Real Estate Transaction Implosion

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Maltese_IHB

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I need some group advice as we are in a pickle. The story will be told in generalities in case the counterparty is an IHBer.



We entered contract to purchase a home in Coastal Orange County with a purchase price in the range of 1-1.5 million dollars. There was to be a 30 day escrow. We were approved for a 30-year fixed mortgage through a very large bank. The approval included an exception to the bank's usual rule of 2 years self-employment. The mortgage became several days late for closing, due the bank asking for last-minute information. Just prior to loan documents being released an underwriter who had previously approved the loan became nervous and bumped the loan up to a "higher" underwriter, who sat on the loan several days and then denied the 2-year self-employment exception. The loan was denied. We have a large sum of money (3% deposit) in escrow and the seller is asking us to pay a late penalty per day. There are alternative adjustable rate loans 5:1 or 7:1 with interest rates in the 5.75 and 6.1% respectively, 80% loan to value. These unfortunately are worse than the rate we were seeing on 30 year fixed. Weare left with the choice of potentially losing our large deposit and legal fees, or going through with a purchase on a loan that we are not comfortable with (mostly due to risk of interest rate increase, home values continuing to fall, etc). The loan can close in 7-10 days, so we may be on the hook for several thousand dollars of per diem fees to the seller.





What would you do? Walk and try to settle for some of the deposit, or buy and not lose the deposit? Would you go after the large bank to cover the penalties that you incurred due to the error of their underwriter?





Thanks for your input.
 
Wow, that sure sucks. We just completed our purchase with a few ups and downs (nothing compared to this of course), so I totally understand the pain and frustration. Just to ask the obvious, doesn't your purchase contract have a loan approval contingency? If so, you should be able to walk away with your full deposit back.
 
[quote author="Maltese" date=1249726637]I need some group advice as we are in a pickle. The story will be told in generalities in case the counterparty is an IHBer.



We entered contract to purchase a home in Coastal Orange County with a purchase price in the range of 1-1.5 million dollars. There was to be a 30 day escrow. We were approved for a 30-year fixed mortgage through a very large bank. The approval included an exception to the bank's usual rule of 2 years self-employment. The mortgage became several days late for closing, due the bank asking for last-minute information. Just prior to loan documents being released an underwriter who had previously approved the loan became nervous and bumped the loan up to a "higher" underwriter, who sat on the loan several days and then denied the 2-year self-employment exception. The loan was denied. We have a large sum of money (3% deposit) in escrow and the seller is asking us to pay a late penalty per day. There are alternative adjustable rate loans 5:1 or 7:1 with interest rates in the 5.75 and 6.1% respectively, 80% loan to value. These unfortunately are worse than the rate we were seeing on 30 year fixed. Weare left with the choice of potentially losing our large deposit and legal fees, or going through with a purchase on a loan that we are not comfortable with (mostly due to risk of interest rate increase, home values continuing to fall, etc). The loan can close in 7-10 days, so we may be on the hook for several thousand dollars of per diem fees to the seller.





What would you do? Walk and try to settle for some of the deposit, or buy and not lose the deposit? Would you go after the large bank to cover the penalties that you incurred due to the error of their underwriter?





Thanks for your input.</blockquote>
I'm sorry to hear that happened to you. The first question I have to ask if did you guys as buyers sign the Contingency Removal Form (CAR Form CR) lifting all of the contingencies? If not, you will be able to get all of your deposit back because the loan was denied. Definitely DO NOT settle on a adjustable ARM loan! If you can not get a 30-year fixed loan on the property, I would seriously consider walking away if you can get your deposit back. Rules at banks change minute-by-minute and I had to deal with a last minute "fire drill" when the underwriter on my buyers loan did not allow me to contribute a portion of my commissions to my buyers but was lucky that there was a quick fix.



