'll pay is a retyping fee, and you can play them off one against the other to see which delivers the most of what you want the fastest.



This used to be a real issue. Years ago, there would be a game as each inquiry was a hit to your credit, so prospective mortgage providers would run your credit again and again, until they drove your score under some noteworthy creditworthiness break-point. They could still use their original report, but since anybody who ran your report after that would see a 678 instead of a 686, or a 572 instead of 588, it would be unlikely that they could provide as good a loan.



However, a few years ago the National Association of Mortgage Brokers sponsored legislation in Congress to change this. It was hardly altruistic of them, people not having their score hurt by multiple inquiries means that they are more willing to allow brokers a chance to compete. Nonetheless, this was a major benefit for anyone who wants to be able to shop around for a mortgage like they might want to for any major purchase, and mortgages are the second biggest purchases most people make in their lifetime (the biggest being the property the mortgage loan secures!). No matter how selfish the motive, however, they still did you a major favor, as someone who might want to have a mortgage someday even if you don't now. Tell your mortgage broker thank you for that.



Now there is a limitation to this, and ironically it affects credit reports run at banks and credit unions, although not brokers. Because in order to qualify for this, the inquiry has to be run under a provider code that says, "inquiry for mortgage." Mortgage broker inquiry codes all say "inquiry for mortgage," because that's the only type of credit they've got. But banks and credit unions give loans for other purposes also, so they have a minimum of two inquiry codes, one that says "mortgage inquiry," and one that says, "general inquiry." If you are talking to a loan officer at a bank, who does car loans and credit cards also, sometimes they use the wrong inquiry code, and it counts as another inquiry. Talk to four banks, potentially four inquiries. Talk to four brokers, unless you space them out by 30 days or more, it's never more than one inquiry.



So anybody who tells you not to let other mortgage providers run your credit because they might drive your score down is either unaware of the law, or simply trying to scare you because they are frightened of having to compete. Incompetent or a liar, one or the other - maybe both. When you get right down to it, they are really telling you that their loans aren't very good. Because so long as they are done within a few days, the fact is that any number of mortgage inquiries all count as precisely one inquiry.



Caveat Emptor

UPDATED here

Is there any program that i can qualify for a home with no down payment?

Lots of them. We may not be talking number of grains of sand on the beach or drops of water in the ocean, but there are more ways to get get into a property with no down payment than most laypersons would believe.

Many loan officers would have you believe that it is a hard loan or that takes something special to get 100 percent financing. It doesn't. In 95 percent plus of all cases, that's just setting you up for three points of origination, setting them up to ask you for referrals, and trying to get you to not shop around. Nor is it a difficult loan to do. As long as you meet the guidelines, 100% financing is routine. Many lenders are begging for these loans. It's almost to the point where fat middle aged men like me have to be careful not to allow ourselves to be alone in the office with young attractive female lender representatives. In my humble opinion, some of these lax underwriting processes are setting the lenders up for unbelievable losses, but as long as I and my clients are telling the truth and playing by the rules, there is no reason why my clients should not benefit.

Now the first way to get 100% financing is obviously to have a lender loan you 100%. Now the best way to structure it, in the vast majority all cases, is the 80/20 "piggyback" loan. As I discuss in One Loan Versus Two Loans, this avoids mortgage insurance (PMI) which saves you money. But there are a plethora of other ways to structure it, if there is a reason to. One rule that I have learned the hard way is never apply for a first and a second from different lenders, even if it looks like the rates will be better applying that way. Even if both wholesalers swear on the name of Domingo Montoya, don't do it. You are wasting your time. If the lender who wants to do the first won't do the second, there is a reason, and the reason is that this person is unlikely to be approved for the second, and the transaction doesn't close until both loans are ready. If I've got the first with the lender, that's leverage that a good loan officer can use to get them to approve marginal seconds. Not so with lenders who are just doing the second. Not to mention that there is ten times the potential for confusion and several times the work coordinating between lenders.

