Category Archives: Mortgage/Lending

Will Banks Cash In on the New Good Faith Estimate

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The new Good Faith Estimate will be required to be used on all new loan applications effective January 1, 2010.   Part of HUD’s GFE may include a service provider list which consists of title and escrow/settlement providers (boxes 4, 5 and 6; section b on page 2 of the GFE).  This list (if permitted by the lender) is important to the consumer as it will determine what the cost difference can be between the good faith estimate and the settlement statement at closing.  

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If a borrower relies on a service provider (title and escrow/settlement services) on the list given to them by their mortgage originator with the good faith estimate, there is a 10% tolerance.  This means that if the cost at closing comes in more than 10% higher of the sum of those fees than what was provided on the good faith estimate, the lender will pay the difference (or credit the borrower) over the 10% sum of those fees.   However if the lender permits and the borrower to shop for their own title and/or escrow vendor, the loan originator is “off the hook” should the fees come in higher at closing.

Per HUD “if no service providers are listed, then it is assumed the customer could not shop and fees will be bound by the tolerances” and that “lenders are responsible for fee requirements listed by their loan officers or the broker”.     

If the lender “permits” the borrower to shop for title and escrow services, they must provide this written list which must include at least one service provider on a separate sheet of paper and then the lender is subject to the 10% tolerance (based on the aggregate of those fees).

I see this as a huge opportunity for the banks similar to what we’ve witnessed with HVCC.   This is their big chance to control where escrow and title go–to them!    Banks will state that they do not want to risk being off on their quotes with new binding good faith estimates and it’s my belief they will do their best to keep escrow and/or title “in house” or affiliated providers.    Some mortgage brokers may find that they will have to use the banks preferred title and escrow vendors just as they do the banks appraisal management companies.     Should this happen, we may see banks use low cost centralized services, similar to many bank processing centers (some are even located out of state).

How will borrowers know how to select or shop for a title and/or escrow company?   Can they rely on their bank loan originator to help them select a title or escrow provider when the MLO (Mortgage Loan Originator) is directed to only have the bank’s providers on the list?    The new RESPA laws will not allow MLOs to recommend anyone who is not on the service provider list.    Should the consumer rely on their real estate agent to recommend the title and escrow provider (many brokerages have joint venture relationships)?

With a purchase, if the title and/or escrow service providers are other than those designated on the written service provider list, then it is presumed that the buyer/borrower selected those providers (even if it was directed by the real estate agents or seller) since the buyer agreed to the contract.   With this scenario, the lender is not subject to the 10% tolerance in fees for those costs.    Buyers may find a surprise comparing the good faith estimate at signing to the HUD Settlement Statment if the title and/or escrow company are different from what was designated on the purchase and sales agreement.

The new Good Faith Estimate may wind up being a huge set back for independent escrow companies and smaller independent title agencies who will most likely lose any relationships they have forged with loan originators who happen to work for one of the big banks.

By the way, if you are planning on selecting your escrow and/or title provider.  You may want to start researching prior to your prequalification process with the mortgage originator.   You may find that effective January 1, 2010 most mortgage originators will not want to provide a good faith estimate until you have committed to working with them as the new GFE’s are binding for the loan originator unless certain “changed circumstances” permit the MLO to issue a revised estimate.  Per HUD:

“If a GFE is given during prequalification, the receipt of one of the six required pieces of documentation will not constitute a “changed circumstance.”

The loan originator is presumed by HUD to have the “six required pieces of documentation” if they issue a good faith estimate.

…I’ll be writing more about this on a future post.

Subject: Need Your Help…Making Home Affordable Program

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I get a lot of emails from people who are looking for some help with their mortgage needs from the articles I write here and on my mortgage blog.   I just heard back from a reader today who I’ve been having an email dialogue with since March.  He contacted me after reading a post I had written with the subject line:  “Need Your Help…Making Home Affordable Program”.   I asked him today if I could share the emails so our readers can see what it has been like for this homeowner trying to get a HARP refi.  