If you guys did sign the Contingency Removal Form (which I hope you did not), you will have to negotiate the sellers...whether you decide to find another lender or walk away and try to get most of the deposit back. This is a great example why buyers in today's lending environment SHOULD NOT sign the Contingency Removal Form until they get FINAL LOAN APPROVAL! Im not sure if the bank has the right to rescind a final loan approval, a lawyer would be a good person to ask. That being said, if you did sign the Contingency Removal Form based upon your lender telling you that you had full loan approval (in writing, either via mail or e-mail) you may have a case against them if you do lose part of all or your deposit.
 
Unfortunately, we did remove all contingencies (per our agents advice) once we had an appraisal and the loan was approved. I have the email from the loan guy saying "congratulations, your loan is approved with the following conditions". He also verbally told me that once the bank gets that far he had never seen a deal fall through.



The ARM loans are through an independent broker and are through a portfolio lender, so they are willing to waive the 2-year self-employment clause.



So the real question is do we try to negotiate with the seller to split the deposit in some way, or do we procede with the purchase in an ARM product. We have been unable to find another bank that can do a 30-year-fixed, 80% loan to value, million plus loan, and is willing to allow less than 2 years of self-employment.
 
[quote author="Maltese" date=1249728785]Unfortunately, we did remove all contingencies (per our agents advice) once we had an appraisal and the loan was approved. I have the email from the loan guy saying "congratulations, your loan is approved with the following conditions". He also verbally told me that once the bank gets that far he had never seen a deal fall through.



The ARM loans are through an independent broker and are through a portfolio lender, so they are willing to waive the 2-year self-employment clause.



So the real question is do we try to negotiate with the seller to split the deposit in some way, or do we procede with the purchase in an ARM product. We have been unable to find another bank that can do a 30-year-fixed, 80% loan to value, million plus loan, and is willing to allow less than 2 years of self-employment.</blockquote>
Wow, that totally sucks...the lender really pulled the carpet out from underneath your feet. What were the conditions of the loan approval? Unfortunately, I think your agent is a a bit at fault too because it sounds like you had a conditional loan approval and not a full & final loan approval. That being said, it's a little late in the game to be pointing the finger of blame. How long before you have your 2 years of self-employment under your belt? Did you guys get a decent deal on the home? Is it a home you guys see yourselves living in for the next 7-10+ years? Do you guys love the home and the neighborhood? If you answer positively to all these questions then I would go ahead and get the adjustable loan to close and then refinance it to a 30-year fixed once you have the 2-year requirement met (hopefully that'll be in the next 6 months).
 
[quote author="usctrojanman29" date=1249731142][quote author="Maltese" date=1249728785]Unfortunately, we did remove all contingencies (per our agents advice) once we had an appraisal and the loan was approved. I have the email from the loan guy saying "congratulations, your loan is approved with the following conditions". He also verbally told me that once the bank gets that far he had never seen a deal fall through.



The ARM loans are through an independent broker and are through a portfolio lender, so they are willing to waive the 2-year self-employment clause.



So the real question is do we try to negotiate with the seller to split the deposit in some way, or do we procede with the purchase in an ARM product. We have been unable to find another bank that can do a 30-year-fixed, 80% loan to value, million plus loan, and is willing to allow less than 2 years of self-employment.</blockquote>
Wow, that totally sucks...the lender really pulled the carpet out from underneath your feet. What were the conditions of the loan approval? Unfortunately, I think your agent is a a bit at fault too because it sounds like you had a conditional loan approval and not a full & final loan approval. That being said, it's a little late in the game to be pointing the finger of blame. How long before you have your 2 years of self-employment under your belt? Did you guys get a decent deal on the home? Is it a home you guys see yourselves living in for the next 7-10+ years? Do you guys love the home and the neighborhood? If you answer positively to all these questions then I would go ahead and get the adjustable loan to close and then refinance it to a 30-year fixed once you have the 2-year requirement met (hopefully that'll be in the next 6 months).</blockquote>


I think the problem is that once the two year requirement is met, they won't be able to get a 30 year fixed. Values are falling fast, faster than many think and then you have the whole problem of appraisals. That's a risk I wouldn't want to take.
 