What do you need in order to get 100% financing, you ask? Well, that's a variable. If you have can prove you make enough money to justify the loan (see Levels of Mortgage Documentation), a credit score of 580 is sufficient. Now, the higher the credit score the better the loan, but if you've got a 580 and can prove you make enough money, the loan can be done. The possibility does not vanish completely until you are below a 560 credit score, although comparatively few lenders will go below 580 for 100 percent financing.

If you can't prove you make enough money, lenders will do 100% financing on a stated income basis down to 640 credit score, and maybe down as low as 600. Now even a 640 credit score is 80 points below the median credit score in this country, so most folks can get 100% financing. However, be very careful about overstating your income as you are still going to have to make that payment every month. Stated income loans are a good way to get in serious financial difficulties if you don't understand their limitations. Therefore, despite the ability to inflate your income, I strongly advise against it. Furthermore, as I've said elsewhere, the rates for stated income loans are higher than for full documentation loans, and they become progressively more so the worse the credit score gets. At 600 credit score, not only is it unlikely that you will be able to get 100% stated income financing, but it will be perhaps 1.5 or even 2% higher than the rate that the person who can prove they can make enough money will get. For all of these reasons, I strongly advise you to stay within a budget where you can prove you make enough money.

Now things like being 30 days late on your rent, and how long of a rental history you have will also influence your ability to get 100% financing, not to mention the rate you will be offered. As with so many other things, take care of your credit and it will take care of you. Make payments of whatever nature, in full and on time. Better yet, don't incur any debts you don't have to.

Suppose your credit is so bad that you do not qualify for 100% financing from any lender? Well, not all hope is lost, although it really does constrain your choices. Most lenders will permit seller carrybacks, so long as they are subordinate to lender financing. So if the lender is willing to give you 90% financing, you can do one of the things that called 80/10/10 financing: 80% first, 10% second, 10% third that is a carryback with the seller.

Now not every seller is going to be willing to carry back money. They are selling the property because they want money, or something that money can buy but the property won't get them. If the seller doesn't have enough equity to cover the costs of selling plus what you're asking to borrow, your offer is probably not going to appeal to that seller. A good buyer's agent will steer you away from properties where the seller doesn't have the equity to work with you. Another thing is that sellers may want you to offer more money in order to accept your offer. Furthermore, they might charge you a really hideous interest rate as an incentive to pay them off ASAP. And they may realize that the reason the lenders won't give you 100% financing is because you are not the best credit risk out there. I certainly don't hesitate to tell my listing clients a lot more about the limitations of carrybacks than there is space for here. I'm a decided non-fan of seller carrybacks, as the request tends to indicate a poorly qualified buyer who may not be able to secure any financing. Nonetheless, given the current buyer's market, some sellers are willing to carry back financing in order to get rid of the property, particularly if the offer is for top dollar. Once the market turns back towards the sellers at all, the ability to do this is likely to vanish. There are many advantages to being willing to shop in a buyer's markets, of which that is only one.

So obviously, you need to know if 100% financing through the lender is possible or likely for someone in your particular situation. You need to know this before you go making any offers to purchase property - and there are types of property where 100% financing is only an option with a seller carryback.

Now, a couple of final points: Just because you can get 100% financing does not mean it's a good idea, or that you should. You get better rates from lenders if you put money down, and writing offers that include having money for a down payment shows a seller that you are serious about buying the property. Other things being equal, I'm going to counsel my sellers that an offer that comes in with even a 5% down payment is a much stronger offer than anything that comes in wanting 100% financing. As a loan officer and buyer's specialist, I've dealt with enough of these that I know the questions to ask to determine if it is likely to work, possible, or ain't gonna happen.

Furthermore, speaking of strong offers: You will need a decent deposit to convince the seller that you're serious about buying the place. The seller is going to spend a lot of money on the escrow for your attempt to purchase that property, and has to give you sole shot for however long an escrow period you agree to. This means they can't work with other offers while they're working with you, and time is money to a seller. They want to know that if you can't consummate this contract in a timely fashion, they are going to have some compensation for the trouble and expense. Prospective buyers with 100% financing can expect to have to put a larger deposit down. Somebody offers a $500 deposit on a $500,000 property, that's going to be rejected so fast and so thoroughly that your fax machine will spin. So if you really have no money, even though you can obtain 100% financing, trying to buy a property in this fashion is likely to be a waste of time.

