(Originally published March 21, 2010.)
Everything seems to be going smoothly. The purchase contracts were signed. The mortgage was approved. The closing is scheduled. Then you get the call that the mortgage has been canceled. The borrower must start from scratch with a new lender!
It’s a nightmare come true for home buyers, realtors, and real estate attorneys. And it’s happening more often than you think – because the homebuyer decided to use the wrong mortgage professional.
With the introduction of the Good Faith Estimate 2010, lenders are now obligated to honor the closing cost estimates they disclose. (Learn more about it in my article, GFE 2010, The Good, The Band, and The Ugly.) Bank fees are held to zero tolerances. If bank fees are even a penny more than what was disclosed, the lender must eat the difference. Most other third party fees (like title charges) are held to a 10% tolerance. If at closing, the actual title or government fees (which aren’t even charged by the lender!) exceed the initial estimate by more than 10%, the lender must pay the difference.
Initially, one would think this is wonderful! Sleazy mortgage “sales people” can no longer under-disclose, and then charge more at closing! But look at some actual examples of the unintended consequences, as shared with me by frustrated realtors and attorneys:
- A home buyer purchases a $1.5M home with a $500K mortgage. He shops for rates and applies for a mortgage with a well known, national bank. The loan is approved, everyone is ready to close – until the bank’s compliance dept. cancels the loan. The “salesperson” forgot to disclose the mansion tax. Oops. Do you think the bank is going to eat that $15,000 expense?
- A home buyer decides to shop for a mortgage online and finds a “great deal” with an out-of-state lender. The mortgage is approved but they won’t schedule a closing. Then the buyer gets a phone call from his mortgage “salesperson.” “Mr. Smith, we won’t be able to close your loan. You see, out here in Oklahoma, it only costs about $400 to close escrow. But y’all in NY use bank attorneys and they charge about $900. Plus, NY has this thing called a mortgage tax that we didn’t know about. Since we didn’t disclose it, we would have to pay it. And my manager won’t let that happen. Sorry. Y’all have a good day now.”
But wait! It gets worse! Even if you are working with a competent mortgage professional who discloses perfectly, who will make sure the lender is disclosing correctly??? Most lenders employ data entry clerks, earning minimum wage, to generate and mail disclosures to borrowers. One mistake or typo on a rate or fee and your loan is dead in the water. Do you have anyone reviewing your disclosures to make sure your lender doesn’t make a mistake? (My clients do.)
In today’s mortgage environment, it’s no longer about rates and costs. It’s about competence. Rates and fees are reasonably consistent from lender to lender. But only a trusted mortgage planner will provide the competence, care, and advice to get the job done right. Don’t entrust your most expensive investment to a smooth-talking “salesperson.” Stick with the professionals.
Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.