March 8, 2009  

I read your post and I’m very excited.  I am a novice when it comes to mortgage so please help me understand this.  I bought my house 4 years ago and the values have dropped.  I have two mortgages 80% and 20% with the same lender.  I am currently paying around 42% of my gross income.  

My understanding is that only the first mortgage will be lowered down?  Both of my mortgages are with the same lender [very large bank].  I will call them on Monday but need to hear from you as I trust your opinion more.  What will happen to my other 20% loan, it’s at 7%.  Please help….

I provide the toll free number and contact information for his bank.  With two mortgages at 100% or higher loan to value, it’s pretty challenging to help anyone.  Second mortgages have become more difficult than ever–even with short sale negotiations.    I suggested that he contact his bank/mortgage servicer since they have both mortgages with hopes they would maybe modify his loan if it did not qualify for the refi.

March 9, 2009

Thank you for your support, it means a lot to me.  I was on hold with the bank for no avail.  I will try again tomorrow.  I guess they’re receiving too many calls these days.

I replied:  I’m sure they’re inundated…they did a lot of second mortgage/home equity loans up to 100% loan-to-value.

March 10, 2009

I was able to get hold of them this morning at 5:00 a.m. (they open at 8 EST).  The good news is that my first mortgage is with Fannie Mae…they would not discuss options with me until I fill out their paperwork.  Thanks for all of your help.

I told him I was glad and asked him to keep me informed of his progress.   He immediately replied:

Sure, I will keep you posted.  I will be submitting my application by this Friday  🙂

I didn’t hear from him again until today.

Hi.  I hope everything is going well for you.  I just wanted to update you regarding my application.   Well, the bank denied my application citing that my monthly payments on my first, including insurance, property taxes and HOA is not 37% of my monthly gross income.   When I argued that the program says 31%, their rebuttal is that they us a sliding scale based on income.  I’m not sure if this is what the program guidelines say or is it just something the bank came up with on their own.   I just wanted to thank you for your help through this effort.

There are a lot of stats thrown to the press about how great HARP is and how many people have been helped.   There are many who have not been so lucky and have had to go through hoops to find out.

Has any home owner had success dealing with their second mortgage with a Home Affordable refinance or loan mod program?

Buyer Beware – “great deals” may come with other “issues”

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big new houseWhen you get the opportunity to buy a house “worth” over a million dollars, for fifty to seventy cents on the dollar, you have to ask yourself if you can “afford” it before you say WooHoo!

#1 –  Real Estate Taxes may be too high

Often people ask why so many pending sales don’t close.  There are many reasons, one of which is that lender pre-approvals show a purchase price vs. a monthly payment.  Reality is that your lender is NOT qualifying you for a purchase price, but for some reason they think it is easier for you to understand a price vs. a monthly payment. They then make assumptions as to other costs, and convert their communication to you, the agents and the seller, to a Purchase Price. (This was not so when I started in real estate, and someone should change that.)

So you have a pre-approval to buy a house for $650,000 with a 20% downpayment.  What that really means is the lender “assumed” taxes of approximately $6,500 a year and homeowner’s insurance of $650 a year. Now you go out and find an amazing, super-great deal! You have the opportunity to buy a house assessed at $1.2 million for “only” $650,000! WooHoo? Maybe not.  The annual real estate taxes are $11,000 a year vs. $6,500 a year and the homeowner’s insurance is $1,100 vs. $650. That means your monthly payment is $412.50 more each month for that particular “$650,000 house”, than your lender assumed when you were pre-approved.

Your income needs to be $15,000 to $18,000 more per year, for you to be able to afford that particular $650,000 house.

There are two possible consequences. One is that the loan will “kick out” early enough for you to get your Earnest Money returned, assuming you have a good Finance Contingency. The other is that you planned to buy with a payment of  $3,400 a month, but end up being approved for a payment of $3,800 a month, with no recourse.

