My Buyer Has Borderline Credit
Q. If I retail a house to someone whose credit is borderline, do I have a responsibility to make sure that they are getting a loan they can afford? I mean, most of these buyers aren’t realizing that if the ARM goes from a 7% loan to an 8% loan, that could mean $120 more per month in mortgage payments. Is it my responsibility to make sure that they know this? Or should I feel OK with the thought that it is the mortgage broker’s responsibility to properly inform the buyer? It’s a moral dilemma for me. -BR, Cleveland
A. You’re absolutely right; it is a moral dilemma. On the one hand, your buyers are grown ups and CUSTOMERS, not a client, so you might ask yourself whether putting their best interests before your is a business mistake. On the other hand, if you do nothing, the buyer you describe is likely to get involved in a mortgage whereby they will be in foreclosure before they make their first payment, which is really wrong.
The real problem with these kind of buyers is not that they are going to get into an ARM; the problem is that they’re as likely as not to get into a sub-prime, high-rate, high-cap ARM with a ton of fees attached AND that there is likely to be loan fraud involved, as well, And the human being in me says that allowing this to happen without comment is morally wrong.
So here’s what I do with, for instance, buyers of my lease/options. When they move in, I warn them that in order to get a good, affordable loan, they will have to take care of certain things on their credit report (and not apply for any new credit, and pay their bills on time, etc.).
When they call me to tell me that they’re ready to refinance, I ask them to let me know what kinds of rates and terms they’re being offered, and I warn them that I’m not going to do anything that’s going to get them or me in trouble (like cooperate with a fraudulent appraisal, re-write the purchase contract to show a higher sales price so that they can “show” 20% equity, etc.)
Before we go to closing, I make sure that they understand that a 2% increase in their interest rates =a 24% hike in their payments, not a 2% hike in their payments. If the terms they get are sub-prime, I tell them so and give them the option of waiting another year or two to improve their credit and refi. And, if I get even a whiff that the loan is fraudulent (for example, if they or the house qualified for much more financing than seems reasonable without faking the facts), I tell the mortgage broker that I am going to talk to the FBI about the loan—which usually ends it right there!
There have been several cases where, even after all of this, the buyer has chosen to move forward with an unfavorable loan, usually because the broker was offering cash back at closing-and in practically all of those cases, he has lost the home within 24 months.
I think that as a business person, your only obligation is to act within the law to get the house sold. But as a caring person, you have to make the effort to make sure that buyers understand the possible consequences of taking on these loans. Still, there’s also a time you have to say, “I’ve done all I can; he’s a grown person and I wish him the best of luck…but I’m not his mommy!
Copyright 2006 Vena Jones-Cox. Reprinted by Permission. From the Real Deal, a monthly newsletter for Real Life Real Estate Investors. [discontinued] National Speaker Vena Jones-Cox has appeared at past MREIA meetings and has been a full-time real estate investor since 1989. She focuses on high-profit, low-hassle strategies that leave her the time and freedom to enjoy financial independence. All told, she’s bought over 600 properties. Vena is also the host of public radio’s “Real Life Real Estate Investing” (Wednesdays at 5 p.m. est at wnku.org), a live weekly program that addresses all aspects of real estate investing. She’s past president of Cincinnati REIA, Ohio. Email: firstname.lastname@example.org or visit www.regoddess.com