Last year I had a client who despite my efforts, and the loan officer’s efforts, to explain the mortgage process made a pretty big mistake. Before starting our home search we sat down with the loan officer to determine the payment he was comfortable with and get his mortgage pre-qualification letter. The client said he did not have the money for a down payment on a loan but did have the money for the closing costs in his bank account. Not a problem, there are plenty of 100% financing options available. . He explained in detail how the mortgage process works and what to avoid. The loan officer did a credit check and his credit score was decent so he qualified for a couple of the programs. The loan officer sat with my client and went over his income and debt to determine his ratios. Every thing looked good; he qualified for the loan at a good interest rate, so off we went to look at homes.
After a couple days of search we found a property my client loved. We put in an offer to purchase. The next morning I receive a phone call from the listing agent stating that another offer came in on the property. The seller was asking for highest and best. My client wanted to know the payment for a higher purchase price and to see if he would be comfortable in a higher price range in the event his offer wasn’t accepted. So, back to the loan officer we went. The loan officer had to re-run the numbers for a higher purchase price which required him to pull the credit report again to qualify for other loan programs. What my client neglected to mention during our first meeting with the loan officer was the purchase of a new car within the past couple weeks that now showed up on the credit report. His car payment bumped his ratios up to the limit for qualifying for the loan with the higher sales price, but he was still qualified to purchase the property. The loan officer explained that if the client’s debt increased anymore that he would not be able to purchase the property with the loan programs they had discussed.
We went back to the listing agent and gave our “highest and best” offer. My client’s offer was selected. We sign the contracts and he gave his good faith deposit. The next meeting with the lender was for his mortgage application and gave the loan officer a copy of his contract. As he was filling out the application, my client told the loan officer that his money for the closing costs was being held in a retirement account. He withdrew the maximum allowable amount from his retirement account for the good faith deposit; if he took anymore he would be penalized, so he took out a personal loan for the rest of the closing costs. Now he had not one, but two new loans he had to repay.
Needless to say, this was horrifying to hear for both the loan officer and myself. He had told us previously that his money was in a bank savings account, not a retirement account. As if the car payment that went unmentioned wasn’t bad enough, now there were two additional payments to contend with. The two additional payments caused his ratios to exceed the loan limits; he was no longer qualified to purchase the home under the previous programs. The loan officer gave him options to do a “No Doc” loan, which is a much riskier loan for lenders and is accompanied with a much higher interest rate. The new payment, compounded with the 2 additional loan payments, was too high for his budget and he couldn’t purchase the home. The contract had to be voided and we had to reduce the price range he was qualified to purchase. He did eventually find a home, but it wasn’t a nearly as nice as the first property he had contracted for.
This mistake could have been completely avoided if he had told the loan officer all of his debt during the first meeting so the loan officer could have advised him of his maximum amount to begin with. Also, had the client listened during the second meeting when the loan officer told him again not to increase his debt and that he was at his limit for qualifying to purchase the property.