It’s possible that you could appeal the assessed value with the County, but I’m not hopeful that will work this year. I clearly wouldn’t recommend anyone promising you can have the taxes reduced to a level commensurate with the lower Purchase Price,  unless you are buying in California. In King County Washington this is NOT a good year to bet that you can prove that the purchase price of $650,000 is a good reason for the County to lower your assessed value of record. Nor is it a good year to think that lower assessed value will equal lower taxes. The County has already notified owners that they are dramatically reducing assessed values (not taxes). 2010 is a particularly bad year to rely on being able to get that tax bill dramatically reduced, in my opinion.

The only sure course is if the bank-owner would have the assessment and taxes reduced prior to sale, in order to obtain a buyer for that home. But I strongly doubt that will happen. Anyone who can’t afford the $11,000 tax bill that comes with that “great deal”, should not be buying that house.

 

#2 – The “carrying costs” may be too high

When a lender pre-approves you for a Purchase Price of $650,000, they do not consider annual use and maintenance costs. Unlike real estate taxes and homeowner’s/hazard insurance, the lender makes no assumptions as to utility bills and other maintenance and repair/replacement costs. In King County a $650,000 house is generally about 2,900 square feet. A house for $1.2M is usually about 4,400 square feet, and often on a much larger lot.

Before you buy that 4,400 sf home on an acre+ lot for $650,000, instead of a 2,900 sf home on 1/4 acre, be mindful of the extra cost to heat and maintain that larger home on that larger lot, in good condition, over a period of years.

 

#3 – Cheaper, bank-owned, new construction may not be “complete”

Most recently we are seeing builders losing their construction projects to the bank. The bank then puts the house on market “as-is”.  Yes, the prices can be awesome! But will your lender finance the “new home” without it being completed? There are programs available to provide funds for purchase and rehab or completion, but are you ready to be your own “general contractor”? Even if you think you can handle it, will the new lender allow you to be your own “general contractor”?

Again, two possible consequences. One is you don’t qualify for the new financing, including cost to complete the home. Again, hopefully that consequence “kicks in” early enough for you to get your Earnest Money back under the Finance Contingency. Another possibility is that the things that need to be completed do not cause the sale to fail, but you end up with a house like the one pictured above. No landscaping, temporary construction fences or barriers, no garage doors…and no money to comply with the neighborhood rules to get your new home in good order in the timeframe required by the CC&Rs.

Once you enter into a Contract to Purchase, you may not be protected against “biting off more than you can chew”. Before you enter into a contract to purchase that “screaming deal”, make sure you can handle all the “issues” that come with.

FHA to Adopt HVCC-ish Guidelines effective January 1, 2010…Correction: February 15, 2010

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HUD recently announced in Mortgagee Letter 2009-28 dated September 18, 2009 that they are implementing “Appraiser Independence” which is very similar to HVCC. 

Prohibition of mortgage brokers and commission based lender staff from the appraisal process…. To ensure appraiser independence, FHA-approved lenders are now prohibited from accepting appraisals prepared by FHA Roster appraisers who were selected, retained or compensated in any manner by a mortgage broker or any member of a lender’s staff who is compensated on a commission basis tied to the successful completion of a loan….

FHA does not require the use of AMCs or other third party organizations for appraisal ordering, but does recognize that some lenders use AMCs and/or other third party organizations to help ensure appraiser independence.

Mortgagee Letter 2009-28 goes on to “affirm existing requirements” with regards to preventing improper influencing of appraisers.  And states that:

“A lender must not assume, simply because an appraiser is state-certified that the appraiser is qualifed and knowledgeable in a specific market area.  It is incumbent upon the lender to determine whether an appraisers’ quaifications, as evidenced by educational training and actual field experience are sufficient to enable the appraiser to competently perform appraisals before assigning an appraisal to them.”

AMCs (and the banks who own them) will have extra reason to party-on this New Year’s Eve.  This new requirement goes into effect on all FHA case numbers assigned on or after January 1, 2010 February 15, 2010. [Update:  HUD has extended the time period before the new guidelines in the above referenced mortgagee letter goes into effect…I corrected the title of this post too!]

It’s September 17, 2009 and I still originate mortgage loans…

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For those of us to whom this statement applies there are a few obvious questions that immediately come to mind:  Why am I still working in this God-forsaken wasteland of an industry?

