While the mortgage crisis may seem a thing of the past, the industry is still feeling reverberations from the aftermath. Recently, the importance of a knowledgeable team, good follow-up, and understanding your rights and responsibilities came to light in a way that can serve as a cautionary tale for future clients, agents, brokers, and lenders. This is why your client’s complete financial history matters.
When homes begin a foreclosure proceeding, homeowners in arrears generally have a few options: short sale, loan modification, and deed in lieu of foreclosure. The third option is frequently employed when the homeowner determines this is the best course of action that will allow them to avoid a foreclosure on their credit record. Once this option is chosen, the homeowner has a three-year waiting period before being eligible to qualify for a new loan.
Facts About the Deed in Lieu of Foreclosure Option
If the borrower goes forward with a deed in lieu they can purchase a home three years from whenever the paperwork is filed and recorded. If it’s in conjunction with a bankruptcy and claimed in the bankruptcy then a lender can use the bankruptcy date. These stipulations hinge upon the bank’s receipt and processing of the paperwork, and if the bank doesn’t file in an appropriate amount of time the client’s deed in lieu won’t get recorded and their three year waiting period never begins.
A colleague’s clients chose the deed in lieu of foreclosure option six years ago. During that time, they rented and diligently worked to reduce their debt and clean up their credit report so they could qualify for a home loan when they were ready. They took the steps to get pre-qualified, made an offer on a home that was accepted, and the day they were to close the sale and take possession of the home, the clients were informed that the deed in lieu of foreclosure option they had taken six years prior was never completed by the bank. The three-year waiting period had never officially started because of a failure on the part of the lender.
How Does This Happen?
We find there is simply not enough education of what the long and short-term effects of these three options are. With the tightening of lending laws, people should know, but frequently don’t, that you really can’t “play” the system and your past financial history does factor into your future home financing prospects. Several things happened in this case: the agent switched lenders to a mortgage brokerage firm and unfortunately, that entity did not take a deeper history into account. As such, the process moved forward without the vital information about the deed in lieu. The clients assumed all was well because in the intervening six years since they chose the deed in lieu option, they never heard otherwise and therefore didn’t think the information was pertinent to their current situation. It wasn’t until they were moved out of their apartment, packed and ready to move into their new home a day before closing that it was discovered the bank hadn’t completed their deed in lieu paperwork. The clients not only lost the home they were going to purchase, but they had also already given up their rental and had to quickly come up with a Plan B. This one omission left them high and dry.
Disclose Everything in Your Financial History
As clients, the disclosure of all possible complications is an important part of the home buying process. You may think a detail from years past is no longer a part of your current financial picture, but one omission or missed task can come back to bite you. Better to arm your agent with all details so they can advocate for you and make sure everything is as you expect in your financial picture. As clients, ultimately, you are responsible to know your entire financial picture – past and present.
As agents and brokers, ask. Have a longer conversation so you can discover what may be missing from the story. Dig deeper into a client’s history before you assume the pre-qual has included all past history. And everyone involved – definitely don’t count on the bank to have done all that was required. Follow-up is key. Anything omitted will surface eventually and can be most inconvenient and embarrassing. Engaging a professional advocate to guide you, someone that knows where trip-ups can happen and the steps that are frequently left out either by the banks, mortgage brokerage firms or the consumer is the smartest way to go.