Caveat Emptor

UPDATED here

Recently, the forty year mortgage has started to make a comeback, and a few lenders have started introducing the fifty year mortgage. The reason, straight from the horse's mouth, the lender's representatives, is lowered payments. In an uncertain and unstable market, investors are getting nervous about 100% interest only financing, and so the lenders are tightening up on the standards of who is able to qualify for that, while looking for another way to compete on the basis of lower payments. One way that they do this is the Option ARM, or negative amortization loan. However, to anyone who does even a minimal amount of investigation those loans are like cutting your own throat. A lot of people will still sign up for them, but now that Business Week did a feature calling them "Nightmare mortgages" more and more people are picking up on the tremendous downsides to this loan, but if they still want too much house and they've got to be able to qualify for, and make, the payment, they need an alternative. That is the forty and now the fifty year loan.



Now nobody does forty year fixed rate mortgages, let alone fifty. They do two and three year fixed rate loans, called the 2/38 and 3/37, respectively. Some lenders will also do a loan that amortizes over forty years, but the remaining balance is due in thirty years. This so-called 40/30 balloon has a lot in common with a thirty year fixed rate loan - including the fact that almost nobody goes more than five years without refinancing, so that the thirty year balloon should be no big deal. All of the preceding forty year loans are sub-prime loans, by the way, with prepayment penalties and higher rates than A paper. A Paper lenders doing the forty year loan are few and far between. People get longer durations from sub-prime lenders; A paper competes for the best borrowers - the ones who can really afford their loans - on rate/cost trade-off and underwriting standards. For those lenders doing the fifty year loan, it is pretty much the same story. The fifty year amortization due in thirty, the 2/48 and the the 3/47.



Now because the lender is risking their money for a longer time, and with less amortization and therefore more risk, most of the lenders - particularly the ones looking to compete on rate that you would prefer to do business with - charge a slightly higher rate for forty year loans than thirty, and a little higher still for a fifty. The difference is not huge, but it is there. Where a 2/28 might be at 7%, the corresponding 2/38 might be at 7.125, and the 2/48 at 7.25 for the same cost. Sometimes they'll say that the difference is as small as a quarter point of cost for the forty year amortization as opposed to the thirty - but that's an eighth of a percent on the rate, at subprime's usual 1 point equals half a percent trade-off.



Now in my opinion, these longer amortization loans are mostly a marketing gimmick to lower the payment - slightly - for those who do not qualify for interest only under lender's guidelines. The forty year amortization started making a comeback early in 2005, most as the 2/38, and the fifty year about March of this year.



My perception is that refusing interest only to these borrowers is a figleaf tossed to nervous mortgage investors. It's not like fifty year amortization is really going to make a difference, as opposed to interest only, if a 100% loan gets foreclosed any time in the first five years, or if property values decline further. Let's do some math.



Assume a $200,000 loan on a $250,000 purchase in California, just so I can do it in one loan without worrying about PMI.

Amortization Period 30 40 50

Interest Rate 7 7.125 7.25

Loan Payment $1330.61 $1261.07 $1241.78

Other costs $510.42 $510.42 $510.42

Total monthly $1841.03 $1771.49 $1752.20

Income to Qualify $3685 $3545 $3505

Now unlike everyone else who has written on longer amortizing loans, I'm not going to obsess about "interest paid over the life of the loan." People are going to refinance in a few years anyway. That's just the way things are. But let's do look at the difference between interest paid in the first two years, the fixed period for most of these at the end of which people will refinance.

Amortization period 30 40 50

interest rate 7.000 7.125 7.250

1 month interest $1166.67 $1187.50 $1208.33

24 mos interest $27,724.41 $28,374.03 $28,941.66

Remaining Balance $195,789.89 $198,108.53 $199,138.73

Comparative Deficit $0 $2968.26 $4566.09

Now the 40 year loan only saves $1668.96 in payments over the first two years, and the fifty $2131.92. So if we subtract these numbers off the deficit in the above table, we are left that the forty year loan costs us $1299.30 in net deficit as opposed to the thirty, and the fifty year loan costs us $2434.17 net of all savings. This on top of the fact that it really doesn't make that much difference in the income we need to qualify for the loan (which in my example is limited to cost of housing with no other payments). Just paying off a credit card that takes $100 payments per month will do more to help you qualify.