  • A) Nobody else is hiring in this booming economy,
  • B) I wanted to move to Nome Alaska but I couldn’t trade my upside down mortgage for a thatched roof yurt and a dog sled, or
  • C) The positive image of my career as portrayed by CNN makes me feel like a rock star.

Seriously, for the love of God Why!?

2009wampconnectIn all seriousness those of us that remain are not that different than survivors of a natural disaster. The clouds dissipate; the water level recedes and her we are – the survivors of the storm.  Not unlike the analogy the first thing that a ‘survivor’ must do is identify the resources that one needs to rebuild and restore one’s life. It is with this in mind that I invite you to WAMP’s Connect event coming up in Bellevue on October 5th and 6th

The Connect event offers each of us the opportunity to come together and meet all of the other survivors face to face. We’ll be able to reflect on what ‘once was’ and still more importantly the ‘what is’. As is the case in any disaster, the landscape we live in professionally is dramatically different than where we’ve been. The resources are certainly more limited – remember the days of quoting ‘hundreds of lenders and programs’? Now it’s more like ‘five lenders and programs’ – and we’re all using the same five!

Fewer programs and tougher guidelines are the realities of the aftershock and yet another reason to learn what others are doing to be more efficient and succeed in this new landscape. The Connect Event also offers the knowledge of how to seed your landscape for tomorrow. New technologies and lead sources like the Zillow Mortgage Marketplace, social network marketing (can you tweet for dough?), and the brace of brave new lenders that have sprung up alongside the resilient and steady familiar faces; they’ll all be represented at the Connect Event. The Connect Event will be nothing short of a meeting of survivors learning how to forge their professional landscapes for tomorrow – so don’t miss out!

There are very few lifeboats in this economy. There have been far more casualties than survivors. Come and be counted among the living. Come to Connect and learn how to forge a better tomorrow for yourself and for the industry you work in. Face it – If we don’t see you at Connect we’re going to suspect that you traded the house for the dog sled and the yurt – Don’t be ‘gone missing’

The Fed’s new GFE Helping to Insure Consumers Get ‘It’?

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[Editor’s Note: I’m excited to publish this guest post from Adam Stein on changing role of good faith estimates. He’s a long-time local mortgage professional with Cascade Pacific Mortgage. ]

ftc screengrabThe FTC study reported on the proposed new Good Faith Estimates early on in 2005. Armed with a very thorough and unbiased study the FTC went on record, early and often, and clearly stated the FTC’s position on (then) HUD’s proposed revised Good Faith Estimate:’ DON’T DO IT!’ It seems the FTC’s findings clearly showed that consumers failed to be able to choose what loan was in their best interest when comparing rates and fees. [here’s the FTC’s Facts for Consumers: Looking for the Best Mortgage: Shop, Compare, Negotiate] So much was the confusion caused by the new Good Faith Estimate that over sixty percent of the consumers could not identify the best loan for them when comparing Good Faith Estimates generated by mortgage brokers and mortgage bankers. HUD, not to be outdone, quickly came to their own rescue with their own ‘not-so-unbiased’ study. HUD, supporting their own, quickly produced a study stating that the consumer really does understand the new disclosure (Really?).

And so the battle over RESPA reform has been waged for the better part of the last ten years. At one point the Secretary of HUD attempted to ‘slip RESPA reform under the mat’ by submitting the proposed rule just hours before Congress went on recess. Those who would have been impacted by the rule change clearly and accurately viewed this effort as ‘under handed’ as much of the required ‘commentary period’ passed by without any representative government in session to discuss the proposed RESPA reform. That effort failed in the end. The banking special interests, however, have finally figured out how to get a Good Faith Estimate through the rule making process under the guise of ‘what you can’t buy in an administration you’ll just have to do yourself’. Enter the Federal Reserve Board.

