We all make plans.
We set goals and make action plans to meet those goals.
And then something happens.
Or as Mike Tyson said “Everybody’s got plans… until they get hit.”
So today, this is a reminder that just because you have a plan and perhaps even put money behind your goals does not mean you have to finish the plan. Don’t be afraid to walk away from a deal.
Evelyn’s Path to Home Ownership
Evelyn, not her real name to protect her identity, is a co-worker of mine. She’s single, has no kids and has a good income with a stable job. She has some minimal student loan debt at decent rates and is a few months from paying off her car. She’s been living the rent life and decided that now was a good time to get (back) into home ownership. She’s put a few thousand dollars away for a down-payment.
Evelyn is actually much of the inspiration behind this blog – she went into the home-buying process without knowing a lot of basic information. My boss and I have spent a lot of time talking to her about things she needs to know about mortgages and financing, HOAs, and more. Evelyn said that I’ve been so much help to her, I need to let others know the same information – hence the blog.
Despite the hot market, Evelyn found a condo that she liked at the top of her price range. It’s a cute one bedroom, one bathroom place in a popular area of town. It’s within walking distance of a lot of stores, restaurants, parks and public transportation. She put an offer in and it was accepted. After a hard search process, that included some other places going fast with multiple bids (she refused to get into bidding wars and stuck to her price range), she decided not to get too excited or attached to this condo.
Down payment assistance
Down payments are important. The more cash you put up front in a deal, the more likely you are to qualify for a mortgage. Your monthly payments will be smaller. You won’t have to pay PMI. But the hardest part of the home buying process may very well be saving up for that down payment.
In our area, like many others, there are various public and private programs for down payment assistance. In fact, there are over 2,000 down payment assistance programs available nationwide. As the name suggests, these programs are designed to give you money to help with your down payment.
These programs are typically pretty attractive – you get money to help you qualify and pay for a house. Many times, they are not limited to first time homebuyers and never have to be repaid. Depending on the specific program, they can be used with a variety of loan options, including FHA and conventional loans. Most homebuyers receive an average of $5,000 but some can receive as much as $100,000 in high cost areas.
The drawbacks, as Evelyn found, are often hidden. You may not be able to refinance for 10 years. Or rent your home out during that period. Only certain lenders and mortgage brokers are permitted, so you may not be able to use a preferred lender or get the best rate.
And origination fees may be hidden.
The eligibility criteria vary by program. Some have maximum purchase prices or income limits. Some programs are limited to geographic region. Other programs have limits on your liquid assets or even on whether you can already own other property. (Most programs are trying to exclude investor type owners) According to one report, more than 68 million or 87% of the houses and condos would qualify for down payment assistance programs.
Evelyn’s Down Payment Assistance
Evelyn qualified for a $10,000 down payment assistance.
She did not know until the end, however, of a middle man bank that administers it and tacks on its own fees.
She was only going to net just over $5,700 in down payment assistance. And those origination fees were going to have to be paid at closing.
And she wasn’t going to be able to rent, sell or refinance the house for 10 years.
She’s in her early 30s and a lot can change in 10 years. She could meet a guy and get married. Then what?
Even though her job is stable, what if she wants to move for a new job? What if she gets some awesome bonuses or raises and wants to upgrade to a new home?
It being a condo and all, she’s also got HOA rules and regulations. Potential assessments.
Trust Your Gut
The mortgage loan officers played a lot of hidden ball tricks with this mortgage. The fees were awfully high and the officers were not upfront about where they were coming from.
Evelyn did not feel comfortable with this mortgage. Less than 48 hours before she was scheduled to close, she decided to stop. Withdraw her offer. She decided to walk away from the deal.
Since she has decided to walk away, the loan officers have been trying to get her to reconsider. They ran the numbers without the down payment assistance and ended up needing less cash to close. Why wasn’t this done a month ago she asked? No good answer from the mortgage people.
And of course the real estate agent is trying to convince Evelyn to proceed saying that the brokers would have the right to sue her for lost commissions.
Now that’s she starting to step back from the process, she’s seeing a lot of things that she wished she saw/knew ahead of time:
Pay Attention to All the Details
Remember, no one is going to pay attention to your finances better than you. The other people in the process are working towards their goals, not yours. While sometimes, those goals are similar enough that you can rely on others, don’t. Always be your own advocate. Stay on top of the people in the process, including your agent and your loan officers.
Evelyn told me just today that through this process, she went from an estimated monthly payment of $1,100 to $1,500. While still within her budget, she didn’t feel comfortable with this. As the terms changed and closing costs went up, the monthly payment went up. Without anyone really pointing that out. It was a detail that she didn’t pay attention to, instead focusing on the top line number as well as the cash to close.
Don’t Rely on Your Agent’s Mortgage Broker Recommendation
Evelyn used the mortgage broker that her real estate agent recommended. She didn’t shop around, even among the approved lenders for the down payment assistance program. Now that she knows what is going on, one wonders what kind of referral fees that the agent may get. And what kind of a better deal that Evelyn could have received.
Ask to Run All The Numbers
Evelyn now knows that she should have asked the mortgage broker to run the numbers both with and without the down payment assistance program. She could have made the decision much earlier to forego the down payment assistance program and the restrictions that would have come with it. Maybe the deal could have been saved if these options would have been known earlier in the process. Now, Evelyn just feels dirty about this mortgage company and this real estate agent.
With less than 48 hours to close, Evelyn withdrew her offer. She didn’t feel obligated to continue down the path to home ownership despite the fact that she loses her earnest money. Kudos to Evelyn for not feeling afraid to walk away from a deal.
Evelyn has said that she will continue to live where she is and try again this fall/winter. She doesn’t want to compete in the hot real estate market this summer when the demand is so high. In the mean time, she’ll pay off her car and put some more money away for a down payment so she won’t need the down payment assistance program. She’ll also considering going with a house instead of a condo to avoid HOA issues.
What deals have you walked away from even after putting money on the table?