Why I think Some Loan Officers are Drug Dealers
T. Duncan sold her home in 2003 and netted $70,000 in equity from the sale. She went home shopping, determined to find something "nice" that "fit her personality" and exuded the confidence she felt about her career and life. The destination was a custom home in a semi-rural community east of Dallas, TX. Sales price of $274,000.
At the time, Ms. Duncan earned $3,600 per month working at a full-time sales position which was mostly commission. She felt very good about her career and the future income potential she had in the home. She admits now she had "stars in here eyes" about her future.
Along came a Mortgage Drug Dealer (MDD for short) who made Ms. Duncan believe this was ALL possible.
The first advice the MDD gave Ms. Duncan was to use 100% financing instead of using her $70,000 in equity in the new home. Generally, I agree fully with the principal of leveraging but the FIRST requirement should be affordability. Read on...
Using 100% financing, the loan amount is equal to the sales price of $274,000. The MDD utilized an 80/20 combination of 2 loans to avoid private mortgage insurance. The challenge arose when calculating Ms. Duncan's debt vs. income relationship (DTI ratio). At $3,600 per month in gross income, Ms. Duncan could afford debt payments of on more than $1,800 per month.
$1,800 per month MUST include her mortgage principal, interest, taxes, homeowner's insurance, all credit card and installment loan payments.
Ms. Duncan isn't sure what her other bills were at the time, but thought she had probably one car payment around $400 per month and a few credit cards with low balances, say $100 per month in minimum payments. That means of the $1,800 ALLOWED, she had $1,300 to use for the mortgage plus taxes and insurance.
Financing $274,000 at 5.5% is a monthly payment of $1,555. Uh, oh. What's a Mortgage Drug Dealer to do?
The first thing the MDD did was to lie about Ms. Duncan's income. Because she had verifiable employment, and because she felt good about her future, the MDD suggested she apply for the loan with $6,000 per month in income. "He told me it's stated income so it doesn't matter", said Ms. Duncan.
With the fraudulently inflated income of $6,000 that allowed the MDD to have $3,000 per month to work with less $500 for her car and credit cards = $2,500 per month. More than enough to qualify? Well, no....not exactly.
Property taxes on the home should be about $9,000 per year or $750 per month. That's based on there being a house worth $274,000 on the land, but when Ms. Duncan closed on the purchase, the taxing district only had it valued and taxed as raw land, about $2,000 per year or $166 per month. The MDD didn't take into account the taxes Ms. Duncan WILL PAY and setup the loan based on current raw land taxation of $166 per month.
A problem arose when the underwriter of the mortgage lender he brokered it to, insisted he use the higher tax amount to qualify the customer. At a first mortgage at 6.00% and a second mortgage at 8.125% Ms. Duncan was looking at the following scenario.
- 1st mortgage payment: $1,313
- 2nd mortgage payment: $ 407
- Homeowner's insurance: $ 210
- Taxes - actual $ 750
- Car and Credit Cards $ 500
- Total $3,180
$3,180 is greater than the $3,000 allowed. This is the point where you tell the client this is more house then they can afford. Perhaps they should use some of that $70,000 in equity as a down-payment. Of course, that's using fraudulently inflated income so remember she's actually looking at monthly expenses of $3,180 on a PRE-TAX INCOME OF $3,600! On Commission, no less!
But instead of pulling back from the brink and telling the client her hopes were to be broken, he pulled out another fun trick. The Mortgage Drug Dealer doesn't want to tell an addict no. Instead he offers another new drug.
This is where the loan became a 1 year ARM instead of a 30 year fixed and to top it all off...a 2 year prepayment penalty equal to 6 months of mortgage interest. But hey! It solved the problem! New interest rate (for the first year) on that first mortgage of 4.625% which lowered the total payments $186 per month to $2,994 per month.
LOAN APPROVED
"I was so excited!", says Ms. Duncan, "I never thought I would own a home this nice". Over the next several months her $70,000 in equity didn't go in the bank, it didn't grow at a high rate of interest, it went into the house. Custom furniture, décor, appliances, the works. "Looking back, I had no idea I was buying too much house. I wanted this home and everyone told me I could do it....and...I did".
FAST FORWARD TO 1/5/2007
If you are interested the house will be sold at foreclosure on 2/6/2007 in Henderson County, TX. I hear it is a really, really nice house.
Ken Stampe
© 2006 http://blog.homeloandfw.com/
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