While the FRB sounds like a branch of the Federal Government it really isn’t. The Federal Reserve is a codified, private sector, coalition of the nation’s largest banks and finance companies who collaborate and advise government on key financial issues. The Federal Reserve Board also is empowered to regulate the Truth-in-Lending Act (TILA) and promulgate rules as required. Is it any wonder that the new Good Faith Estimate, vilified by the FTC for creating consumer confusion, creates a bias towards Good Faith Estimates that are generated by banks over those prepared by mortgage brokers?

My concerns are twofold: if the consumer can’t properly identify the best loan they will pay more; if mortgage brokers appear less competitive due to the disclosure of indirect compensation the mortgage broker channel will be reduced if not eliminated.

Mortgage brokers were initially the scapegoats of the ‘mortgage meltdown’. More recently, however, the broader aspects of derivatives and the role played by Wall Street and the nation’s largest investment banks have come to light. I find it ironic that now, after the creators of toxic assets have been exposed, that the FRB will promulgate rules that make their disclosures deceivingly more appealing to consumers. In the end the rule will hasten the consolidation that is already occurring in this battered real estate economy. There will be fewer choices for the consumer to choose from, moreover; when the consumers do choose their mortgage over sixty percent will choose higher rates and fees thanks to the new disclosures. Way to go FRB – You have successfully reduced, if not eliminated, competition in the mortgage marketplace and virtually guaranteed the mortgage shopping consumer will get it ‘in the end’.

The Federal Reserve’s proposed changes to Regulation Z (Truth in Lending)

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If you’ve been following Ben Bernanke’s testimony on the Hill this week, you may have noticed him hinting about significant proposed changes to Reg Z and changes in how mortgage originators are compensated, leaving many of us in the industry wondering “what now”.   Don’t get me wrong, Reg Z could use some tweeking…it’s just that the mortgage industry is in a state of constant change (evolution?) with a deluge of new forms and/or regulations including MDIA, HVCC and the new Good Faith Estimate which goes into effect on January 1, 2010.

From this morning’s Press Release:

“Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply,” said Governor Elizabeth A. Duke. “With this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization.”

Closed-end mortgage disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. The Board’s proposal would:

  • Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers;
  • Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit;
  • Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and
  • Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.

The Board will also work with the Department of Housing and Urban Development to make the disclosures mandated by TILA, and HUD’s disclosures, required by the Real Estate Settlement Procedures Act, complementary; potentially developing a single disclosure form that creditors could use to satisfy both laws.

In developing the proposed amendments, the Board recognized that disclosures alone may not always be sufficient to protect consumers from unfair practices. To prevent mortgage loan originators from “steering” consumers to more expensive loans, the Board’s proposal would:

  • Prohibit payments to a mortgage broker or a loan officer that are based on the loan’s interest rate or other terms; and
  • Prohibit a mortgage broker or loan officer from “steering” consumers to transactions that are not in their interest in order to increase the mortgage broker’s or loan officer’s compensation.

Clarity and transparency for consumers is a must with the mortgage process.   I’m not sure what to make of this line:  “Prohibit payments to a mortgage broker or a loan officer that are based on the loan’s interest rate or other terms“.     Mortgage rates are increased or decreased based off of paying points which includes the mortgage originators compensation.    Perhaps the FOMC would like to see mortgage originators be paid hourly instead of based off of rate…I’m all for that!  🙂

Collaboration: The important DNA in any small business

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Collaboration:  Do you have this DNA in your small business?  Is it part of your mission statement or mantra?

This is not so much an insight into how a successful real estate transaction comes to fruition as much as it is a testimony of what makes any task, job, objective or goals conclude with a positive outcome.  Whether you are in the military and command a small unit of soldiers or, what I commonly describe the role of  a Realtor as,  “the Conductor

Mortgage Disclosure Improvement Act: New Waiting Periods on Mortgage Transactions

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In an early post, Ardell wrote about the significance of a buyer being able to close quickly…new regulations may put a damper on that.   With mortgage applications taken after July 30, 2009, waiting periods will go into effect with regards to when and how disclosure forms are provided to the consumer.   The Mortgage Disclosure Improvement Act (MDIA), which modifies the Truth in Lending Act (TILA), was originally going to become effective on October 1, 2009, however the effective date was moved up two months which may catch some real estate professionals by surprise.