These numbers get worse, not better, in the bigger loans that the lenders are using them to justify. Let's assume a $400,000 loan on a $500,000 property instead:

Amortization period 30 40 50

interest rate 7 7.125 7.25

Loan Payment $2661.21 $2522.13 $2483.58

Other costs $630.83 $630.83 $630.83

Total monthly $3292.04 $3152.96 $3114.41

Income to Qualify $6585 $6310 $6230

Amortization period 30 40 50

interest rate 7.000 7.125 7.250

1 month interest $2333.33 $2375.00 $2416.67

24 mos interest $55,448.83 $56,748.07 $57,883.32

Remaining Balance $391,579.79 $396,217.06 $398,277.46

Comparative Deficit $0 $5937.30 $9132.95

Considering that over two years, the forty year payment saves $3339.92 in payments, it's still down by $2599.38 as opposed to the thirty year amortization, and the fifty is down by $4869.83 in just two years - never mind what happens if you have to do it again in two years, and once again, paying off a credit card probably will do more to help someone qualify full documentation.

Now I don't see anything particularly wrong with forty and fifty year mortgages, although a 30 year is better while making very little difference on the payments, I can see the benefits for those who lie in this income range. But pardon my lack of enthusiasm for something that makes very little difference to whether someone qualifies for the loan, while costing them far more than they save in terms of payments, even over the short term and disregarding the effects if the people do not refinance. Far better to just persuade someone not to buy quite so much house in the first place, even if it means you get less of a commission. But then if most real estate agents sold property on the basis of what people could afford rather than it's beautiful and they want it and therefore it's an easy sale and now let's figure out a way to get them the property even if they can't afford it, the southern California real estate market would not be in the state it is in.



Caveat Emptor

UPDATED here

Having written several articles on Negative Amortization Loans, telling of the details of what is wrong with them, and even destroying the myth of Option ARM cash flow, I sometimes get asked if I would like to see them banned completely.



Well, given the pandemically misleading marketing that surrounds these loans, and pandemically poor disclosure requirements, I am tempted. It only takes one person losing their life savings and having their financial future ruined to make a very compelling story, and I've seen more than one and read about many more.



However, when you ask if they should be banned outright, I have to answer no.



Part of this is my libertarian sympathies. Adults should be allowed to make their own mistakes. But there are economic and a realpolitik reasons as well.



The fact of the matter that just because Negative Amortization loans are oversold under all of the friendly-sounding marketing names such as Option ARM, Pick a Pay, and even 1 Percent Loan (which they are not), does not mean that there is no one for whom they are appropriate or beneficial. People for whom these are appropriate do exist. Consider someone with crushing consumer debt, and no significant usable equity on a home they've owned for a while. They sell the home, they end up with nothing and still have the consumer debt. They can't refinance cash out. But if you put them into an Option ARM for a while, you remove from several hundred to over a thousand dollars per month from their cash flow requirements. In three years, they will pay off or pay down those consumer debts, and then you refinance to put them back on track, and the money that has accumulated means nothing compared to what they've paid off. It's a very narrow niche, but it does exist.



Consider also someone starting a business. Cash flow insolvency is what kills most start-up businesses. Until the customer base builds, they don't have enough money to pay the bills. Lower monthly cash flow requirements on their house can mean the difference between success and failure of their business, far outweighing the cost of the extra money in their balance that they accumulated. Furthermore, the fact is that when their cash flow gets tight, they're not making the mortgage payment anyway. They are likely to lose both business (through insolvency) and property (through foreclosure) if the business fails anyway, and the lowered cash flow requirements of the Negative Amortization loan may give the business more of a chance to succeed, and once it is profitable it will pay back the investment many times over.



There's still a need to really explain what's going on, and all of the drawbacks of the loan, but people in these two circumstances really do have a valid possibility of it being in their best interest. Banning negative amortization loans completely takes away that option, thereby hurting those people.



