Why Don’t Lenders Trust Borrowers?, by Richard Montgomery

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Dear Monty: We made an offer on a house and the seller accepted it. We informed our agent that we are paying for the house from the sale of our house and cash. The seller’s agent contacted our agent who sold our old house and wanted to make sure the closing was scheduled and verify the sale price of the old house. Can he do it ethically? We signed our purchase and sale agreement indicating that we had the funds to buy this house, so why would he “investigate” further?

Monty’s Response: It is good practice for the seller or seller’s agent to validate the financial circumstances surrounding the purchase of a home. It is not uncommon for the sale of the buyer’s old home to fail. If the buyer of your old home had a home that was pending but not yet closed, you may want to know the same information.

ARE APPROPRIATE CONTINGENCIES IN PLACE?

Based on your statements, you have an accepted offer. Did your agent include a contingency that allowed you to cancel the purchase of your new home if the sale of your old home did not close? Without alarming you, here are some of the main reasons why purchase agreements are not closed.

Reason #1: The buyer cannot remove the financing contingency. There are a variety of events that cause this. Some are beyond the buyer’s control, such as job loss or a poor appraisal. The low rating will cause the lender to deny loan approval or require a change in loan requirements. The buyer controls events such as buying a new car or quitting a job. Both of these examples change the buyer’s income/debt ratios. Either of these events can cause the lender to refuse the loan.

Reason #2: Home inspection reveals undisclosed or unknown defects. The inspection report is often delivered to the buyer a week or two before closing. The nature of the defect may cause the buyer to lose interest in the house, or he may not be able to come to an agreement during this second negotiation. Defects often lead to large and costly tasks. Examples that are known to kill sales are: entrepreneurs won’t leave a job to take on a new one, especially on short notice; the defect can create a delay in the closing, which disturbs the whole closing process.

Reason #3: Buyer’s or seller’s remorse. Buying or selling a home involves most homeowners’ largest asset. Changes in living conditions are a financial experience, but also an emotional experience. When there are bumps in the road, it will cause some people to give up. Certain external events can make them want to go out: an unfavorable medical diagnosis, a seriously injured child or parent in an accident or simply a feeling in their head telling them to stop.

THE ROOT CAUSE IS TO SAVE MONEY

Unfortunately, some buyers and sellers cheat or take shortcuts. Some sellers will attempt to prevent discovery of a defect by concealing it or not disclosing it. Buyers will try to hide monthly payments or overstate their income. Sometimes people forget or make mistakes. These people are a small minority, but they are the reason you were “investigated”. The practice of verifying the transaction is the lender’s protocol for everyone.

Richard Montgomery is the author of “Money from Home: An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” It advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty or at DearMonty.com

Photo credit: VisionPics on Pixabay

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