Did My Lender Pull a Bait and Switch?

By Gina Pogol
Mortgage Credit Problems Columnist

Brent Asks: Dear Gina, I am a first-time home buyer who is working with a mortgage broker. I have a Good Faith Estimate for a loan with 10% down, a 10% second mortgage, and an 80% first mortgage. I am supposed to close in a week. I called my broker about locking my mortgage but was unable to get hold of him for several days. He just called backand said that my bank account is short by $375 and so the only loan I can get is an FHA loan at a higher rate and with mortgage insurance. My payment is much higher and I don't want this loan but if I don't take it I'll lose my deposit on the house. What can I do?

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Gina Says:

Dear Brent,

I'm sorry about what you are going through. Without knowing your broker's side I can't determine if there is any funny stuff going on but it appears that at a minimum you haven't gotten the best service. FHA does offer more flexibility and so do lenders who fund bad credit home loans. But if your bank account was the culprit, you may not need that kind of flexibility. Here are my thoughts:

The loan process has several steps. It appears that you got some disclosures but then the communication stopped.

When shopping for a mortgage, it's important that you choose a loan professional who is responsive to you and returns phone calls. It is also good to ask this person how your loan will proceed and what to expect. Here's how it should go once you were under contract to purchase your home:

  1. You would get disclosures from lenders while you shop for your mortgage. Then you select your lender and loan program (in this case, an 80/10/10 program). You can get pre-qualified and receive a pre-qualification letter at this time.
  2. You complete your application and provide your documents including account statements. A good loan officer knows the program guidelines and should be able to tell you if you need to have more in the bank to get approved.
  3. Your application is underwritten (this is probably done electronically) and if you are accepted, you are given a credit approval letter and a list of closing conditions--that is, things that need to happen to fund your mortgage. This could include accounts to pay off, money to transfer, or an acceptable property appraisal.
  4. At any time during this process, you can lock your mortgage rate. That means contacting your loan officer, finding out what current rates are and agreeing on a rate and price. You should get a new set of disclosures stating what the rate is, what costs are involved, and when the rate lock expires.
  5. If anything major changes during the process (for example, if the property doesn't appraise for its sales price, your credit rating drops, or you take on more debt), the lender has to issue new disclosures to you.
  6. The lender should then draw up your final mortgage documents and you should get a chance to look them over before signing.
  7. The lender funds the loan and you get your keys.

Communication is crucial.

My concern with your problem is that it doesn't seem that there was much communication between you and your loan agent. There are several points during the process when you should have known what program you were being put into and what it was going to cost. You should have received an approval or declination letter. You should have received new disclosures for the FHA loan if you were declined for the 80/10/10.

But you should be able to keep your deposit.

Ordinarily, a financing contingency means that you cannot be forced to proceed with a property purchase or forfeit your deposit if the financing is not acceptable to you. And most real estate agents also build in an automatic extension of time if your loan closes a little late. If I were you, I'd have a conversation with my agent. Then, get some quotes from lenders (this site has both bad credit and traditional lenders) and see if you can get the loan you really want. This site also has tips on choosing prospective lenders. Get one that provides the level of service you need. Good luck and thanks for writing.

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