Furthermore, in realpolitik, it is unlikely that any attempt to ban them will be successful, or permanent if it is successful. Let us presume some public spirited official in Congress or at the Fed decides to make the attempt. What do the scumbags who make their living selling these loans do? They won't go back to selling real loans with real payments - if they could do that, they wouldn't be selling negative amortization loans. Negative amortization loans are a way to sell property without the apparent up front costs of a higher payment that always will be indicative of the housing market. Given a choice between giving up screwing people and fighting back, they are going to fight back. Lobbyists, PAC, and grassroots deception en masse, and probably astroturfing as well. If the average voter gets a pamphlet saying Congress or the Fed is trying to ban these loans that "are the only way middle class people can afford a home!", they are not going to do research in order to educate themselves about what is really going on. They are going to call their congress critter and voice the opinion the negative amortization industry gave them - and they're likely go so far as to go apply for one themselves, unless they already know what a bad deal that loan is. Chances of congress resisting: Basically nil. There is no organized group in opposition, no budget for groups that want to push a ban. Any ban would be politically dead on arrival.



There is an approach that will work, however: Disclosure requirements. If these people have to tell the prospective victims in easy to understand language and easy to read print about all of the problems they are letting themselves in for with these loans, very few people are going to sign on the dotted line. "Caution: If you accept this loan, the 1% is a nominal, or in name only, rate. You are really being charged a rate of X%, and this rate will vary every single month. If you make the minimum payment, your loan balance will increase by approximately $Y per month at current rates, or Z percent within five years. You will have to pay this money back in lump sum if you sell, or with higher payments at a later date. If you cannot afford full payments now, you will unlikely be able to afford them in the future after your balance has increased. There is a three year prepayment penalty on this loan, and if you sell the property or refinance within that time, you will pay a penalty of approximately $A in addition to whatever additional balance has accrued. It is currently under consideration that the mere fact that you have one of these loans will have significant derogatory effect upon your credit rating, even if you never make a late payment, due to financial difficulties encountered by borrowers with this kind of loans in the past." I could go on in bullet points for a couple of pages, but I trust you get my point. You have all of this in writing from the federal government, the least an intelligent adult is going to do is find out what's really going on here.



Furthermore, the only way disclosure requirements could be fought by the industry is behind closed doors. The only way it stays behind closed doors is if nobody raises a political stink, and it's easy to raise a political stink about stuff like this. Newspapers and television reporters and bloggers all converge on the issue, and the industry is left in the awkward position of crying because they have to tell the truth. That doesn't play well with the American public. The way this plays with the American public is the major reason for the successes of Porkbusters. Despite some very entrenched and very powerful enemies lining up against them, they've won on a couple of big issues because of the power of the idea that the American people have that the truth should be told. Take the tack that all you want is for the industry to tell the truth, and watch the political wind die out of their sails. David beats Goliath reliably in American politics when the issue is "Do I have to tell the truth?"



To summarize, it is tempting to try to ban negative amortization loans. But it is far better social and economic policy to go the disclosure route instead, and far more likely to be politically successful.



Caveat Emptor

UPDATED here

Ken Harney has some welcome news on Move afoot to end uninvited mortgage pitches



To a certain extent, these are a good thing for consumers. However, it gets way overdone.



What happens is this. Let's sat I get a client into my office, they apply for a mortgage, and I run their credit. The three credit bureaus, Experian, TransUnion, and Equifax, then turn around and sell the fact that this person has just had their credit run under a mortgage inquiry code, together with some of their more easily obtainable information.



Result? My clients are besieged with mortgage pitches. For months, every time they answer the phone it's likely to be someone else who has paid the money for a red hot mortgage lead.



Needless to say, my clients aren't happy. I have had several clients come out and accuse me of selling their information to telemarketers. Now, the fact that I encourage folks who come here to shop their mortgage around notwithstanding, it would be shooting myself in the head to sell their information to other providers. I know what I've got, I know what I quoted them, and I know I intend to deliver. The only thing that will stop me is if they do not qualify for that loan. If someone is satisfied with what I intend to deliver, far be it from me to tell them to shop around because they might be able to do better. My family and I do have to live, you know. I won't stop or prevent or hinder them from shopping their loan around (which alone sets me apart from 90 percent plus of the loan providers out there), but telling them to do so is just not part of my job description at that point in time. It's like expecting the mechanic as he starts working on your car to tell you that you might be able to get a better deal somewhere else.



