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A Mortgage Nightmare: Knowing Who NOT to Listen to.

It was late afternoon on a weekday during the summer of 2004, which could only mean one thing: It was time for Jen to pick up her son, Jake, from little league practice.  Jen and her husband Tom were expecting another child and decided they needed a bigger place in Indianapolis, Indiana.  But they didn’t want Jake to have to switch schools and so they looked for a home in the same school district.  What they found was a nice, 3-bedroom, brick, ranch style home built in the late ’90s.  It listed for for $149,500 but they got it for $145,000.

A local mortgage broker had managed to secure a loan approval with very reasonable terms for Jen and Tom through a top national lender. He was one of three mortgage brokers their Realtor had recommended.  He was also the one with whom they’d had the best rapport and so they decided to give him a chance.  By all accounts, he performed his job to the letter.

They were around 10 days into a loan process that, from an underwriting perspective, was fairly simple and straight forward.  Both were salaried workers who had been in the same line of work for at least the past two years, both had nearly spotless credit and had managed to build up a small but respectable balance in their mutual savings account.  From the start, there were no foreseeable impediments to closing the loan in fewer than 30 days and so their loan officer did a 30-day lock on a 30-year fixed rate of 5.5 percent—good thing too, because rates soon thereafter began to slowly rise.

Turns out, Jen’s mom was a woman whose motherly instincts and good intentions were exceeded only by her complete lack of mortgage sense; a woman who when told of their 5.5 percent interest rate practically recoiled in shock as to why it wasn’t even lower.  “Jen, you have great credit.  There’s no reason they shouldn’t be able to get you a better rate, especially with rates as low as they are. I think they’re taking advantage of you and I think you should shop around.”  The hyperbole of all those mortgage commercials, promising 30-year fixed rates “as low as 3.75 percent” had apparently gotten to her.

Jen, who had always respected her mom’s opinions, even to a fault, convinced her husband Tom that indeed maybe they should shop around.  A few minutes on the internet and one pre-approval request later they had more mortgage quotes than they knew what to do with.  After a reassuring telephone conversation with a very confident loan officer from a well-known national mortgage lender they decided to submit a complete loan application including full documentation.  Twenty-four hours later they were approved for a 30-year fixed rate of just 5.125 percent.

They promptly and apologetically told the loan officer with whom they had been dealing that they would no longer require his services. They felt bad, but this was a loan they would have to live with for 30 years and a 5.125 percent rate would save them a lot of money, so they decided it was worth it.

The time it would take to close the new loan would exceed the time allowed under the contract and so the purchase agreement had to be amended—something the seller wasn’t thrilled with. Everything seemed to be on track when just one week before closing the underwriter of this conventional loan asked for proof that a collection account appearing on Jen’s credit report had been paid.  Jen had been been a member of a health club for less than one week when her employer transferred her to a job location that was outside the 25-mile radius allowed for cancellation of the membership.  Rather than mail the documentation to the health club she instead decided to deliver it in-person. The person she handed it to assured her he would “take care of it”.  And since she never heard a single word from the club thereafter she assumed the membership had been canceled.  But no.  The full 2-year contract amount was apparently reporting as a collection to the credit bureaus.  And since Jen never made copies of the documents she had personally delivered, nor gotten any kind of written acknowledgment, she had no proof that the collection was invalid.

Unlike the FHA loan she’d been approved for via her previous loan officer, the guidelines of this conventional loan required that all collections either be paid in-full prior to closing or be accompanied by a written payment agreement.  Even if Jen had been willing to pay a collection account that, by the way, should never have existed in the first place there was no way she could do so since the money would have had to come from Jen and Tom’s mutual savings.  Put aside the fact that their 5-percent down payment had to come from savings, the conditional underwriting approval stipulated that the borrowers must have 3 months’ worth of reserves in their savings account prior to close.  Between this and the down payment there was no money left to pay the collection.  With no options left, and out of time, Jen and Tom crawled back to their FHA loan officer, desperate and humiliated.

But there was just one problem: They had missed the deadline to extend the rate lock and their 5.5 percent rate had expired.  Rates began to slowly rise not long after their original rate had been locked at 5.5 percent.   Now, a 6.25 percent was the best rate they could get.  They could try to shop around for a better rate but they’d already seen where that got them.  They reluctantly agreed to the higher rate, a rate that would cost them approximately $25,000 over the life of the loan.  The irony is obvious: Jen and Tom’s desire to save money wound up costing them money. They made the mistake of taking advice from someone who hadn’t the qualifications to dispense it, namely, Jen’s mom.

When it comes to something as important as a mortgage loan, never let price alone be the sole criterion by which you judge a loan program or lender.  The price doesn’t have to be perfect, it just has to make sense and be reasonable.  That’s was Jen and Tom’s $25,000 mistake.

Finally, when deciding on a lender, always seek a recommendation from someone who makes his or her living in that business. The real estate agents at MSWoods Indianapolis real estate make a living helping their clients buy homes for sale in Indianapolis, Carmel, Fishers, Zionsville, and Greenwood.  It is in their interests to recommend only those lenders that have come through for their clients time and time again and are always happy to make recommendations.