A Mortgage Horror Story

Tears streamed down Amy’s face as she sat in disbelief. Her husband John’s heart pounded with anger.  They were both in shock. Tim and Amy had always been lucky, but not today.  With all of their worldly possessions packed in a moving van, on the day of closing they received a call from their loan officer informing them that their mortgage loan had just been denied due to an “unexpected underwriting problem”.

Apparently, Tim and Amy had purchased an entertainment center a month before they were set to move in to their new Carmel home.  They wanted to have it ready for move-in day.  Problem was, the new payment associated with the purchase was now showing on their credit report, thereby throwing their debt ratios over the maximum allowed under the loan guidelines.  They had already been granted an exception for high debt ratios and so this was the ‘final straw’.  They didn’t realize that an updated credit report would be pulled prior to final underwriting approval.  They naively assumed that the credit report used for the original approval would be the only credit report required.   If only they had known.  If only someone had told them—someone like, uhh, their loan officer.

Sadly, this story is based upon an actual occurrence.  And while it probably lies on the more extreme end of the mortgage-horror continuum it is nevertheless symbolic of the communication barrier that often exists between borrower and lender;  a barrier that can lead to very bad things when it becomes insurmountable.  Even sadder is the fact that this tragedy could have been so easily averted had Tim and Amy’s loan officer issued some very simple advice: Do not make any purchases that will report to the credit reporting agencies as these will throw your debt ratios out of whack and your loan will be denied.  Who knows why their loan officer failed to properly advise them.  Maybe it was inexperience.  Maybe a lack of diligence.  Call it what you will, it was completely unacceptable and should never have happened.

Now to be fair, people are human and human beings will from time to time make mistakes, loan officers included.  Heck, sometimes loan officers even take the blame for other people’s mistakes.  Everyone from underwriters to loan processors to title searchers to appraisers to loan funders can make mistakes that can seriously undermine the loan process and put into jeopardy the prospects of the loan closing at all.  But it is the loan officer’s job to catch these mistakes when possible in order to preempt any serious loan meltdowns.

The moral of the story is that YOU need to do YOUR diligence when seeking a loan officer.  While it is impossible to know for certain that any particular loan officer is the right one for you it is nevertheless both prudent and easy to ask around.  Most seasoned real estate agents and Realtors can tell you based on first-hand experience which loan officers have come through for their clients and which ones have ‘dropped the ball’.  Real estate agents at MSWoods Real Estate, for example, take a results oriented approach when referring home shoppers by suggesting lenders that have gotten the job done time and time again.

A few questions you should ask your lender:

  • Pre-approval versus conditional approval: Regardless which lender you choose there are certain key questions you should make a point of asking your lender in order to better understand where you stand in the approval process.  It’s exceedingly common for loan officers to tell loan applicants that they are “pre-approved”.  But what does this really mean?  The fact is, most pre-approvals are based on little more than rough ‘guestimates’, cursory glances at credit reports or superficial analyses of a borrower’s total credit picture.  Contrast this to what is known in the lending industry as a “conditional underwriting approval”.  This latter type of approval is more concrete in the sense that it is based on either an actual human underwriter’s scrutiny or one of several different automated underwriting systems that have become standard in the lending industry.  A conditional underwriting approval is a lender’s way of saying, “Just meet these conditions and your loan will be approved”.   While a conditional loan approval is not the same thing as a commitment to lend, it is as close to a ‘hard’ approval as you can get compared to a pre-approval.  So when your loan officer tells you you’ve been pre-approved you should strongly consider asking for clarification in this regard.
  • What is your interest rate and is it fixed or variable?  If you are told you have a fixed rate be sure to ask whether it is fixed for the life of the loan.  It’s not out of the realm of possibility that an unscrupulous loan officer might use the term “fixed” to mean “fixed for the first two or three years”.  Misrepresentations like this are not common but they can happen once in a while, either through ignorance or duplicity.
  • Does the loan come with a balloon payment? A balloon payment is triggered after a period of time, typically 5, 7, 10 or 15 years, have elapsed under the loan term at which point the remaining outstanding loan balance becomes immediately due in-full.   Unless you’re lucky enough to have tens or even hundreds of thousands of dollars lying around you’ll be forced to either refinance the loan or face foreclosure.
  • Is there a pre-payment penalty? Some mortgage loans will contain a provision for a pre-payment, or early payoff, penalty whereby a percentage of the remaining loan balance is factored into the final payoff amount.  Lenders often offer lower interest rates in exchange for a borrower’s consent to pay a prepayment penalty.   As a general rule, pre-payment penalties are best to avoid since there’s more potential downside than upside.  On the downside, a prepayment penalty can mean the difference between being to get financing on the home and being stuck in a loan with less than ideal terms.  For example, what if rates go down and you have good credit?  It would sure be nice to refinance and get a lower rate.  But if the payoff amount including the prepayment penalty won’t fit into the maximum loan-to-value then you’ve got to bite the bullet and cough up the difference or stick with what you’ve got.  In an even worse case, your home may have depreciated to the point that you owe more than it’s worth.  In these uncertain economic times, with foreclosures still at historic highs, this is not un unrealistic scenario for some unfortunate home owners.  On the plus side, if your situation is stable and you have a high level of certainty that you’ll be staying in your home for a least the length of the pre-payment penalty then you may be able to get a lower interest rate.

In conclusion, whereas developments in the Indianapolis real estate market have tended to favor buyers, developments in the mortgage industry have tended to favor lenders.  While interest rates are still relatively low from a historic perspective, credit requirements have become stricter than in years past.  If you’re in the market for a home in Fishers, Carmel, Indianapolis, Zionsville or Greenwood then chances are this article applies to you.  Call the fine folks at MSWoods Indianapolis real estate and ask an agent to refer you to some good lenders, because buying a home starts with a loan.