BUYER AND SELLER BEWARE
To say the electronic age is upon us is, as one mortgage broker likes to say, “the biggest no-brainer since the history of earth”. The “e-“words such as “e-trade” and “e-commerce” have become so common that they now appear in dictionaries. Enter the word “e-mortgage” in a Google search and it will return over 160,000 entries.
Modern Lending Practices
So what does this mean for home buyers and sellers? Long gone are the days when most homebuyers obtained mortgages from their local bank or credit union. Today, almost 70 percent of all loans go to independent mortgage brokers who do not provide the money to fund the loans. When you apply for a loan with them, they shop the mortgage market (including sub-prime lenders – who will lend to borrowers with poor credit) to find the best deal for them, not for you. While the competition among lenders has a tendency to keep rates competitive, there are risks. First, sub-prime lenders and low documentation requirements (little paperwork to verify the borrower can afford the loan) allow more unqualified people to obtain a loan. One result of these lending practices is a soaring foreclosure rate, which has caused some sub-prime lenders to fail and not honor their mortgage commitments. Another risky lending practice occurs when mortgage brokers (in an effort to maximize their fee) do not place the loan with the actual lender until the day of closing. These are lending practices that put both the buyer and seller at risk.
Problems for Home Buyers and Sellers
By way of example, let’s review the case of Mr. & Mrs. Seller. Due to a new addition to the family, the Sellers have placed their house on the market and started the search for a larger home. Eventually the Sellers entered into an agreement to sell their house to the Buyers and their real estate broker took a $20,000 deposit. After the Buyers received notice that they qualified for a mortgage, the Sellers entered into an agreement to purchase their dream home the same day (back-to-back purchase and sale) and put down a $30,000.00 deposit.
Fast forward to the day of closing when the Sellers learned that the Buyers have not received the funds to purchase their home. Maybe the mortgage broker had placed the loan with one of the many sub-prime lenders who have failed or just waited too long to place the loan. Regardless, all of the Sellers’ belongings are packed in a truck headed for Pittsfield and they are out $10,000.00!
Reducing Your Risks
Although you cannot plan for every contingency (like a bank failure), there some steps you can take to minimize your risks. Are you familiar with your lender? Is it a local bank or credit union? If not then ask questions about them and their lending procedures. Ask your mortgage broker about his or her background and experience, and ask how they will choose a lender for your loan. Remember most buyer/borrowers will have many choices available for their mortgage loan.
If you are contemplating buying and/or selling a home, Russell, McTernan, McTernan & Fruci, LLP would be more than happy to assist. Please remember, a written Offer to Purchase is a very important part of the process, so contact us before you sign it.