Posted by Funds2Go
7 Mistakes Borrowers Make

7 Mistakes Borrowers Make


Big Mortgage Mistakes and How to Avoid Them

Source: Hannif Highclass c/o Lenders for Growth Inc.
Publish: Funds2Go BLOG: Mortgages, Loans, Financing

Sometimes a new client will ask what issues tend to come up again and again during the commercial mortgage financing process and what mistakes they should try to avoid. Here are the top seven mistakes that come to mind. As you’ll see, most of these fall under the general topic of “timing is everything

1- Borrowers assume that their bank will look after them better or respond more positively to them because they have been a loyal customer for many years.

Most, folks deal regularly with a bank where they have their work earnings deposited. For many it will be the same bank their parents have used. For whatever reason most people have been with the same bank for many years.
It is therefore perfectly normal that they will feel loyal to that bank and in some way expect the same kind of loyalty from their bank. Approaching a bank for a loan in that frame of mind is setting yourself up for disappointment.
5 major banks in Canada do almost 75% of the business– as such the need or incentive to give you special favors is hardly there. Besides this, today’s housing loans are now highly commoditised, with computers making decisions whether you get a loan or not and at what price. This is called Credit Scoring! Do the banks want your business? Of course they do but on their terms, not yours.

2-  Selecting the loan Provider offering the best price over the telephone, on the radio or in the newspaper.

If you cast a wide enough net you are bound to find a rogue who will beat all the other prices, but has neither the capacity nor the intention of delivering such prices. His objective is to rope you in and move the process along until it is too late for you to back out. At that point, he raises the price using any of a dozen tricks available for that purpose. Be on the alert.  Remember: Because the market is constantly changing, you can’t hold a broker or lender to a price quote until you lock the prices.   A  commitment is the lender’s agreement guaranteeing the prices.

3-  They go to a bank and apply for a loan unprepared. - Soliciting price information without providing ALL the information about the loan

Going to a bank and applying for a loan not knowing what to expect can set you up for big surprises. There are definite rules that apply to lending and if you are not familiar with at least the basic requirements, you could ruin your chances with no hope of redemption.Prices change with varying borrower, property and transaction characteristics which lenders believe affect their risks and costs. These include loan size, credit rating, type of property,fconstruction loan, small business loan and more, your ability to document income and assets, etc.

Lenders quoting prices assume a set of standard specifications.

Unless informed to the contrary, lenders quoting prices assume a set of standard specifications that generates the lowest price. If the specs on your loan differ at all, the price will be higher.

  • For example, lenders assume you are purchasing a single-family home as your permanent residence. However, if in fact you are buying a condo, or the house is intended as a second home, expect to pay more.
  • For example, lenders assume that your income has been stable for the past 24 months. If in fact you became self employed in the past 12 months you may not be qualified for the best rate regardless of your present income.
  • For example, lenders assume that your refinance loan or mortgage request does not include a certain amount of cash-out. If you get a quote for a 7% rate it may change to 7.5% once the lender finds out that you need $100,000 cash over and above the existing loan.

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4- Working with multiple brokers

The myth is that taking this approach benefits the borrower because it generates more market coverage and insures a better result. In the borrower’s mind the math goes something like this: “more brokers  means more offers which should result in a better deal for me”. The fact is that when lenders start seeing the same loan submission coming in from multiple sources they assume that no one is actually in control of the deal. Lenders are less likely to take your offer seriously.

Side Note: Just last week I got an application from a broker, looking for a refinance of 2nd. mortgage for $1.5 million. The very next day got a request for the same property from another broker. Worst still, I found out that a third agent had supplied the same deal to one of our affiliate private lender. Guess what? We did not even bother to underwrite the deal, thought it was waist of our time. Especially not sure which person is actually in-charge.

5-  They do not fully understand the cost versus benefits of the loan features.   and /or Assuming that the lender who offers the best price on one type of loan will also have the best price on another.

Some loans are like the home video or DVD player. Heaps of features that only an Einstein can program and that nobody uses. Yet, we are paying for these extra features when we would be just as happy with an On/Off, Play/Stop and Record buttons.
Similarly some home loans come loaded with features that some borrowers can’t or will never use. There is no point for example paying extra fees for an Offset Account unless you have some substantial surplus funds each month to leave in the Offset Account.

Some banks will quote 1-2% lower interest but then want to charge you a must take insurance at a ridicules high % point!
Many of these features are valid but make sure they apply to you and will benefit you.

6- Using the wrong lawyer

Sometimes a borrower feels compelled to use a lawyer who is a friend, or perhaps his brother-in-law (who happens to be a matrimonial or estate attorney) to close a commercial Real Estate transaction. My advice is simply: Don’t!
Most borrowers will end up saving money and perhaps shaping the terms of the deal far more to their liking if they hire a seasoned pro. Using a lawyer who is inexperienced in this very specialized area will only run up the bank attorney’s bill, and may well cause the borrower to need to extend the time to close, which may result in additional fees and penalties, etc. The best advice to achieve a smooth closing is to choose a real estate lawyer who is a seasoned pro in this very specialized (commercial vs. residential) field.

7-  They borrow all their loans from the same bank.

You’ve heard of the saying: “Divide and conquer” Well, this applies to you if you have several properties and several loans. When buying an investment property for example, most borrowers will go to their current lender for their investment loan. The process is made simple by the bank using the equity in the borrower’s home to fund the investment purchase. This is quite OK and in most cases is in the best interest of the borrower. The benefits of this process become less apparent when the borrower purchases subsequent properties and keeps putting all their eggs in the one basket.

Never put all your eggs in one basket!

There are a number of reasons why taking all your loans from the same lender is not a good idea:

  • It can be very costly just to add an additional loan. The bank is likely to re-value all your properties thus adding up valuation fees;
  • If Lender’s Mortgage Insurance is required it will apply on the total amount owed to the bank. The larger overall debt will attract a much higher premium than you would have paid on a smaller separate loan.
  • Your overall debt is assessed at the bank’s benchmark rate (usually up to 2% above the rate you will pay) and thus reduces the amount you can borrow;
  • All your properties combined generally secure all of the debt. This means that if you want to sell only one property down the track, the bank will have to re-assess your total limit – this again adds to the costs, and in the worst case scenario if your situation has changed you may no longer be eligible for the loan;
  • Most banks set a “comfort zone” on how much they want to be exposed to a single borrower.  Once that limit is reached, the exposure is restrained by reducing the percentage they will lend against all your properties (reduced loan to value ratio).

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The answer to all these problems is to spread your loans among several lenders. You will create a competitive situation in the process and maintain your independence.

Lenders for Growth (Private Lender) - genieSHANTI

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