For obvious reasons, any transaction involving someone’s home is a significant and important transaction. Some attention to the following subjects will add value to your services for your clients.
Credit: Since most of your clients will need a mortgage, make sure they get a copy of their credit report and review it for errors. Advise them to reduce any credit card balances that are more than 50% of the credit card limit. If they are going to receive the down-payment funds from any source other than their bank account, try to have those funds transferred at least two months — and preferably six months — before obtaining financing. Also, without a doubt, having a pre-approval letter is almost an unstated requirement for any bona-fide purchaser in today’s market.
Predatory Lending: There are potential bills going around Congress, but no clear definitions. On one hand, equal opportunity and anti-discrimination laws have helped to expand access to capital for previously underserved borrowers. On the other hand, many families suffer from abusive practices.
The most common form of predatory lending is risk-based pricing where interest rates are based on credit risk. Lenders argue that because a greater percentage of loans to less creditworthy borrowers can be expected to go into default, higher rates are necessary to obtain the same yield on the portfolio as a whole.
The other common practice is selling the borrower credit insurance, which pays off the loan should the borrower die. Although most life insurance policies could be used the same way, credit life insurance is usually the only one the lender is licensed to sell. It probably is the most expensive form of insurance and, since the single premium can be financed into the loan, people buy it because they do not have to pay up front.
However, unlike a regular insurance policy, if you sell the home, the policy ends, even though the premium has been paid. Life insurance can be paid monthly according to need and transferred to other mortgages/debt obligations.
Real Estate Agent Representations: I will never forget one of my first dealings with an agent. When I asked him if he thought the building was well built, he kicked a few doors, knocked on the wall with his ear to it and gave me a confident nod. No, this was not a movie.
We all love to know the answers and unfortunately we are not skilled enough to give them. My most frequent response to clients is, “I am not an engineer, but I can refer you to one who can tell you about the structural integrity of the building.” Make sure your client is not relying on an agent’s representation instead of a professional roofer, plumber or electrician.
Mortgage Brokers: Always get it in writing. I have had brokers promise a loan that never occurs. I have seen a lender try to rescind on a mortgage commitment. Unfortunately, once your client waives the financing contingency, then that is usually the last contingency before closing. If there is a problem with the loan, then they can lose the earnest money. I always try to get a written commitment with no conditions or at least the conditions in writing so as to minimize my client’s risk.
Extended Title Insurance: Easy to remember and it costs a little more, but it is worth it.
Home Inspectors: As with the increase in real estate agents, there has been an increase in home inspection companies. Ultimately, I always refer my clients to a licensed engineer and not someone who just received their certificate in the mail.
Agent Referrals: Like most agents, I have my network of lenders, inspectors, etc. However, many real estate companies legally disclose to their clients that the company has an interest in and/or compensation agreements with mortgage lenders, escrow companies and the like. Unfortunately, most people simply sign these disclosures when they have no idea about the amount of compensation involved. For example, I have been offered as much as 1% of the total transaction by a lender who wanted me to refer my client to them. I believe it is unethical to receive monetary compensation above my commission. Nevertheless, more real estate agencies are using such disclosures and more agents are receiving anything from monthly desk fee payments to plain cash.
-Frank D. Prestia
