I saw it coming 30 days ago.

About three months ago, I got a call from a self-employed electrician, John, who want to buy a $400,000 home for him and his wife, Claudia, who is a commissioned retail sales person.  

John and Claudia are in their mid-60's and have rented for over 20 years.  

John said he and Claudia wanted a 100% stated income loan.   Three months ago, this was no problem and they have pretty good credit so it wasnt a problem.   They went out house hunting.

30 days ago they made an offer that was accepted.   John called me to tell me and he was very excited. 

30 days ago, you could sense what was coming, so I got him in quickly, we did the loan app and locked his loan.    The payment was around $2700 per month.  The rate was 7.125% interest only, of course.

As I always do, I called the selling agent, Tammy, and the listing agent, Scott, to introduce myself.   Scott and I really hit it off and we had a great conversation. 

"Aaron, are you really confident that this can be done at 100% stated income in today's market?" Scott asked me.

"I am pretty confident, but I am getting their tax returns, just in case, I have to switch it to full doc," I told him. "By the way, how much earnest deposit did you get?" I asked. 

"Only $1000," Scott said.

I had a horrible feeling when he said that.

I got all of the tax returns and 12 months bank statements for a back-up plan and we confirmed over $75,000 in liquid assets.

We processed the loan, got it into underwriting, and sure enough, last week, the crisis hit, our lock wasn't honored, and the 100% stated income loan, interest only was declined. 

Everyone understood because of the daily news clips but they were still all very disappointed.

I spent hours researching and I moved it to another investor.  They gave us the same rate of 7.125% but they required that the loan not be interest only.  So, the payment was $3000 per month, $300 higher than before.  

I felt great and called John.  John was bummed and said "its too much."

I understood so I got him a few more options but only one was cheaper.  5% down. 

Sure, this would have been $20,000 but the payment would have then gone down by about $400 per month from the original $2700 to $2300 and would have paid for itself in around 4 years.  

John had told me in an earlier conversation, "We will die in this house."

Instead, John said, "I don't want to put any money down."

I was out of options. 

John tried to find a different lender to get him the same loan for $2700 per month or less.  No one he called could do any better.  It simply didn't exist. 

Today, the escrow officer called me and told me she needed John to send her a cancellation letter.  She asked if I could help get it.

I called John to let him know what he needed to do to cancel.  I offered him one last shot at the loan options but he declined.

I told him I was sorry about the turn of events and asked him what else we could have done.

He said, "Aaron, I lost a lousy $1000. It's no big deal.  I know you did the best you could.  When this all turns around I will call you and we will try again."

I can't help but think about all the time and effort that was put in by me, the escrow officer, and the agents, Scott and Tammy.  I wonder if he had simply been required to put down more earnest, if we may have had a better chance at closing the deal. 

I spoke with Scott today.  We have another transaction together.  He said, "Never again, Aaron.  I will never advise my sellers to take anything less than at least 1-2% of the purchase price for earnest."

I know the market is tough in many areas but I hope this post helps you see, first-hand, the challenges you may face later when the earnest deposit is perceived as "no big deal."