When Lenders Make Clients Jump Through Hoops
Question: We were pre-approved for our home loan. We’re making a down payment of almost 50% cash and have excellent income and credit. But about two weeks before the closing date, the lender indicated that it doesn’t believe we have saved so much for our down payment and claims we must have borrowed the money. The lender insists on documentation for all our fund transfers to consolidate our accounts to make the down payment.
We are asked to jump through financial hoops because our finances are in excellent shape. The mortgage broker handling our application is of little help. We have decided to pay cash for the house if the lender doesn’t make the loan. Do we have any recourse against the mortgage broker or lender?
Answer: If the lender gave you a written pre-approval mortgage letter or certificate, without any condition for verifying your down payment source, the lender is in breach of contract for requiring more documentation.
As a practical matter, you have no effective way to force the lender to honor the written loan commitment pre-approval. Most such pre-approvals are only contingent upon an appraisal of the house and verification of employment. If you had the down-payment money in various accounts, why not give the lender the requested information and move on?
However, if you can pay cash for the house, after taking title you can then refinance with any lender you wish. Refinancing homeowners are in a stronger borrowing position than home buyers because homeowners are not under time pressure and can shop around to find the best deal. Stay away from the mortgage broker who led you to the unsatisfactory lender.
Buy Vacation Homes With Money Not Needed
Q: What are the expectations for second or vacation homes? Is this a good or bad time to buy a vacation home?
A: Second or vacation homes should be purchased only with discretionary money that you won’t need, just in case things don’t go well. Residences in vacation areas are subject to wild fluctuations in market value, much greater than in developed urban areas.
That’s why most mortgage lenders charge higher interest rates, due to higher risk, on vacation or second homes, compared to primary residences.
Better to Collect Mortgage Payments Than Rent
Q: I have been renting my house for 14 years. I would like to buy it from my landlord. It is dilapidated but in a wonderful area. Where do I start?
A: Presuming you have a good relationship with your landlord, inform him or her you want to buy your residence. Don’t even mention the house’s poor condition.
As the former owner of rental houses that I sold to my tenants, I know it is much more fun receiving monthly mortgage payments than collecting rents and having to deal with tenants. Your landlord will probably have a similar attitude.
Have a friendly face-to-face meeting with your landlord. Explain the benefits to him or her of helping finance your purchase (unless you have a bundle of down-payment cash and can qualify for a new mortgage) by carrying back a first or second mortgage. One of my former rental houses broke even on the monthly cash flow. After my tenant bought her home from me, by her taking over the existing first mortgage and my agreeing to carry back a second mortgage, her monthly payment stayed about the same. But I now receive over $450 net each month with no worry about repairs.
Second Mortgage Lender Can Also Foreclose
Q: My friends purchased their home. They took over payments on the existing first mortgage, and the sellers gave them a second mortgage for the balance of the purchase price.
All of the monthly payments to the mortgage company have been paid on time. But my friends never made any payments on the second mortgage to the sellers. The sellers foreclosed. Now the sellers’ attorney informed my friends they must vacate or be evicted. Is this legal? What happens to the first mortgage on which the payments are current?
It was my understanding only a first mortgage lender can foreclose and make you lose your home.
A: You are mistaken. Either a first or second mortgage lender can foreclose for nonpayment and cause the borrower to lose the home.
After the second mortgage lender began foreclosure, your friends had time to cure their default on the second mortgage. Apparently they failed to do so.
If the second mortgage lender acquired the house at the foreclosure auction, that lender must now make payments to the first mortgage lender or lose the house by foreclosure to that lender. However, if a third-party bidder acquired the house at the foreclosure auction, that new owner must make payments on the first mortgage. For more details, consult a local real estate attorney.
A 15-Year Mortgage Versus a 30-Year One
Q: Should I refinance with a 15-year mortgage or a 30-year mortgage? Obviously, the 15-year loan will save me substantial interest. Which loan is better for income tax deductions?
A: Don’t let the income tax deduction control your decision.
As I write this, the interest rate difference between 15-year and 30-year home loans is more than 1%. That is very high. Traditionally, the difference was one-fourth to one-half percent interest.
However, the big problem is the monthly payment on a 15-year mortgage is about 20% larger than for a 30-year mortgage. If this is higher than you can comfortably afford, my suggestion is to refinance with a 30-year mortgage but pretend it is a 15-year mortgage and make extra principal payments each month. If you find this increased monthly payment is too high, you can then revert to the lower 30-year payment rate.
Pay Down Mortgage During Stock Slump?
Q: With the stock market in the tank and going nowhere, I’m thinking of selling a few loser stocks and investing the money in paying down our home loan, which has a 6 7/8% interest rate. What do you think of this idea?
A: I am not a stock market advisor, so I can’t suggest when to sell your stocks. However, if you pay down your mortgage, you will be making an investment at 6 7/8%. In today’s financial markets, that looks like a great investment.
But I must add a word of caution. Please don’t make a large lump sum “investment” to pay down your mortgage if you will ever need that money again. The reason is that you might not be able to reborrow it if you are retired, unemployed, sick or unable to qualify for a mortgage refinance or a home-equity loan.
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Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to 251 Park Road, Burlingame, CA 94010, or e-mail robertj bruss@aol.com. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.
