Is my Lender honest or taking advantage of me?

27 Replies

Hello everyone. I'm new to real estate and im looking to house hack. Background credit score 740, pre-approved for $230,000 for FHA loan with 203k for renovations. I am very inexperienced and don't want to be taken advantage of. I asked my lender what the interest rates are and he said:

"The rates for rehab loans are slightly different than your typical mortgage because it is a special program and they can change from day to day. Once you have a sales contract we can discuss your Interest rate, mortgage payment, down payment amount, etc.." (Loandepot)

 Is this predatory?

@Jeremiah Hatcher Hey Jeremiah, 

Based on what you listed this doesn't sound predatory to me. If you haven't already done so, something you should do is get pre-approved with other lenders (maybe two more) and compare all of the information given among them. Unless something has changed, If you do them all within 30 days of each other this should only count as one inquiry on your credit. Speaking with multiple sources will let you know if it's possibly predatory or standard lender rhetoric. Also, you have a high credit score so you may not have to do the 203k program. For example, Caliber Home Loans offers the 203k program and their own in-house version of it (I believe they just call it a Construction Loan) that essentially works the same way but there is much less red tape. They only offer this to applicants with higher credit scores like yours. I used the 203k loan on my first personal home and there is so much red tape involved. I found out about the other program with Caliber about a year after I did my first home and wished that I knew about it. Also, this is not an endorsement of Caliber because I never used that program with them, I just used them to give a real world example.   

@Marshall White

Thank you so much for the useful information. I definitely plan to speak to other lenders to gauge what time of information they give me. The reason I was considering 203k was because I do have a good credit score but I don't have cash for down payment and renovations, just for the down payment.

@Jeremiah Hatcher

I completely understand and I was in that same boat when I used the program. What I was suggesting works just like the 203k program does, the purchase price and renovation costs are under the same loan and it only requires 3.5% to 5% down payment. When you speak with the other lenders just ask if they have a program like the 203k. If they do offer a similar program this may save you from jumping through many hoops that are typically required for the 203k but make sure you compare them both from top to bottom.   

@Jeremiah Hatcher as a lender I don't like to really talk about rate. Rates do go up and down on a daily basis but really don't change "TOO" much from lender to lender. If I quote a rate you are going to hold me accountable for it even when I tell you, verbally and in writing that it is subject to change till the time of lock. Just no point in the hassle if you don't even have a property under contract. 203k loans however are higher than normal FHA loans so you will be looking at something probably in the mid to high 5s

Nothing about that sounded predatory to me. Sounds like you don’t have an actual property lined up yet, and nothing locked in, so he/she just didn’t want to commit to actual numbers until you do. Seems reasonable and far from predatory. 

Just my two cents. 

As others have said, it’s difficult to get an exact rate quote upfront since rates change so frequently. Though you should be able to get a good ballpark. Also, agents that have developed good relationships with lenders will be an invaluable resource.

What you do want to pay attention to is the paperwork you get once you’re under contract and have “applied” for a loan. You should get a loan estimate that will breakdown all your expected costs throughout the transaction. Read and understand that, and keep a copy for reference. You may need to refer back to it later.

@Jeremiah Hatcher a lender should never tell you to get a property under contract before he can tell you the interest rate and mortgage payments... what if you can’t afford it??? You must know the numbers up front prior to even looking at properties and making offers. Yes it may change slightly but you still need to know the numbers before committing to a deal... I would definitely check rates and number with at least two different lenders, just to compare before making a decision. The guy down the street may be giving way better interest rates (causing lower mortgage payments) just because he’s for the people and loves doing the right thing, while the other guys charges higher just to put a little extra cash in his pocket each month. It’s all business, you have the good and the bad, do your due diligence and shop around, please! Best of luck!

@Jeremiah Hatcher I would ask your loan officer about a first time homebuyer program in your state - something like Illinois Housing or Chicago DPA. Reason being, you can sometimes get a down payment assistance (DPA) loan that is foregiveable or has to be paid back with interest or without interest, different states have different programs. For example, I was able to utilize a DPA & closing cost assistance loan for my 1st home - this allowed me to use most of my savings to improve the property. Fortunately, I had a good deal where even a 2nd & 3rd mortgage still allow the property to cash flow so be sure to factor that in but it also allowed me to entirely leverage the property so I only have what I put into it. Not for everybody or every deal but it is something to consider to avoid the red tape of a 203k, putting savings towards a down payment instead of sweat equity, & possibly having a loan greater than the value of the property. Food for thought!

I have a ton of clients in Chicago that have used the 203k loan, here is what I would say to all of that

first 203k is only hard if your lender is not great at it, there are some lenders out there that do a big portion of their business in renovation loans. 

in terms of red tape it really depends on the type of renovation you are doing many renovations can be done with a streamline 203k which just needs the bid and your contractor to be licensed.  

203k is higher interest than a normal fha most clients refinance after they complete the work to get the rate back down.

your pre-approval shouldn't have a purchase side and a construction side to it, if your approved for 230K you can buy a house for $1 and renovate with the other 229k the ARV just has to be close to the 229k

Originally posted by @Jeremiah Hatcher :

Hello everyone. I'm new to real estate and im looking to house hack. Background credit score 740, pre-approved for $230,000 for FHA loan with 203k for renovations. I am very inexperienced and don't want to be taken advantage of. I asked my lender what the interest rates are and he said:

"The rates for rehab loans are slightly different than your typical mortgage because it is a special program and they can change from day to day. Once you have a sales contract we can discuss your Interest rate, mortgage payment, down payment amount, etc.." (Loandepot)

 Is this predatory?

This isn't predatory, but I don't like the fact that he/she said to get into contract first. You want to work with a Loan Officer or Broker that wants to help you and wants to learn and understand what your goals and needs are. Furthermore, I would start to ask questions like " How many 203k's have you done " " Is your team efficient regarding 203k documentation" " Do you have contractors and HUD consultants that you can recommend to me" Etc.

Once you and the Loan Officer or Broker are on the same page then you need to find a Realtor that's on the same page as you. Ask them questions like " Have you worked with investors " " Are you willing to help me look for homes that need repairs " Etc. Let them know what you're looking for and that you have been pre-approved and are ready to put in an offer on a home that needs repairs. The more honest you are upfront will help because most Loan Officers have no clue what a 203K is and/or have no interest in doing these types of loans. Same with Realtors, A lot of them don't want to deal with certain types of transactions.

When you have these 2 key components down, you'll be ready to take down anything that comes your way. You'll be prepared and you'll have a team around you with experience.

Do some research and leg work and make it happen. You can do it!!!


I hope this all helps and have a good one.

 

@Jason Zimmer

Speaking to other lenders they told me that I have the ability to lock in rates. I'm sure there may be some other fees such as lock in fees, but that's definitely a lot more forward than "get something under contract and we will talk about it". They also gave me numbers to work with very readily and encouraged that I ask many questions to each Lender and choose who I think is the right fit for me. The first guy never recommended I even talk to anyone else. It seems more like he is sold that I'll work with him.

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