The following is an account of a loan horror story recounted by a Charlottesville lender.
First, a solution:
What Realtors can do to avoid a similar scenario: Work with lenders who have successfully closed at least five loans in the past twelve months of the type they are proposing. Work with lenders who have a reputation for ethical conduct. Choose your lenders based on factors other than glad-handing, happy talk or willingness to buy you lunch.
Take note of last-minute loan blowups and share that information with your business associates and clients. (I know many Realtors already do this when their client is proposing use of an on-line lender about whom the Realtor has already heard horror stories.) There are plenty of good lenders who would be happy to competently handle your deal, and there’s no reason for lenders who blatantly abuse their industry partners and clients to be making money.
What Buyers can do: ask lenders for names of satisfied clients who did the type of loan they are considering. This is perfectly reasonable. Don’t buyers and sellers ask Realtors for testimonials from happy clients? (ed. note: one of my more favorite questions of late is, “tell me about one of your dissatisfied clients, and why they were so dissatisfied”)
We’ve never seen a lender hauled before a panel of their peers on ethics charges (as happens in the Realtor community) though there’s certainly been ample cause. That’s unfortunate, but forewarned is forearmed.
Now, the tale:
Buyer (happens to be first-time but that doesn’t matter) and Seller enter into a contract, after two Realtors spend the usual hours marketing, showing, driving, negotiating and doing paperwork …
Buyer is going to do an FHA loan. They’re so popular now, for good reason. Buyer is hooked up with a lender. Don’t know how they connected, whatever, but if it was his Realtor who referred him to the lender we hope she’s learned a lesson.
The lender is not FHA approved. He’s pretty sure he will be, soon, so he originates the loan. Home inspection, appraisal done and paid for. Commitment letter issued (hearsay, I didn’t see it). Two weeks prior to closing the lender apparently gets worried that this FHA approval isn’t going to come through. It likely never will.
He contacts at least two local FHA lenders and attempts to refer the deal to them. One of them turns it down flat and the other takes the application, runs it through his underwriting system and can’t get an approval.
The lender doesn’t notify the borrower or Realtors at this or any point. Now we get into hearsay, in italics.
Two days prior to closing the lender told the borrower that they didn’t qualify for FHA (they didn’t, but the lender didn’t even have the option. If they’d been an experienced FHA lender they’d have know he didn’t qualify). The rate went from about 6% to 7.75 or higher. Closing costs/payment also went way up.
This is the problem with hearsay but you get the idea. The lender had flipped the loan to FNMA/conventional, got what’s called an expanded approval, which has high rates and high PMI. The payment was at least $200 higher and this was an “affordable” home.
On closing day the listing agent went to the closing table with the sellers expecting to sign. They were at the table when they found out the buyer’s loan wasn’t going to close.
At that point one more FHA-experienced lender was called in and ran the loan through his underwriting system- it wasn’t approved.
The listing agent is out all her marketing time and expense. The seller has lost valuable marketing time and now has a stale listing if they didn’t before. The buyer’s agent is out all the hours spent driving around a client who didn’t qualify, negotiating, doing paperwork etc. The potential buyer is out appraisal fee, cost of home inspection, maybe more, and has given up the lease on his rental unit so doesn’t have a place to live.
Oh, also, the lender didn’t get paid his commission. He put all these people’s time and money on the line in the slim hope that he might get paid. They all got screwed by this industry partner. (Sorry for the salty language.)
This is an easy problem to avoid. There are a lot of lenders out there now who don’t have what it takes to manage the current market. They might not be able to do the loan and not even know it. They might be able to but not know how. I hate to see you guys lose time and money. We are all in the same boat. There are a lot of good lenders who can get deals closed in this lending environment and will tell you if it’s not going to work.
I hope you can make this into a cautionary tale to help your readers- buyers, sellers and Realtors. Let me know if you have questions or need a referral to the other lenders or Realtors involved. I’m not sure they’d talk but I’d hope they would, to help someone else avoid a similar problem.
Although you (rightly) point out the very questionable business practices of the lender, it seems to me the person who fell down on the job here was the buyer’s agent. The lender may have been sketchy, and the buyer may have found the lender themselves, but avoiding the pitfalls of inept or amateur (FSBO-like incompetence?) buyers is precisely the “Value Added” by the RE Agent involved.
