These mortgage horror stories show what can go wrong during the application and underwriting process when borrowers, lenders, and sellers neglect their duties.
Applying for a mortgage can seem like a daunting, even overwhelming, task. You have to lay most of your financial life bare for a lender to review.
But sometimes things don’t go according to plan. The internet abounds with mortgage disaster stories in which something went entirely wrong, somebody didn’t do what they were supposed to do, or other forces created chaos. Reddit offers many such stories.
Some of these stories have sad endings with the sale collapsing completely. Others end with the sale going through at extra cost to the buyer, the seller, or both. Some stories eventually lead to a happy outcome, overcoming challenges to make sure the deal goes through.
By showing what can go wrong, many of these stories offer lessons for buyers and sellers about what to do and what not to do.
1. Credit Problems and Credit Requirements
In order to qualify for a mortgage loan, a prospective homebuyer needs to have reasonably good credit. Different loan programs have different standards for “good” credit. Every loan program requires full disclosure of a borrower’s outstanding debts, open lines of credit, and other information that affects their credit score. At the same time, lenders should be reasonably open about their own requirements.
One Reddit user, a real estate agent, tells a story about a client with a steady job, good income, and more than enough cash on hand to cover the down payment. They seemed like a perfect candidate for a mortgage. After weeks of underwriting, however, the lender told the client that he had too many lines of credit open. This nearly tanked the entire sale. According to the Reddit user, the client had to switch to a different lender, and was able to close after another three weeks.
2. Mortgage Default By The Seller
A seller must have a clean title to their home, or they must disclose any problems ahead of time so that everybody can get the paperwork right. Title companies and others do their own research to identify any possible title problems. Thorough due diligence can help prevent a disaster.
Another Reddit story (warning for salty language in the original post) involves a sale that was delayed because the seller’s lender provided a payoff amount that was significantly more than the sale price. It turned out that the seller had allegedly stopped paying their mortgage, and the listing agent was not aware of this. The deal could not go through, since the sale price would not be enough for the seller’s lender to release their lien.
3. Seller in Bankruptcy
A similar problem can occur when a seller is in bankruptcy. Filing for bankruptcy freezes all assets. A sale cannot go through without permission from the bankruptcy judge. Once the bankruptcy case is over, though, the seller no longer needs anyone’s permission. Homebuyers and others should take care to make sure that a bankruptcy case is really over, though.
A mortgage lender on Reddit says that she planned on submitting a deal to underwriting as soon as the seller finished making payments on his Chapter 13 bankruptcy plan. It turned out that the seller never actually completed the plan, they just stopped making payments. In other words, the bankruptcy case was most likely still active. The deal did not go through at all.
4. Spending The Down Payment Before Closing
Some amount of time will inevitably pass between the approval of a loan application and the closing. Whether this is a matter of days, weeks, or longer, a lender will want to make sure that the borrower is in the same financial position at the time of closing as when the loan was approved. A homebuyer can mess up their own deal by changing their financial situation.
A Reddit story describes two homebuyers who nearly prevented their closings from happening. One client opened several new credit accounts in order to buy about $10,000 worth of furniture and major appliances for the home they didn’t own quite yet. The other, in an effort to “make some extra money for furniture and stuff,” lost his entire down payment playing blackjack. Fortunately for him, he was able to get enough to cover the down payment through gift funds in time for the closing.
5. Confusion Over The Type of Home
Some mortgage loan programs only cover certain types of properties. Some loans, for example, are not available for manufactured homes. Borrowers need to be clear about the type of home they are hoping to buy, and lenders should be clear about whether they will loan money for that kind of home.
Two weeks after receiving a pre-approval for a mortgage and signing a contract with a seller, a Reddit user received word from his lender that it was rejecting his loan. The problem appeared to be some confusion on the part of the lender about whether it could loan money for a manufactured home, as well as what exactly constituted a “manufactured home.” The realtor was able to salvage the deal by going to another lender.
6. Inheriting A Reverse Mortgage
The final story isn’t actually a “disaster” story, but it could have been. A Reddit user’s father “died unexpectedly.” The user posted a question about their father’s reverse mortgage. The father was “very private about his finances,” so the user knew almost nothing about the reverse mortgage until after he died.
Other Reddit users offered helpful advice about possibly needing to sell the house in order to pay back the reverse mortgage lender. This could have turned into a disaster story if the user did not seek guidance on what to do.
Avoid Mortgage Disasters!
Concerned about a mortgage disaster? We’ve all heard horror stories.
The Wood Group of Fairway is here to help. We can answer your questions and guide you through every step of the process. Get started on your free pre-approval today. It’s easy!