We have 12 months until 2 years of self-employment. If rates remain in favorable in 12 months, and if home prices hold steady, we should be able to refi into a 30-year-fixed. We do plan on staying in this house for a very long time frame. It is a good deal (not great), and I love the area, but there will be other good deals and other good areas. A refi will also cost quite a bit of money (approx 10k for points plus closing costs) so tilts the equation slightly toward giving up our deposit.



We are waiting to see if the seller is going to allow us to go forward with another loan application, or if he/she will try to cancel on us. If he/she cancels, I hope we might have a shot at some of our deposit.



Further complicating matters is that we gave up our rental, and will be homeless in 2 weeks. Not sure how that will play out. If the loan can't close in time it may force our hand into renting a place and giving up our large deposit or at least fighting for a portion of it.
 
[quote author="tmare" date=1249731903][quote author="usctrojanman29" date=1249731142][quote author="Maltese" date=1249728785]Unfortunately, we did remove all contingencies (per our agents advice) once we had an appraisal and the loan was approved. I have the email from the loan guy saying "congratulations, your loan is approved with the following conditions". He also verbally told me that once the bank gets that far he had never seen a deal fall through.



The ARM loans are through an independent broker and are through a portfolio lender, so they are willing to waive the 2-year self-employment clause.



So the real question is do we try to negotiate with the seller to split the deposit in some way, or do we procede with the purchase in an ARM product. We have been unable to find another bank that can do a 30-year-fixed, 80% loan to value, million plus loan, and is willing to allow less than 2 years of self-employment.</blockquote>
Wow, that totally sucks...the lender really pulled the carpet out from underneath your feet. What were the conditions of the loan approval? Unfortunately, I think your agent is a a bit at fault too because it sounds like you had a conditional loan approval and not a full & final loan approval. That being said, it's a little late in the game to be pointing the finger of blame. How long before you have your 2 years of self-employment under your belt? Did you guys get a decent deal on the home? Is it a home you guys see yourselves living in for the next 7-10+ years? Do you guys love the home and the neighborhood? If you answer positively to all these questions then I would go ahead and get the adjustable loan to close and then refinance it to a 30-year fixed once you have the 2-year requirement met (hopefully that'll be in the next 6 months).</blockquote>


I think the problem is that once the two year requirement is met, they won't be able to get a 30 year fixed. Values are falling fast, faster than many think and then you have the whole problem of appraisals. That's a risk I wouldn't want to take.</blockquote>


I see your point, but we would have 7 years to work that out. If the market bottoms in 2012, and drags the bottom a few years, by 2016 we may be back to even. In that time we should have paid down 100K of principal, so a refi might be possible even if values drop another 100K. However rates could be thru the roof at that point, making me skittish.
 
[quote author="Maltese" date=1249732123]We have 12 months until 2 years of self-employment. If rates remain in favorable in 12 months, and if home prices hold steady, we should be able to refi into a 30-year-fixed. We do plan on staying in this house for a very long time frame. It is a good deal (not great), and I love the area, but there will be other good deals and other good areas. A refi will also cost quite a bit of money (approx 10k for points plus closing costs) so tilts the equation slightly toward giving up our deposit.



We are waiting to see if the seller is going to allow us to go forward with another loan application, or if he/she will try to cancel on us. If he/she cancels, I hope we might have a shot at some of our deposit.



Further complicating matters is that we gave up our rental, and will be homeless in 2 weeks. Not sure how that will play out. If the loan can't close in time it may force our hand into renting a place and giving up our large deposit or at least fighting for a portion of it.</blockquote>
12-month can be a long time, especially with how volatile both the mortgage and real estate markets can be. I guess it comes down to how much risk you guy are willing to deal with. If you can get a 7 or 10 year ARM which isn't that much higher than today's 30-year fixed rate then I think you guys may be fine in terms of not losing that much value but the risk comes in when the interest rate resets (which may cause you guys to become forced sellers if rates go through the roof at that time). I guess the first step would be to see if the sellers are even willing to give you guys some more time to get that adjustable rate. If they aren't, then it's time to negotiate the refund of your deposit. Be prepared that they may be willing to give you more time in exchange for you guys putting more funds into escrow. I just hope they are reasonable and not send you guys a Notice to Buyer to Perform Form (NBP) because that will be a bad sign they are getting impatient.
 