Indeed, if I had the option of paying extra for that credit report so my clients aren't besieged by unsolicited offers, I would take it every time. Not only would my clients be less harassed, but the prospective providers who pay for that sort of information are not precisely known for their sterling character, if you know what I mean. I've had clients tell me stories of people determined to sell them negative amortization loans without informing them of the drawbacks. I've had clients tell me of people determined to get their business that they told them of loans that do not exist, often with conspiratorial pitches like, "This is the loan they won't tell you about! You have to ask for it!" Well then, why are you offering it? By all means, put it out there on the table and let's compare the two loans by cranking the numbers, but the vast majority of the time it turns out the reason you have to ask for that sort of loan is that it's a piece of garbage and no self-respecting loan professional would expect you to accept such awful terms.



Now let me tell you about the numbers of such pitches. Because each of the big three credit bureaus is innocent of the actions of the others, it starts in three places, each of which pitches to the prospective providers that it sells the information no more than four places. I don't know why the number four became magic, but it seems to pop up everywhere in the mortgage leads industry. So each of them sells to four, and there are three of them. That's twelve people you're going to be getting a phone call from right there, and never mind that you're on the "Do not call" list.



But what's going to happen the majority of the time is that somewhere around ten of those who initially buy the information are resellers. They pay sixty bucks a pop, and turn around and sell the information to four other folks at twenty-five bucks a pop. Some of these places are in turn resellers; indeed, some of them got this information directly, which is all that keeps the whole process from snowballing until people are besieged by what seems like every last person with a valid mortgage license for the area. So twelve, forty-eight, hundred forty four, four hundred thirty two wannabe mortgage providers swarm each person I run credit on. I try to remember to warn them, but there is nothing I can do to stop it from happening, however much I might want to.



Now do not get me wrong. It is a good idea to shop your mortgage and I have even repeatedly told people who come here that they should actually sign up with at least two prospective providers, a main and a backup, because at the end of the process the power is all in the loan provider's hands and it is often abused. Having two loans ready to go defuses most of the potential for abuse, leaving aside the issue that I guarantee my quotes in writing when the client decides they want it and gets me enough information to lock the loan.



But there is a major difference between that and setting this pack of wild ravening prospective mortgage providers on my clients, willing to promise the sun, the moon, and all of the stars and planets if my clients will simply drop me and sign up with them instead. There is a major difference between agreeing that shopping the loan is a good idea, and throwing my clients to a pack of hundreds of telemarketers who call for months - sometimes as long as two years, so that they seem to be part of the next wave the next time those folks need a real estate loan - and bulk mailers who are almost singlehandedly responsible for global deforestation and accelerated filling of our urban landfills. If it does happen, I will be pleased to see it end.



I'm also gratified to see National Association of Mortgage Brokers on the correct side of this:

But the National Association of Mortgage Brokers doesn't agree. When credit bureaus sell overnight trigger lists to third-party lead generators, the brokers argue, they fail to comply with a key provision of the Fair Credit Reporting Act: that anyone receiving consumers' personal information must be in the position to make a "firm offer of credit" or have previously received permission from the consumer to obtain credit file data. Third-party lead generators obtain no permission and are in no position to make any credit offers, firm or otherwise.

There is a world of difference between suggesting you shop your mortgage and making certain you shop hundreds of providers, whether you want to or not.



I would suggest contacting your congresscritter to register your support for this proposal.



Caveat Emptor.



P.S. In the meantime you can stop it from happening to yourself at www.optoutprescreen.com or by calling (888) 567-8688.

UPDATED here

"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

UPDATED here

I got an ill-mannered complaint email about how an evil loan officer from another company ordered the appraisal without waiting for the inspection to be done, and it turned out there was a minor problem that the seller likely could have had repaired, but this clown chose to walk away, and as a result is griping about having to pay for the appraisal.



