Q&A: In denial about mortgages

Q: In December, we accepted a $250,000 offer on our home. We accepted the offer because we had seen a pre-approval letter, our broker spoke to their mortgage rep, they wanted to close quickly and the buyer was putting down almost 50 percent.

Months later, after things were delayed more than once, we finally got the commitment from the bank. But then days before we were to close, we were told that the buyers’ loan had been denied! What good is a mortgage commitment, and what can we do to prevent this from happening again?

A: The buyers never had a mortgage commitment. What they had was a letter from a loan officer saying they might qualify for a loan. A final loan commitment will depend on an appraisal of the property, a complete review of the borrower’s finances and whatever other standards the lender wants. Moreover, the loan officer is simply a salesman marketing loans – someone who does not have the authority to approve loan applications.

Let’s look at this from the lender’s perspective. The lender wants to make loans, but a lender cannot possibly make a loan without knowing the value of the property. Why? If a loan is made the property will be security for the debt. The result is that lenders routinely issue what are called “hand-holding” letters, which say that generally the borrower is in the financial ballpark when it comes to sufficient financial capacity to purchase the home. But an absolute commitment to make a loan? Nope. Read the lender’s letter; you’ll find a “gotcha” clause somewhere.

As to the future, you can require as a condition of the sale that a buyer make a prompt and full application for financing and provide a lender letter “satisfactory” to you by a given date stating that the buyer has sufficient income, credit and assets to qualify for the financing required to purchase the home. If the letter is not “satisfactory” to you then the deal is off, the buyer gets back his deposit and you can begin to market the property again. In addition, you should require that an appraisal of the property be completed by a given date to assure that such a valuation does not delay the loan application. Your attorney or broker can provide proper language.

Q: Instead of returning a home to a lender, why can’t owners just do a short sale?

A: If you had asked this question a few years ago you could be fairly sure that the lender would not want the keys back or have much if any interest in a short-sale.

Today’s world is different. Lenders are still opposed to both short sales and key returns because they’re in the business of making loans, not owning houses. What lenders want are their loans repaid, with interest.

But the realities of the marketplace are forcing lenders to rethink their options, especially in local markets that have seen swift and deep value declines.

• Do lenders want homes returned? No, but it may be better to grab the keys and get a deed-in-lieu of foreclosure then to battle needlessly with an owner. In some cases, lenders might even provide cash to help owners move if a home is returned in good shape.

• Do lenders want to accept short sales? No. With a short sale the lender is accepting less than the outstanding mortgage balance in a settlement with the borrower. However, a short sale with a loss may be better than a foreclosure with a far-bigger loss.

• Instead of a returned home or a short sale, maybe the lender can offer a loan “workout,” either a loan modification or a payment plan. In many cases however, modifications cannot be made because loan investors -- the folks who actually own the mortgages -- will not okay modifications. Workouts may allow lenders and owners to postpone the loss of a home for many months even if loans later re-default.

• Lastly, what about a total refinance? For borrowers with equity a refinance at a lower rate could lead to smaller monthly payments and no loss to the lender. This option is simply not plausible in many areas because value declines since 2006 have been so great. Another barrier? Lenders with second liens may not approve and scuttle the deal.