[quote author="usctrojanman29" date=1249733582][quote author="Maltese" date=1249732123]We have 12 months until 2 years of self-employment. If rates remain in favorable in 12 months, and if home prices hold steady, we should be able to refi into a 30-year-fixed. We do plan on staying in this house for a very long time frame. It is a good deal (not great), and I love the area, but there will be other good deals and other good areas. A refi will also cost quite a bit of money (approx 10k for points plus closing costs) so tilts the equation slightly toward giving up our deposit.



We are waiting to see if the seller is going to allow us to go forward with another loan application, or if he/she will try to cancel on us. If he/she cancels, I hope we might have a shot at some of our deposit.



Further complicating matters is that we gave up our rental, and will be homeless in 2 weeks. Not sure how that will play out. If the loan can't close in time it may force our hand into renting a place and giving up our large deposit or at least fighting for a portion of it.</blockquote>
12-month can be a long time, especially with how volatile both the mortgage and real estate markets can be. I guess it comes down to how much risk you guy are willing to deal with. If you can get a 7 or 10 year ARM which isn't that much higher than today's 30-year fixed rate then I think you guys may be fine in terms of not losing that much value but the risk comes in when the interest rate resets (which may cause you guys to become forced sellers if rates go through the roof at that time). I guess the first step would be to see if the sellers are even willing to give you guys some more time to get that adjustable rate. If they aren't, then it's time to negotiate the refund of your deposit. Be prepared that they may be willing to give you more time in exchange for you guys putting more funds into escrow. I just hope they are reasonable and not send you guys a Notice to Buyer to Perform Form (NBP) because that will be a bad sign they are getting impatient.</blockquote>


Funny you should say that, because I didn't mention that they gave us a 3 day notice to perform 3 days ago, which we did not sign based on our realtors advice. Today we informed them of our predicament, and we are waiting to here from the seller.
 
[quote author="Maltese" date=1249733788][quote author="usctrojanman29" date=1249733582][quote author="Maltese" date=1249732123]We have 12 months until 2 years of self-employment. If rates remain in favorable in 12 months, and if home prices hold steady, we should be able to refi into a 30-year-fixed. We do plan on staying in this house for a very long time frame. It is a good deal (not great), and I love the area, but there will be other good deals and other good areas. A refi will also cost quite a bit of money (approx 10k for points plus closing costs) so tilts the equation slightly toward giving up our deposit.



We are waiting to see if the seller is going to allow us to go forward with another loan application, or if he/she will try to cancel on us. If he/she cancels, I hope we might have a shot at some of our deposit.



Further complicating matters is that we gave up our rental, and will be homeless in 2 weeks. Not sure how that will play out. If the loan can't close in time it may force our hand into renting a place and giving up our large deposit or at least fighting for a portion of it.</blockquote>
12-month can be a long time, especially with how volatile both the mortgage and real estate markets can be. I guess it comes down to how much risk you guy are willing to deal with. If you can get a 7 or 10 year ARM which isn't that much higher than today's 30-year fixed rate then I think you guys may be fine in terms of not losing that much value but the risk comes in when the interest rate resets (which may cause you guys to become forced sellers if rates go through the roof at that time). I guess the first step would be to see if the sellers are even willing to give you guys some more time to get that adjustable rate. If they aren't, then it's time to negotiate the refund of your deposit. Be prepared that they may be willing to give you more time in exchange for you guys putting more funds into escrow. I just hope they are reasonable and not send you guys a Notice to Buyer to Perform Form (NBP) because that will be a bad sign they are getting impatient.</blockquote>


Funny you should say that, because I didn't mention that they gave us a 3 day notice to perform 3 days ago, which we did not sign based on our realtors advice. Today we informed them of our predicament, and we are waiting to here from the seller.</blockquote>
Well I've done enough of these transactions that I've seen just about every form out there on CAR WinForm plus had to manuver past many speed bumps and handle several late minute fire drills. Even the one cash purchase transaction that I was a part of had some tense moments. There's no such thing as a perfect real estate transaction, something always pops up.



