When A Bad Lender Almost Blows the Deal

--- by Osman Parvez

Buyers rarely consider the risk of a lender selection. It's just not on their radar for possible failure points. After all, a mortgage is a mortgage, right? What is there to consider beside rate and fees?

A lot, it turns out. 

When a lender fails to perform, there are serious impacts to both buyer and the seller. 

For the buyer: 
- Loss of earnest money
- Loss of appraisal fees
- They don't get the house they wanted
- Due diligence costs (inspection fees, etc)
- Blacklisting by the real estate community (yes, this happens)

For the seller: 
- Lost time on market
- Tainted listing
- Delayed closing, delayed travel, delayed life transitions
- Delayed purchase on the replacement home
- Lower price with buyer #2
- Additional carrying costs

A few weeks ago, I had a lender nearly blow up a deal by failing to perform. Not only did they fail to provide loan approval before the loan termination deadline, the loan officer couldn't even be bothered to call us in advance and let us know they had a problem. We heard about it on the afternoon of the last possible day from the buyer's agent. 

Although this was horrendous behavior by an employee of a well known national bank, I'll follow the Buffet rule; praise by name, criticize by category. The bottom line is the loan officer won't get another deal from me not because she couldn't obtain loan approval, but due to her failure to communicate. When I called her for an explanation, she couldn't even tell us clearly what happened. And frankly, there was no excuse for waiting until the last possible moment.  

The hero of this story was the buyer's agent who scrambled and pulled in a high-quality lender quickly. A few hours after telling me that we had a problem with loan approval from lender #1, she had us on a conference call with lender #2. The new loan officer assured me that he already had almost every piece of documentation needed for the underwriter, with the exception of the appraisal and employer verification. He also had many years of experience, the buyer was already approved through automated underwriting, and they were going to pay a rush fee for the appraisal. He said he was 99.9% confident that this loan would be approved. 

Naturally, my sellers were not very happy with this situation as it impacted the timing and financing of the home they intended to purchase as a replacement. Closing was going to be pushed out almost three weeks and require another appraisal. If lender #2 also failed to perform, it would also force us into the slower fall market. 

In order to agree to the extension, I negotiated for a portion of the earnest money to become non refundable for any reason. It was time for the buyer to have more skin in the game. The buyer understood and agreed, most likely due to the influence of their agent. 

She did a good job helping to save this deal, so per the Buffet rule, I'll name her: Jessica Miceli. 

Take home lesson: Choose your lender carefully. If you're going to shop mortgages, be sure to shop only well known local lenders who have a long track record in the community they serve. If you did your homework when you selected your buyer's agent, trust their referrals. 

In my business, for example, I've referred many clients to Mike Roth at Elevations because he has never failed to communicate and perform. It's not that there hasn't been challenges. I recall one particular deal where a few days before closing, he informed me that the underwriter had missed the investor ownership percentage at a local condo complex and they couldn't fund the deal. When I told him my buyers had already given up their lease and their possessions were packed in a moving truck, he took ownership of the mistake. He was able to get a portfolio loan approved for our buyer in time for closing. 

Mike is not the only name on our referral list, and he doesn't get every client. Sometimes other lenders beat him on rate or fees, but he crushes communication and performance. That's why he's been the loan officer on three of my investment properties and my personal mortgage. Mistakes happen. The key question is whether ownership is taken and what steps are made to correct the problem. 

Note: If you're refinancing, it's a very different game. You already own the house, the law now requires clear disclosures on fees, so the risk is primarily bad servicing on the loan. 

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties. We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

image: Ben White

Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.