Long gone are the days where a mortgage shopper needed to have solid credit and a 20% down payment in the bank. Today there are so many lending institutions catering to virtually every situation. Never before has the process of borrowing money been this quick and easy. While this is largely a positive development, it has also created an environment in which many borrowers, particularly first timers, are preyed upon by unscrupulous mortgage brokers and lenders. Ultimately, the decision to borrow money is the borrower’s. Unfortunately, however, too many people allow their mortgage broker/banker convince them to choose the wrong loan at the wrong time so that they might reach their monthly sales quota. With the amount of information available now on the internet, pleading ignorance is hardly an excuse to allowing oneself to be taken in. At the very least, mortgage shoppers should look for a broker or lender that explains the risks as well as the benefits of a particular loan product. I am reminded of a client I helped a few months ago who was looking to secure financing for a two-family house he was purchasing in New York City. His intention was to live upstairs and rent out the apartment to help offset the housing expenses. The way homes are appreciating in that market, it seemed like a perfectly good idea. However, when we sat down to discuss his plans and address his concerns, I was surprised by what I felt was this person’s reckless approach to buying his first home. Consider the specifics of the transaction. The purchase price for this house was $565,000 and this individual wanted to put zero down for maximum financing. Furthermore, his bank account showed an amount that would not even cover the closing costs. Consequently, the buyer requested a seller concession whereby the seller agrees to pay the bulk of the closing costs. The seller honored the request but increased the sales price by the same amount, bringing the purchase price to a new figure of $587,600. The buyer makes a very respectable income but I winced when I saw that his median credit score is 618. While this score is not terrible, it is not considered strong either – especially for an applicant who had very little saved and was seeking 100% financing. Assuming the home would appraise at the new higher purchase price (which it eventually did); the bank was willing to approve the loan. However, we had to structure the loan as an interest only payment in order to keep the monthly payments low enough for him to qualify, thereby making the loan even riskier. While I certainly welcomed his business, I felt that I owed it to my client to make certain that he fully understood what he was taking on. Even with the extra income generated from the rental unit, he was putting himself in a very vulnerable position. I stressed to him that what the lender agrees to fund and what he can afford are completely two different things. Taking
all of the risks into consideration, and despite my reservations,
my client went forward with the purchase and is living life as a
homeowner and landlord. While he does not regret his decision, I
shudder to think of the impact a job loss could have on his ability
to make the payments. |