First, that appraiser did the work based upon your representation you wanted the property. You signed a purchase contract saying that you were intending to purchase the property, and someone acting on your behalf because of that action ordered the appraisal, which has to be done if you're going to get a loan. That appraiser did the work. They are entitled to be paid.



Second, scheduling an appraisal promptly protects you. The longer the entire process takes, the worse the loan you are going to get. If they didn't lock your rate right away, the loan officer is gambling with your money. But rate locks aren't free, and they are for definite periods of time. The longer a rate lock is, the more you will pay for it. Furthermore, if you go beyond them you're either going to pay a tenth of a point for five days, or a quarter for fifteen (both assessed in full on the first day of extension) or pay worst case rates. The person who ordered the appraisal was acting in good faith to protect your interests based upon the representation that you wanted the property. If you didn't, why did you make an offer and sign the purchase contract? Speed is important in getting a loan done, and even if in some instances people like you end up paying for an appraisal when they cancel escrow, the people who actually want the property benefit by having everything done right away. Appraisals are around $350. A tenth of a point of $400,000 is $400. A quarter of a point is $1000. Or you can pay a quarter of a point more - $1000 - for a longer rate lock in the first place, but the assumption when you sign that purchase contract is that you want the property, which means the appraisal has to get done, and you want the lowest rate, which means the shortest practical lock time. People get sued - successfully - for not ordering the appraisal right away. This person was doing exactly their job.



I have stated before that I will bet money, based upon no additional information, that a loan done in thirty days or less will be a better loan than one that takes sixty or more. Ordering all of the services: inspections, appraisal, disclosures, zone report, etcetera, right away is part of how a good loan officer - and good agents - get a transaction to close fast, on time, and to the loan quoted. For the buyers who carry through on their intention, as evidenced by that signed contract, doing this is the only correct way to do business. Delaying the appraisal until after the inspection adds to the time it takes to get the loan done. How do you think the seller feels about everything they had to pay for, now that you flaked out?



A purchase contract should not be something you enter into lightly, thinking you can get out of it easily if the slightest thing goes wrong. This is part of the reason for buyers agents. They should explain to you that this is a binding contract, and you are agreeing to purchase that property, and in many cases the seller can sue to make you buy the property. A buyer's agent will also spot a lot of problems before you make the offer. Don't think of them as building inspectors; few agents have that license (and I'm not one of them). But there is nothing that says that I can't spot potential issues and bring them up. In this particular case, it's a trivial issue that I spot and tell my clients about on a regular basis before they make an offer, and as a result, we have dealt with the issue before the contract is agreed to.



Caveat Emptor

UPDATED here

do mortgage company's usually seek a deficiency judgment on home foreclosures

Depends upon whether it is a recourse loan or not. A recourse loan is one where the lender can come after you for any excess amount of money you owe. Whether a loan is recourse or non-recourse varies with the state you are in, whether it was a purchase money loan or a refinance, and always, what it says in the Note.

For a non-recourse loan, that's it. If something happens and the property does not fetch enough money at sale to pay the lender off, that lender is out of luck whether they want to be or not. These are often used in reverse 1031 exchanges, where the accommodator is going to hold title to the property for a while but is usually unwilling to shoulder the risk that the lender may be able to come after them for a deficiency. Due to the fact that the lender cannot come after the borrower for the difference, these are riskier loans and therefore carry a higher rate-cost trade-off than recourse loans. This is nothing more than any rational person would expect.

The law is different everywhere, but I don't think have never seen a cash out refinance that was not a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of tools to get that money back.

Now just because a loan is non-recourse does not mean that the lender will necessarily approve a short payoff. In fact, it is usually harder to get those approved because the lender knows that this is the only chance they have to get their money, whereas with a recourse loan they can attach other assets to pay for their loan.

Finally, it is to be noted that just because a lender does have recourse and can attach other assets does not mean that they will. If you're down to $0.47 to your name, they'd have to be pretty silly to waste a lawyer's time doing so. However, just because you don't have it now doesn't mean that you will never have it. Statute of limitations also varies, but if you receive a financial windfall within the first few years, don't be surprised if the lender who you thought forgave the difference is standing right there, demanding their metaphorical pound of flesh.

Caveat Emptor UPDATED here