Here are some of the details:

Good Faith Estimate and Truth in Lending Disclosures….required waiting periods.

Under MDIA, early disclosures are required for “any extension of credit secured by the dwelling of the consumer.”    Three business days from application, the consumer must receive an initial Good Faith Estimate and Truth in Lending (unless the borrower is denied at application).   

The earliest a transaction can possibly close is seven days after the initial disclosures have been issued by the lender (delivered in person, mailed, emailed, etc.).    This is assuming no re-disclosure is required.

Re-disclosure (waiting periods after the early disclosure and corrected disclosures) of the GFE/TIL are triggered if the fees and charges are more than 10%; if the APR is more than 0.125% or a change in loan terms.   Three business days must pass in the event of re-disclosure.   Re-disclosing is nothing new, it typically happened at closing–this will no longer be acceptable.    Mortgage originators “should compare the APR at consummation with the APR in the most recently provided corrected disclosures (not the first set of disclosures provided) to determine whether the creditor must provide another set of corrected disclosures”.   Double check those APRs prior to doc!

From MortgageDaily.com:

“The Commentary added by the MDIA Rule expressly provides that both the seven-business-day and three-business-day waiting periods must expire for consummation to occur.  The seven-business-day waiting  period begins when the early disclosures are delivered to the consumer or placed in the mail, and not when the consumer receives the disclosures.  The three-business-day waiting periods begin when the consumer actually receives or is deemed to receive the corrected disclosures.  If corrected disclosures are mailed, the consumer is deemed to receive the disclosures three business days after mailing.  If a creditor delivers corrected disclosures via email or by a courier other than the postal service, the creditor may rely on either proof of actual receipt or the mailing rule for purposes of determining when the three-business-day waiting period begins to run.”

Consumers have the right to waive or shorten the MDIA if “a consumer determines that an extension of credit is needed to meet a bona fide perosnal financial emergency”.  

No monies may be collected from the borrower with exception to a “bona fide and reasonable” credit report fee until they receive the initial disclosures.   This may cause a delay of when an appraisal is ordered.  Most lenders require an upfront deposit to cover the cost of the appraisal.    The collection of fees rule may also cause potential issues if a borrower is doing a certain type of lock (some with float down or extended lock periods require an upfront deposit).   NOTE:  HVCC requires the borrower receive a copy of the appraisal at least three days prior to closing.

Tim Kane can attest that there is nothing worse than a borrower learning at signing their final loan papers that the fees are significantly higher than what was originally disclosed.  I’d like to think that all mortgage originators redisclosed WHEN modifications to the transaction/fees take place…obviously, this has not been the case.  

DFI covers MDIA here. 

Re-disclosures could become a “holy hand grenade” to quick closings.

Lower Interest Rate – Escrow Timeframe

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1) How long is Escrow?

The correct answer is it can be as long or short as the buyer and seller want it to be. However a long escrow timeframe can cause an escrow to fail, because it can create a situation where the buyer no longer qualifies for the mortgage. Just because the buyer qualified when the offer was submitted, doesn’t mean the buyer will continue to qualify on the day the lender is supposed to fund the loan so the escrow can close.

A lender assumes a given interest rate when they qualify the buyer. If that interest rate is different for the reasons detailed below, at time of close, the buyer may not qualify at that changed interest rate.

2) Why do most agents write a contract to close in 30 days or less?

Dan Green of The Mortgage Reports wrote a post today explaining why a shorter escrow timeframe equals a lower mortgage interest rate. His post explains that a 60 day lock “costs more” than a 30 day lock, often in terms of higher interest rate vs. higher cash costs to close.

In order for the buyer to get the rate they think they are getting, they have to be able to lock that rate for no longer than 30 days. While the buyer is not required to lock that rate, it should at least be a possibility. If a buyer looks at a rate quote of 5%, they often are not told that assumes a rate lock period of no more than 30 days. So if they sign a contract to close in 60 days, and then try to lock the rate in the first week of their contract, they will find the rate to do that is higher than the rate they were quoted the day they made the offer.

