Why Don't Lenders Trust Borrowers?
Dear Monty: We made an offer on a home, and the seller accepted it. We advised our agent that we are paying for the house from the sale of our home and cash. The seller's agent contacted our agent who sold our old home and wanted to make sure we had the closing scheduled and verify the old house sale price. Can he ethically do this? We signed our purchase and sale agreement stating we had the funds to purchase this home, so why would he "investigate" further?
Monty's Answer: It is a good practice for the seller or the seller's agent to validate the financial circumstances surrounding a home purchase. It is not uncommon for the sale of the buyer's old home to fall apart. If the buyer of your old home owned a house that was pending but not yet closed, you might want to know the same information.
ARE THE PROPER CONTINGENCIES IN PLACE?
Based on your statements, you have an accepted offer. Did your agent include a contingency that allowed you to cancel your new home purchase if your old home sale didn't close? Not to alarm you, but here are some main reasons purchase contracts fail to close.
Reason No. 1: The buyer cannot remove the financing contingency. There are a variety of events that cause this to happen. Some are beyond the buyer's control, such as losing their job or a low appraisal. The low appraisal will cause the lender to either deny the loan approval or require a change in the loan requirements. The buyer controls events like buying a new car or quitting a job. Both of these examples change the buyer's income/debt ratios. One or both of these events may cause the lender to deny the loan.
Reason No. 2: The 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 they may not be able to come to terms in this second negotiation. Defects often lead to large, expensive tasks. Here are examples known to kill sales: Contractors will not leave a job to take on a new job, especially on short notice; the defect may create a delay in the closing, which upsets the entire closing process.
Reason No. 3: Buyer or seller remorse. Buying or selling a home involves the largest single asset of most homeowners. Changes in living circumstances are a financial experience, but also an emotional experience. When there are bumps in the road, it will cause some people to give up. Some external events can cause them to want out: an adverse medical diagnosis, a child or parent severely injured in an accident or simply a feeling in their head telling them to stop.
THE ROOT CAUSE IS SAVING MONEY
Unfortunately, some buyers and sellers cheat or cut corners. Some sellers will try to prevent the discovery of a defect by concealing or not disclosing it. Buyers will try to hide monthly payments or overstate income. Sometimes people forget or make mistakes. These folks are a small minority, but they are why you were "investigated." The practice of vetting the transaction is the lender protocol for everyone.
Richard Montgomery is the author of "House Money: An Insider's Secrets to Saving Thousands When You Buy or Sell a Home." He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty, or at DearMonty.com
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