Q: We got preapproved for a loan and started house hunting in June of this year. In August, we made an offer on a bank-owned home (REO), and the bank accepted. Three days before we were supposed to close, the mortgage broker told us that the loan was in jeopardy because we have a state tax lien on our credit reports for $6,000. The thing is, we told him about this tax lien back in June, when we gave him a copy of our payment arrangement letter from the state! We have always made the payments on our lien on time. We signed a three-week extension of escrow. Can this stop us from getting the loan? Why is this just now coming up? What is our recourse against the mortgage broker if he screwed this up for us?
A: You really have three issues here: (1) your concerns that your mortgage broker is not on top of things, (2) how the tax lien may impact your ability to qualify, and (3) how the payment arrangement affects your ability to secure the mortgage.
Mindset Management
Between your discontent with the mortgage guy and your need to secure your mortgage quick-like, obviously getting the mortgage takes top priority. Just for a few weeks, shift out of outrage mode (even though your anger is justified) and into problem-solving mode.
Often, people with tax-liens got them because they suffer from "non-filer" syndrome, which you might as well call ostrich syndrome, because it amounts to just sticking your head in the sand and practicing extreme procrastination when it comes to handling unpleasant financial matters. If you want this house, you do not have the luxury of time to avoid the unpleasant, so get ready to get in motion.
Need-to-Knows & Action Plan
In response to your question of whether this issue could prevent you from obtaining a mortgage, the answer is yes it could. Frankly, with the current credit crunch some lenders will pounce on a last-minute surprise to avoid funding the loan. Also, every mortgage professional I know — lenders and brokers — says that no reputable mortgage lender will lend to a borrower with an active tax lien. However, they will lend to a borrower with a recently released tax lien, or to a borrower with a tax lien that gets paid off at closing by the escrow company.
So, your first matter of business is to get the tax lien released. I’m not sure what state you are in, but some states will release a tax lien just on the strength of your having reached and abided by your payment agreement. Others will release it only if you pay the entire outstanding amount. Try contacting your state tax authority first to ascertain which position your state takes; you might even want to talk with a tax attorney and get some help in getting the lien amount reduced or the lien itself released.
Every state will release your lien if the outstanding amount is paid off. You don’t say whether you have the funds to pay your lien off, but if you do (or you can scrounge them up) — you’re golden. Work with the tax authority, the lender and the escrow holder to determine whether you should pay it off in advance of closing or whether you should have escrow pay it from your funds at closing — because of your short time frame, if you send the funds over in advance and the lien is not released in time, you could lose the place. Most lenders will allow the transaction to close if escrow is given the funds and instructions to pay the lien off.
If you don’t have the funds to pay the lien off, there are two possible workarounds available to you. First, see if you can still qualify for the mortgage if you redirect some of your down-payment funds to pay the lien off. Second, see if you can negotiate a closing-cost credit increase that escrow can use to pay the lien off. Before you go this latter route, check with the lender to see if that application of a credit is acceptable. You may or may not have to agree to increase the purchase price, which might, in turn, require a revised appraisal. The bank seller may or may not play ball, but if your other option is losing the property (and, potentially, losing your earnest money deposit if you have removed contingencies or your objection period has expired), it behooves you to try!
If your state agrees to release the lien without it being paid in full because you are in compliance with your payment agreement, you now have the issue that your monthly debt obligations are higher than the mortgage lender initially believed. Your monthly payment to the state will be added to your other monthly obligations so that the lender can re-calculate an accurate debt-to-income ratio for you. If the debt-to-income ratio thus calculated falls within their guidelines, you’re golden.
If not, you may have a problem. In that case, your loan officer will need to apply for an exception and potentially even apply for a loan with another lender with a more generous guideline for debt-to-income ratio, but such a loan might have a higher rate or other less desirable terms — if you have to apply for a different loan or use a different lender, make sure you read your good faith estimate so you know what changes you are in for!
With all that said, before you try any of this, you may want to get a second opinion from a reputable mortgage professional, and consider changing mortgage brokers. Get referrals from friends and family who have rave reviews about their loan rep’s awesome problem-solving skills. If you truly did disclose this months ago, and your mortgage broker was sloppy or sneaky enough to let this issue creep up on you this late in the game, it calls into doubt the issue of whether he can pull this now-tricky deal off in such a short time frame. The issue of a tax lien should have been a red flag for him in June when you went in to get preapproved, and should have been resolved before you even started house hunting — definitely before you put deposit money down on a home.
Focus now on getting your transaction closed. If you get it done, limit your recourse to describing your transaction in an online vendor review forum like Yelp.com and move on with the business of enjoying your home! If you don’t get the home, and you lose your deposit money because of it, contact your mortgage broker’s company owner to seek compensation for the lost deposit money and, if the broker holds a license, report his negligence to the licensing agency. Beyond that, the amount of the deposit and the miscellaneous facts of the case will dictate whether you should take him to small claims or superior court for negligence resulting in your lost deposit — consult with a real estate malpractice attorney to understand whether you have a valid claim worth pursuing.
My hope for you is that you work out the lien issue, get the home and have many happy years there!
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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