The rate can change in a few hours without the issues noted in this post. But even if the rate does not change at all, the rate will be higher if you try to lock it through a 60 day closing vs. a 30 day closing.

The honest lender who asks “what is your proposed closing date” and gives you a “60 day lock rate quote” will be higher than the lender who assumes a 30 day lock. Be sure the lenders are using the same parameters when quoting you a rate prior to making an offer, so that you are comparing apples to apples. In this scenario the most trustworthy lender could appear to have a higher rate, when they are being most honest about the potential for rate if you lock for 60 vs. 30 days.

3) How does the closing date timeframe, chosen at time of offer AND ACCEPTANCE, impact the buyer and seller in other ways?

Buyer A gets a pre-approval letter the day they are submitting an offer. The lender pre-approves the buyer for a $300,000 mortgage at 5%.

Seller B accepts the buyer’s offer BUT asks for a 90 day closing, as the home they are moving to is new construction, and won’t be completed for 90 days.

Buyer A accepts the seller’s counter-offer as to closing date.

30 days later the buyer sees interest rates rising and wants to lock the rate. The lender quotes the “lock rate” and the buyer is confused. “I see the rate on your website is 5%. Why are you quoting me 5.25%?” Lender explains that a 60 day lock vs. a 30 day lock adds 1/4 of a % point to the mortgage interest rate.

Here’s where it gets REALLY complicated…if the buyer doesn’t qualify to buy the house if the rate is 5.25% vs. 5%, he can’t lock it. If he chooses to wait until the closing is within 30 days before he locks the rate, the rate could be at 5.5% at that time. If the timeframe for the finance contingency protecting the buyer’s Earnest Money expires prior to that time (and almost all do), the buyer is painted into a corner by circumstance.

Moral of the story is often a buyer CAN let the seller have 90 days to close if they are renting month to month. But a buyer must consider the impact of the interest rate floating out for 60 of those 90 days and/or the cost of locking for more than 30 days at time of contract.

Today, it is near impossible for a seller to stay in the property for more than 60 days from time of offer and acceptance. You can close in 30 days and let the seller stay or rent back from the buyer. BUT the buyer’s lender will not allow that seller to rent bank for an extended period. If the buyer is qualifying at an “owner occupied” interest rate, they will impose a maximum number of days that the buyer can rent it to the seller. Beyond that time period the buyer’s lender will consider it an “investment” mortgage, and higher investor interest rate and higher downpayment requirements, vs. an “owner occupied” purchase money loan.

The “ifs, ands or buts” that happen in a split second during negotiations, can change the “assumptions” made at the time the buyer received their preapproval letter. The lender is often not “in the room” while these negotiations take place, or consulted for every tiny change in close date or rent back terms. They most often don’t see those “changes” until the buyer and seller both sign the contract as finally negotiated.

These small changes can put the buyer’s Earnest Money “at risk” of loss. The agent is the “protector of the buyer’s Earnest Money”, as related to changes in contract terms during negotiations. Yet how many realize the changed position the buyer is put in when the seller counters for a longer close date?

We see thousands of articles on “How to choose an agent?” Perhaps asking the agent “what happens if the seller wants to close in 90 days, or wants to rent back for 90 days?”, is a better question than “How many homes have you ‘sold’ this year?” The cost of closing is VERY important to the buyer. Not closing at all, due to changes no one played out to the likely eventual worst case scenario, affects both the buyer AND the seller.

Agents don’t “sell” houses. Agents represent the buyer OR the seller AND the transaction as a whole, as it appears at time of offer…AND as it changes during negotiations and escrow.

Handing a contract to escrow and waiting for a commission check is no longer an option. Changes in lending BACK TO the old tried and true rules of the game, requires agents to be on their toes all the way to the day escrow closes…or doesn’t close.

Why are so many escrows not closing these days? Everyone asks that question. Truth is the skills needed by an agent have changed dramatically back to old school…and agents still think “it’s the lender’s job” vs. theirs.