I was speaking to a potential client the other day and our discussion reminded me that they’re still out there. The creation of added regulation, testing, and licensing requirements certainly thinned out the herd, but they’re still out there: bad loan officers.
What was the situation? I had a current homeowner interested in buying a new home, and the price point he was looking at was substantial. Naturally, he wanted to apply equity he’d built up with his current home but wasn’t sure how that process worked. He planned to buy the new house before selling his current home, not wanting to be held captive by the constraints of timing both purchase and sale perfectly.
After finalizing plans with his builder, the out-the-door price ended up being around $850,000. My client had about $200,000 saved to apply as a down payment, about $200,000 equity in his current home, and a goal of securing a loan amount for the new house. While the challenge was how to get there since he wasn’t selling his current home before he bought, my client hoped to secure a loan of about $450,000 while securing a payment amount that fit comfortably within the family budget.
Before being referred to my office, my client worked with a lender who does a lot of local advertising on radio and television – a guy I’m familiar with because every time I see his commercial I think “Geez, that guy looks like he could have a heart attack any second.” Anyways, the loan officer advised my buyer that it would be best if he did a cash-out refinance on his current home to access some of his equity, plus combine that with the saved up $200,000 to put down on the new house. This would’ve been a huge mistake that any lender worth their salt wouldn’t have advised.
First, a cash-out refinance with a conforming loan limits a borrower to taking 80 percent of their home’s value as a new loan. In the case of my borrower, he would only be able to access about 60 percent of the $200,000 in equity he was seeking due to cash-out limitation guidelines. Secondly, it’s important to note that any refinance is going to have a set closing cost between $2,000-$3,000. While the cost of a refinance isn’t much of a burden within the context of a refinance loan being a long-term (two years or more) plan, paying that much money for a short-term solution simply isn’t a smart decision.
Fortunately, this story has a happy ending. My buyer started asking for referrals to talk with another loan officer, so I was lucky enough to get connected with him before he made the wrong financial decision. Now he and I are working together to get the target payment he wanted on his new house without paying for an unnecessary loan on his current home.
This type of thing is just a reminder that there are many bad and selfish loan officers out there, so always do your homework. Make sure you find someone knowledgable and trustworthy. Avoiding small financial missteps now could make the difference in your achieving your goals long-term.