Many homeowners who turn to friends and family for loans end up getting screwed.

Shopping for a home loan can be very stressful, and it’s also one area where you should be sure to know the qualifications of who you’re dealing with.

Many people turn to friends and family (or friends of friends) for their loans without considering how experienced or ethical these lenders may be. While many of these lenders are highly competent, there are those that are not only incompetent, they intentionally ream their "friends and family" for additional costs.

"I have had several Spanish-speaking borrowers come to me to help them understand loans they had obtained from a friend or a family member," says Jim Chubb of Pacific Inland Home Mortgage in Soquel, California. He said he’s seen cases with "a gigantic commission" and "misleading or incomplete information about the loan and the costs".

And it gets worse… Chubb says that many of these lenders are either "unsupervised or taught to overcharge friends and family because they trust who they are working with". They’re actually TAUGHT to overcharge friends and family! Can you believe that?

I’ve been witness to the drama several times as my clients have found that out that their "Aunt Suzie" or "hubby’s friend Joe" were either too inexperienced or just didn’t have the resources to get them the promised home loan. Thankfully, I work closely with direct lenders who can step in at the last minute to "save" these deals!

Case 1: Lender doesn’t know how to review the credit report.

Buyer Bob had some "blips" on his credit report, including a bankruptcy and some tax liens. Knowing that this could create difficulties, Bob sent his credit report to Cousin Joe a full 30 days before he was to start his home search, just to make sure that he could in fact get a loan.

Joe assured us over and over that all was well, until a week before we were supposed to close escrow. Then he called Bob and said, "Hey, did you know you had a bankruptcy on your credit report?". HUH? He didn’t know that yet, after having the credit report for almost 60 days already? Turns out that this was the first "purchase" loan that Joe had ever done - all of his prior loans had been refi’s.

Ultimately we were able to get Bob into his new home after only a slight delay in his escrow closing by using a more qualified direct lender.

Case 2: Lender doesn’t know how to structure loans to eliminate PMI.

Buyer Brenda was urged to use her Cousin Jane by family members. Cousin Jane worked for a major bank, so this didn’t sound too bad at first. Then Jane started quoting loan structures that didn’t make sense, and this purchase almost totally fell apart when the loan docs arrived at escrow with DOUBLE the  PMI (private mortgate insurance) rate than was quoted by Jane. That’s $500 per month in PMI on a purchase price of about $300,000. 

How can this happen? Instead of splitting the purchase into two loans (80/20), Jane packaged it as one loan. As a result of this, instead of having zero PMI, it was actually double the normal rate. When asked why this wasn’t disclosed earlier, Jane said that there was no way to know this, and insisted that she had "30 years in the business" and knew what she was doing.

Well, once again the lender didn’t have experience with purchases, only with other types of transactions. Another save, and this one closed on time!

Case 3: Lender cannot obtain the promised loan.

This one fits right in with the current lending trends, where direct lenders actually have options available to them that are not available to the loan brokers. Lenders like Wells Fargo and Countrywide are keeping their best offerings in-house, meaning that only their in-house personnel have access to them.

Buyer Sylvia thought she was ready to go, with a good FICO score and the promise of 100% financing from Lender Larry, who works for a mortgage broker. However, once Larry submitted Sylvia’s paperwork to various banks, he found that he was unable to produce the promised loan, or even a loan with 5% down.

Within 48 hours, we had full loan approval for Sylvia through Tricia Apostol, a direct lender with Wells Fargo. Although we were only able to get 95% financing, Sylvia found that her monthly payments (including taxes and insurance) were a full $200 less than the rate promised by Lender Larry (and his quote was without taxes and insurance). Why? Because Lender Larry was using a loan program with a significantly higher interest rate than the direct lender!

Lessons Learned

Buying a home is a significant investment, and obtaining a home loan is arguably the most stressful part of the process. If you’re considering using a friend or family member as your lender, be sure to interview them as you would any other professional. Not only should you ask how many years they’ve been in the business, you should also ask if they’ve handled home purchases before (as opposed to just handling refi’s).

Also, be sure to use a Buyer’s Broker (realtor) who has the resources and training to monitor your loan’s progress as well as the rest of the transaction. That way you’ll have further assurance that your home purchase is on track for an on-time closing.

Looking for a Buyer’s Broker to help you buy your next home? Be sure you use an Accredited Buyer’s Representative such as Santa Clarita Realtor Linda Slocum to be sure that you have qualified representation. Contact Linda Slocum at 661.670.0349 or at Linda@SantaClaritaRealEstateBlog.com when you’re ready to buy your next home!

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