“I have been offered a tremendous deal — a house that appraises at $364,000 that I can buy for $294,000, with 100 percent financing, and the builder will pay all my closing costs … I can afford the payment for only six months, and it will take all my savings, but the broker says that I will be able to do a cash-out refinance in six months based on the appraisal and net about $60,000, which will cover the payment for another two years. …”
You need a reality check. If the builder could sell the unit for $364,000, he would not be offering it to you for $294,000. Appraisals done for builders usually produce the numbers the builders want. That this particular builder, in addition to offering the “bargain” price, is also willing to pay your settlement costs, is a reflection not of his generosity but of his desperation to sell the house.
Further, the probability that you will be able to do a cash-out refinance in six months is vanishingly small. Lenders won’t do a cash-out refinance in excess of your equity in the house. Since the true value of your house when you close is no more than $294,000, and your mortgages add to the same amount, you will have no equity. Payments of principal over the first six months will amount to about $1,000. The other $59,000 of equity you are looking for would require price appreciation of 20 percent over six months. That conceivably could happen in a go-go market, but the go-go markets are all gone.
What is distressing about your story is the willingness of the builder and broker to take advantage of your inexperience and naiveté. They rid themselves of what to them is a minor business problem by leading you into financial disaster. Don’t fall for it.
Your Mortgage Records Can Save Your Home Equity
“I have accumulated monthly mortgage statements for eight years, so when is it safe to begin throwing them out?”
I would retain them all until the loan has been paid off.
Why keep them, you ask? Marie McDonnell, a Massachusetts-based finance analyst who audits home loans when predatory behavior by servicers is suspected, related the following experience to me. Three years after her client’s mortgage had been originated, the servicing was sold to another firm, but the records of his account covering the first three years were not transferred to the new servicer. When the client with Marie’s help realized that he had been systematically gouged, the only available records for the first three years were those of the client. Had the client not kept the records, the skullduggery could not have been proved.
Mortgage servicers make mistakes, some of them deliberate, designed to increase the servicer’s income at the borrower’s expense. You don’t select the firm who services your mortgage, but even if you did, servicing can be sold without your permission. Under the law, you must be informed about such a sale but you can’t prevent it. The law should but does not require that when servicing is sold, the entire historical file be transferred to the new servicer. So keep your records, they just might save the equity in your home.
What is a 30-Day Delinquency?
Anyone who has read a credit report has noticed that payment delinquencies are shown as 30, 60 and 90 days. This confused the borrower who sent me the following note.
“I had a mortgage payment due Feb. 1 that I paid March 1. The lender reported me to the credit bureaus as being 30 days late, but in fact, I was only 28 days late — there are only 28 days in February. They refuse to fix it, how can I get them to recognize their mistake?”
You can’t. They are following industry practice, which is indeed needlessly confusing. The 30, 60 and 90 days really mean one, two and three months. The practice of expressing them in days probably reflects the attempt to minimize the number of digits used in credit reports. “60 days” uses seven digits whereas “2 months” uses eight.
Your March 1 payment was one month late, and the fact there were only 28 days in that month doesn’t matter.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.