A couple of posts down-stream, you and Dave Phillips expand on a carry-over thread from the local bubble blog about lawyers vs. real estate agents and the ethics/motivation. I think this little story begs the question: who is the buyer’s agent really working for here? The buyer? The seller? Themselves? The lender is clearly looking to maximize their own business – to the point of possibly bait-and-switch on an unsuspecting borrower. The seller and seller’s agent clearly are on the opposite side of the table – they just want to close. Who is really looking out for the borrower/buyer here? Should the buyer’s agent only be motivated by the potential loss of income by “driving around a client who didn’t qualify”?
Reading your sketch of the story, I found myself wondering if it was simply the case that the only lender who would even “work with” the buyer for a property in this price range was a questionable one – perhaps that’s the reason the buyer’s agent steered their buyer to that lender. Just speculation.
This is a big problem (as you’ve pointed out before) with the whole compensation structure – and it extends beyond just the problems of dual-agency.
I can’t speak for the buyer’s agent involved in this case but I can tell you that even a real buyer’s agent – and one with a lot of experience who does everything the right way can be duped by a lender.
I (at the time an exclusive buyer’s agent) was working with a buyer who was referred to me through another agent. The agent referred the buyers to a lender she had used before and that had done the buyer’s parents mortgage just months before.
I interviewed the lender on the phone – not only had he been in business for ten years and was local but he had a lot of experience doing the type of loan (CHFA – a first time homebuyer program in CT with a lower fixed rate).
I felt comfortable and we proceeded. Immediately after we located a property, I sent the contract over the lender and I had a hard time reaching him. When I finally did, he told me that the buyer was going to need a small gift from the parents (news to me). The purchase price was under the pre-approval amount I had been given to work with.
So, the parents agreed to the small gift. I kept tabs on the lender and regularly called his loan processor who said everything was on track. The day mortgage committment was due, I couldn’t reach anyone so I got an extension – after multiple calls I found out that the small gift had to be $20,000 and the lender was trying to get the buyers to take out an adjustable rate mortgage if the parents could’t do the gift. We postponed the closing three days while the lender tried to figure something out but he was completely inept.
The buyers lost the house. I sent them to my lender who pre-approved them for much less, they found another house and thankfully I didn’t lose a client.
To this day, the lender has not called me back to apologize for royally screwing up – nor has he apologized to the clients.
This situation had nothing to do with dual agency.
Though I agree with many of Scott’s points, I have to respectfully disagree on one of them.
As a Buyer’s Agent, I do what I can to keep buyers out of bad lender’s hands and harms way. But there is no way for me to physically make them use the lender I recommend or make them not use their cousin, brother-in-law, company-recommended lender, etc.
In fact, pushing my own lender can actually increase liability to myself and my broker should the lender drop the ball (nobody’s perfect all the time). There is a fine line you have to walk between consulting your clients and forcing them to do something which can turn them off and can open you up to serious liability.
Here’s what I tell my buyers (and it’s the truth):
“If something goes wrong with the lender I recommended, I can help and they’ll jump through hoops to make it right. If something goes wrong with yours, I can’t do anything to help you because they don’t me from Adam and have no reason to jump through hoops, let alone answer my phone calls.”
What Danilo said. The lenders I recommend (same as the home inspectors) have reputations to protect. All I can do is encourage my clients to at least consider those whom I trust. Ultimately the decision is theirs, but for those of my clients who choose out of area lenders or others whom I don’t know, problems develop more often than not, and then, there is absolutely nothing I can do about it.
Frankly, I didn’t know that a buyer/Realtor even should ask whether a particular lender was FHA-approved.
I do now.
Great post – unfortunately many loan officers are trying to manage loans that they’ve never originated before. In this scenario, the loan officer is in violation of FHA standards – you simply can not originate FHA loans without being approved, you can’t even order a case number. So, I ask: how did an FHA approved appraiser deliver an appraisal report without that case number. He or she is also in violation.
Danilo: I respectfully disagree with you that recommending loan officers increasing your liability. If you have good experiences with a loan officer, then you have a shield in case something does go bad.
Loan officers: regarding FHA loans, if you don’t know how to order a case number, run CAIVRS, clear LDP and EPLS, know what MCAW means, know that you need seller and both agents to sign the amendatory clause and real estate certification, then RTM before you even touch an FHA loan. Its all in your lender’s guides.