DEAR BENNY: I recently purchased a new home. Before I wrote an offer to the seller, I contacted three mortgage brokers to get a loan. After meeting with the brokers ("A," "B," "C"), I chose broker "A" and went through the application process, and was approved for the loan. I signed a lock-in agreement to make sure that the interest rate would not change before closing.
In the four weeks before closing day, the stock market was very volatile. My real estate agent told me that mortgage rates were fluctuating up and down. One week before the closing date, market rates for my loan were about 0.5 percent lower than what I had locked in. I asked broker "A" if he would consider lowering the rate in my lock agreement to the current rate. He said that his bank did not allow it. So I called broker "B" and asked if he could lock me in at the current rate. He took my application, processed my paperwork and I signed another lock agreement for the current, lower rate. Broker "B" ultimately closed my loan one week later. Is what I did illegal? –T.
DEAR T: This is a very common problem when interest rates are fluctuating, as they are now. When you locked in with broker A, I suspect he had to pay a fee to the company that was actually going to provide the money. That’s the reason why you were unable to lower your rate with broker A.
From my experience, I cannot recall ever seeing a provision in those "lock-in" agreements that would penalize you for going to another loan company. However, you have to read your agreement carefully to make sure that you are safe in what you did.
I sympathize with broker A; he spent time and money assisting you and at the last minute you went somewhere else.
But, while it was not morally correct what you did, it is not illegal. The only case I have ever seen where a lender sued a borrower for walking away from a loan commitment involved a multimillion-dollar loan transaction with a commercial borrower.
DEAR BENNY: My partner and I plan to loan the full amount on a house for my son and daughter-in-law. We don’t want to be on the title, but we want the loan to be secured by using the house as collateral. I would like them to be able to get the new-home-buyer credit and establish some credit history.
What is the best way to handle this situation and still protect us? Can I put a lien on the house? Do I need a lawyer? –Lynnette
DEAR LYNNETTE: Your son and daughter-in-law should sign a promissory note in the amount that you will be loaning them. This document spells out all of the terms and conditions of the loan — such as what interest rate will apply, when payments are to be made, and when the entire loan will come due.
They will also sign a deed of trust (called a mortgage in some parts of the country). This is a legal document that gives you the security (the collateral) that you need to make sure that you will ultimately be repaid. The deed of trust must be recorded among the local government land records where the property is located.
It should be noted that the deed of trust not only protects your money, but also gives the borrowers the right to deduct their interest payments on their annual income tax return. You will have to declare the interest as income on your tax return.
I do recommend that you retain an attorney to assist you. The lawyer will have to prepare all of the legal documents, and then record everything properly. The attorney should also be asked about the new "first time home-buyer" tax credit. It really is an interest-free loan that ultimately has to be repaid. And since it is so new, at the present time I do not know whether it would apply in your situation.
DEAR BENNY: I live in Canada. Is now the best time to buy property in the States as an investment? I want to buy and rent out, and wait until the price goes up, so what is the best type and location to buy?
I read that some detached single-family houses have dropped by thousands of dollars. Could the price of those houses in the future increase substantially? Any disadvantage? –Frank
DEAR FRANK: Although both of the crystal balls on my desk cracked about a year ago, I remain optimistic about the real estate market. Even today, we are seeing pockets in the United States where real estate prices are rebounding.
My suggestion: Pick a geographical area that is of interest to you, and retain both an attorney and a real estate agent in that area. Have the agent locate a number of properties (some of which may have already been foreclosed upon and are being resold by the bank) and then you must make a trip to personally inspect each property. Once you make a decision, turn the matter over to your attorney, who should be able to guide you through the rest of the process.
Are you going to use your own money or will you need to obtain mortgage money? You probably know that at the present time, unless your credit is exceptionally good and you can put down at least 25 percent of the purchase price, you may have trouble finding mortgage money for investment properties.
You should also determine whether there are any laws in Canada that may impact on your purchasing property here in the United States.
DEAR BENNY: We signed a contract with a builder two years ago to buy a condo. We just received a notice that we have to close at end of this year. Right now we want to terminate the contract because we can’t afford to buy it anymore. In our contract, the default paragraph states:
"In the event Buyer fails to cure the default within the time specified herein, Seller shall retain the Earnest Money, together with amount paid pursuant to paragraph 16, as liquidated damages. However, should Buyer have deposit more than fifteen percent of Purchase Price as Earnest Money, exclusive of any interest earned thereon, Seller shall retain only fifteen percent of the Purchase Price in the event of Buyer’s default, and the balance shall be refunded to the Buyer. Retention of Earnest Money as provided above, together with any amount paid pursuant to paragraph 16, shall be Seller’s sole and exclusive remedy hereunder."
The builder has threatened to file a lawsuit against us. According to the contract, is there a case that the builder can sue us if we pay them all amounts specified in buyers default? This situation stresses us out. –Jin
DEAR JIN: It will not be a consolation to you, but you are not alone. There are many people who signed contracts for properties that were under construction and are now unable to qualify for a mortgage loan. There are also a lot of people who would rather lose their earnest deposit rather than pay for a property that is now worth considerably less than their contract price.
You must retain a lawyer to represent you. I cannot provide specific legal advice in this column. However, the clause from your contract is quite different from the ones I have seen in the past several years. Usually builders require that the entire deposit be forfeited if the buyer does not go to closing. In your situation, unless there is other language in the contract to the contrary, at the very least all you can lose is 15 percent of the purchase price. If your deposit was more than 15 percent, you should at least get a refund of that difference.
But your attorney may also be able to find "loopholes" in the contract. Many such contracts contain language that settlement (called escrow in the western part of the country) must take place within X number of years. However, these contracts also contain what is known as a "force majeure" clause — if circumstances outside of the control of the builder delay the closing, then the period of time is extended by that amount of time.
Too many builders use "force majeure" as an excuse for the delay, when in reality the delay was not outside of their control. Your attorney should carefully review this issue (as well as others) to determine if you have the right to get your entire deposit refunded.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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