I don’t know how I made this oversight, I somehow forgot to put this on the blogroll when I started reading it a few months ago, but one blog I’ve been reading a lot lately is Searchlight Crusade, which is about mortgages, real estate financing, and the like. The author is a loan broker and (former?) real estate agent.
If you are thinking of buying a house, this is the blog to read. If you already bought a house, learn what you (probably) can do better next time, or when you refinance. If you want to understand the housing bubble, go there for an in-the-trenches view.
The single most important fact on this blog is the fact that mortgage rate “locks” are not really locks — the mortgage broker/lender/bank may give you a “30-day lock” (or 45- or 60-day lock), but they are not actually legally obligated to loan you the money at the “locked” rate.
[M]any mortgage providers will play a game of wait and hope. They tell you they have a certain loan when they in fact do not, hoping the rates go down to where they do. Or theyâ€™ll tell you about a rate they actually have, but wait to lock it hoping the rates will go down so they can make more money because when the rates go down, the rebate for a given rate goes up.
Note, please, that they usually have zero intention of finishing your loan if the market doesnâ€™t move downwards enough. Whether itâ€™s National Megabank with a million offices, or Joe Anonymous working out of their home, their motivation is to do what it takes so they make money, and they will keep sweet talking you as long as they possibly can. Theyâ€™re certainly not going to work for free, and many of them will not do it at all rather than compromise their usual loan margin. If you allow them to play this game, when you finally give up in disgust, they still have several weeks after you apply with someone else where theyâ€™re the only ones that can possibly have the loan done, and if the market moves down during those weeks, theyâ€™re covered. If you could have gotten a better loan during that period, you likely would. But because you were quoted a price that didnâ€™t exist and believed it, theyâ€™ve got what looks to a consumer to be a competitive advantage. And if they call after you’ve cancelled their loan and say that they can close the loan now when the new provider you just contracted with isnâ€™t ready yet, most people will go ahead and sign the papers because This Loan Is Ready now.
And this is complete legal! They have no obligation to loan you anything at any particular rate or any particular terms until you sign the final papers — and if you back out then, you lose your deposit (sometimes called “earnest money”) on the house. Which is probably thousands of dollars, often 2% of the value. Plus the deposit you might have made with the movers. Plus, you may have already sold your old house, and have no other place to live. In other words, you are over the barrel, and it’s an excellent time for a not-so-honest broker/lender/bank to squeeze another few thousand dollars out of you — or worse, another $300 a month for the next 30 years. (The scary thing is, he says that even though 80-90% of buyers who notice the discrepancy cave, many don’t even notice they are signing up for higher payments than they agreed to.)
And Searchlight has a proposed solution to this — get a backup loan. In other words, apply for two loans — perhaps one from the guy who said the other guy’s deal was too good to be true — and make the final choice at the closing table. Assuming they both actually show up with the money, which they may not.
Let’s just say I discovered this blog about two months too late.
Next time, I’m going to get a backup loan. Maybe two or three backup loans.