Anyhow, if I had to make a wager I'd say that the sellers come back to you and tell you to deposit additional funds into escrow in exchange for additional time to extend the escrow period. Btw, did you guys have 30 or 45 days on your offer? I allows put 40-45 days on my offers because of the current lending environment. Please keep us posted of what transpires.
 
[quote author="usctrojanman29" date=1249736055][quote author="Maltese" date=1249733788][quote author="usctrojanman29" date=1249733582][quote author="Maltese" date=1249732123]We have 12 months until 2 years of self-employment. If rates remain in favorable in 12 months, and if home prices hold steady, we should be able to refi into a 30-year-fixed. We do plan on staying in this house for a very long time frame. It is a good deal (not great), and I love the area, but there will be other good deals and other good areas. A refi will also cost quite a bit of money (approx 10k for points plus closing costs) so tilts the equation slightly toward giving up our deposit.



We are waiting to see if the seller is going to allow us to go forward with another loan application, or if he/she will try to cancel on us. If he/she cancels, I hope we might have a shot at some of our deposit.



Further complicating matters is that we gave up our rental, and will be homeless in 2 weeks. Not sure how that will play out. If the loan can't close in time it may force our hand into renting a place and giving up our large deposit or at least fighting for a portion of it.</blockquote>
12-month can be a long time, especially with how volatile both the mortgage and real estate markets can be. I guess it comes down to how much risk you guy are willing to deal with. If you can get a 7 or 10 year ARM which isn't that much higher than today's 30-year fixed rate then I think you guys may be fine in terms of not losing that much value but the risk comes in when the interest rate resets (which may cause you guys to become forced sellers if rates go through the roof at that time). I guess the first step would be to see if the sellers are even willing to give you guys some more time to get that adjustable rate. If they aren't, then it's time to negotiate the refund of your deposit. Be prepared that they may be willing to give you more time in exchange for you guys putting more funds into escrow. I just hope they are reasonable and not send you guys a Notice to Buyer to Perform Form (NBP) because that will be a bad sign they are getting impatient.</blockquote>


Funny you should say that, because I didn't mention that they gave us a 3 day notice to perform 3 days ago, which we did not sign based on our realtors advice. Today we informed them of our predicament, and we are waiting to here from the seller.</blockquote>
Well I've done enough of these transactions that I've seen just about every form out there on CAR WinForm plus had to manuver past many speed bumps and handle several late minute fire drills. Even the one cash purchase transaction that I was a part of had some tense moments. There's no such thing as a perfect real estate transaction, something always pops up.



Anyhow, if I had to make a wager I'd say that the sellers come back to you and tell you to deposit additional funds into escrow in exchange for additional time to extend the escrow period. Btw, did you guys have 30 or 45 days on your offer? I allows put 40-45 days on my offers because of the current lending environment. Please keep us posted of what transpires.</blockquote>


My realtor recommended going with a 30 day escrow because we were in a multiple offer scenario, and she wanted our offer to be the strongest. In retrospect, this was very poor advice. Taking a short escrow that you are unsure if you can fulfill can only lead to trouble. In our case the seller demands several hundred dollars per day that we are late. We havent agreed to that in any contract, and we will see where this goes.
 
Yeah, it's all about setting realistic expectations with sellers and listing agents. A good listing agent will explain to their sellers that having a 45 day escrow period vs. a 30 day escrow period shouldn't make one offer seem any stronger than another. I never make this assumption that the listing agent will do that so I allows call and go over the offer with the listing agents to explain to them why I put a 40-45 day escrow period (once they understand, it's a non issue). The focus concerning distinguishing the strength of the buyers should be based upon the % of down payment, recent pre-approval from a direct lender, strong fico scores/credit reports, and significant proof of funds along with the obvious price being offered for the home. If the property did have multiple offers, the listing agent should have kept a few as back-up buyers and the sellers may be able to just go to them quickly (this would make for an easier time getting most of your deposit back if you go that route).
 
