The Disappearing Mortgage Loan Commitment
By Beau Brincefield, James Granoski, and Brian Block*
Question: What’s more important than finding the best mortgage rate and terms for your client? Answer: Finding a lender that will actually fund the loan at settlement in accordance with the rate and terms quoted.
During periods of financial instability, especially when mortgage interest rates are on the rise, problems with inexperienced, underfinanced or downright dishonest lenders increase. Under such circumstances, these lenders find that they cannot deliver on their commitments to borrowers and they either seek to avoid their commitments entirely or they seek ways to increase the charges to the borrower to cover their additional costs of lending.
Naturally, comparing rates and terms available from various lenders is important. In this regard, it is also important to understand the difference between the quoted rates and terms and the actual total cost of the loan. In other words, don’t forget to require the lenders to disclose not only the interest rate and points, but also the other charges that they will require the purchaser to pay at settlement. The creativity of some lenders in coming up with new charges to put on the HUD-1 is sometimes downright astonishing.
Even when the borrower has been made aware of the importance of comparing all the terms of the loan, it is important for the borrower to realize also that the mortgage market is very competitive and that it is unlikely that a borrower will find the rates of one reputable lender to be significantly superior over those of other reputable lenders. The key word, here, is “reputable.”
The prudent and conservative approach for most borrowers is to deal with established, well-known and well-respected lenders referred to them by their Realtors®. This is generally better than trying to save a few dollars by dealing with a bargain basement lender whose rates and terms are so much better than everyone else’s that they seem to be just too good to be true. That may be exactly what they are, especially if the money markets take an unexpected turn for the worse. Rick Eul, a mortgage lender with Bank of America says that homebuyers should listen to their Realtor’s® advice in choosing a lender, “because experienced Realtors® know which lenders provide consistently good service and return their phone calls promptly.”
“The first consideration in choosing a lender should be the reputation of the lender for reliability and integrity” says Carol Greco, a top-producing agent at Long & Foster. Realtors® and homebuyers “should ask lenders how long they have been in the business and they should be especially wary of Internet lenders.” Choose “lenders with a reputation for good service and for delivering results on time,” she adds.
When money is plentiful and available at low cost, the marketplace is flooded with new lenders. At such times, it is relatively easy to get into the mortgage lending business because customers are plentiful and profits are high. When interest rates rise and the money supply begins to contract, it may be hard to find the lender come closing time.
Sonni Lieberman of Weichert Realtors®, agrees with Greco. She believes in finding a lender who has a “proven track record of reliability” and who is “flexible and offers a wide variety of loan products.” Lieberman stresses that on-time performance is key, “nothing is worse than sitting at a real estate closing waiting for the lender’s documents to come through.”
Finally, Realtors® should help their clients understand the illusory nature of most loan “commitments.” Typically, sometime early in the homebuying process, a real estate agent or lender will attempt to “pre-qualify” a purchaser for a certain amount of financing. “Pre-qualifying” a purchaser means that the lender has obtained some basic financial information about the purchaser sufficient to make a preliminary and general determination concerning the price of the home that the purchaser can afford and the type of financing that the purchaser might be able to obtain.
Most Realtors® and lenders would recommend that a purchaser seek “pre-approval” rather than “pre-qualification.” Lenders would normally issue pre-approval letters to purchasers after the lender has checked and verified all of the purchaser’s financial information, run credit reports and met, personally, with the purchaser.
So, what’s the problem with the “commitment letters”? The problem with virtually all commitment letters is that they are subject to so many contingencies, limitations and qualifications that the lender has available to it a number of escape hatches if the lender decides that it does not want to honor the commitment at settlement. Ultimately, this is where you separate the reputable lenders from the rest of the pack.
If you don’t know how to distinguish the lenders from the pretenders, talk with some of your more experienced colleagues who have been through an interest rate cycle or two. Ask them to tell you the lender(s) they have used over the years and which ones they found they could depend upon and which ones they could not. After hearing a few of their horror stories, you will probably come to agree that the lender with the best rates and terms may not be the best lender after all.
Who Do You Call?
Whom can borrowers contact if they feel that they have been misled or otherwise taken advantage of by a lender? The following web sites can provide at least a point of contact with Federal and State regulatory authorities:
For Federally Chartered Banks:
www.occ.treas.gov
For Federal Credit Unions:
www.ncua.gov/
For State Chartered Financial Institutions:
Virginia: www.state.va.us/scc/division/banking/
Maryland: www.dllr.state.md.us/finance/
District of Columbia: www.dbfi.dc.gov/main.shtm
*The authors are attorneys with the law firm of Brincefield, Hartnett & Kahn, P.C., in Old Town Alexandria. Mr. Brincefield is also a member of the NVAR Hall of Fame and Mr. Block is also a real estate agent.
An earlier version of this article was published by the Northern Virginia Association of Realtors.