im no genius but i think you should





get an exact replica of the loan you had with the original bank -- a 30 year fixed. even if the interest rate is higher, get it. deal with other problems later



(this is assuming you have your heart set on the house)
 
Interestingly, while we were in escrow with our fixed 30-year loan locked, a family friend (the guy is a mini Donald Trump and owns a couple of high-rises and parking structures in Manhattan) blasted us for going fixed. He argued that no matter how much we liked the house today, we will definitely want to move up in 10 years, so doing a fixed rate loan is dumb and a 10/1 ARM is the way to go to be able to enjoy the lower rate for the time we own the house and get rid of it by the time the rate goes variable. Of course in your case, it seems that you have to go ARM to have the same rate you had with you fixed loan, which is kind of lame.

BTW, any of you guys happen to be a licensed physician? Our lender has specific loan programs for physicians and the self-employment duration won't be an issue with them.
 
[quote author="Mazy" date=1249740568]Interestingly, while we were in escrow with our fixed 30-year loan locked, a family friend (the guy is a mini Donald Trump and owns a couple of high-rises and parking structures in Manhattan) blasted us for going fixed. He argued that no matter how much we liked the house today, we will definitely want to move up in 10 years, so doing a fixed rate loan is dumb and a 10/1 ARM is the way to go to be able to enjoy the lower rate for the time we own the house and get rid of it by the time the rate goes variable. Of course in your case, it seems that you have to go ARM to have the same rate you had with you fixed loan, which is kind of lame.

BTW, any of you guys happen to be a licensed physician? Our lender has specific loan programs for physicians and the self-employment duration won't be an issue with them.</blockquote>
Not I, I'd probably faint at the site of blood and I don't think I could handle another 4 years of school at this point. :P
 
[quote author="Mazy" date=1249740568]BTW, any of you guys happen to be a licensed physician? Our lender has specific loan programs for physicians and the self-employment duration won't be an issue with them.</blockquote>


Correction: Your lender, like most including Fannie and Freddie and the lenders who use their guidelines for jumbo loans, will credit school time for professionals (doctors and attorneys) as being employed, as long as you can provide proof of income via a contract or tax returns that you can qualify for the loan. For example, I did a loan for a Doc who had been working at Kaiser for 3 months, and never worked a day in his life before that. He provided the contract he had with Kaiser and two months worth of paychecks, and he qualified for a loan as if he had been working at the same job for two years. However, that was back when if you could fog a mirror you could get a loan, so it may not be as easy, but it should be able to be done.
 
[quote author="graphrix" date=1249742015][quote author="Mazy" date=1249740568]BTW, any of you guys happen to be a licensed physician? Our lender has specific loan programs for physicians and the self-employment duration won't be an issue with them.</blockquote>


Correction: Your lender, like most including Fannie and Freddie and the lenders who use their guidelines for jumbo loans, will credit school time for professionals (doctors and attorneys) as being employed, as long as you can provide proof of income via a contract or tax returns that you can qualify for the loan. For example, I did a loan for a Doc who had been working at Kaiser for 3 months, and never worked a day in his life before that. He provided the contract he had with Kaiser and two months worth of paychecks, and he qualified for a loan as if he had been working at the same job for two years. However, that was back when if you could fog a mirror you could get a loan, so it may not be as easy, but it should be able to be done.</blockquote>
You forgot to add that they will require getting a copy of an official transcript for proof of graduation.
 
[quote author="usctrojanman29" date=1249744434]You forgot to add that they will require getting a <strong>copy of an official transcript</strong> for proof of graduation.</blockquote>


Not sure how an underwriter would need to know the GPA for qualification for a loan, but... yes, they will most likely require proof of graduation. IRCC a copy of the diploma should suffice with a contract and/or proof of income. Underwriters have access to databases that would confirm this, so it would be unnecessary to have a borrower pay for an official transcript, when there are other ways to prove graduation.
 
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