Lender changed the terms and now the deal doesn't pencil

Detroit, Michigan
General Real Estate Investing
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Lender changed the terms and now the deal doesn't pencil

Steven Whipple
Member since 2024 · 19 posts · 16 votes

I found my first deal, and everything looked good. All the numbers worked out the way I wanted. We got pre-approved for financing, and our offer was accepted. We paid for the inspection, and it turned out well. Last night I got an email from the loan officer telling us the underwriter says the loan looks like predatory lending and raised the rate by 5/8 of a percentage. Closing costs end up being over 9k on an 80k loan. Now the deal doesn't pencil out. While it will still cashflow, the COC ROI is down to 5%. The loan officer says do the deal and the refinance in 7-8 months.

Should we walk away or do as he suggests and refinance in 8 months? 

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y

@Steven Whipple

If that is what the loan offer is telling you, that is a very shady loan officer.

There’s no guarantee you’ll be able to refinance.

Ask for a breakdown of fees and an explanation why the interest rate increased.

Did you have an interest rate lock?

Who is the lender?

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Steven Whipple

    If that is what the loan offer is telling you, that is a very shady loan officer.

    There’s no guarantee you’ll be able to refinance.

    Ask for a breakdown of fees and an explanation why the interest rate increased.

    Did you have an interest rate lock?

    Who is the lender?

    7e investments53 Reviews
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    2Reply
  • Steven Whipple
    OP
    Member since 2024 · 19 posts · 16 votes
    2y

    No, the raised rate is where they want to lock it. I'm thinking of seeing if I can't find another lender. 

    1Reply
  • Steven Whipple
    OP
    Member since 2024 · 19 posts · 16 votes
    2y

    To answer your other questions, Premier Home and Finance. 

    The breakdown on the closing costs show over 3k to buy down the points. 

    I wonder if the issue is the loan is less than 100k.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    2y
    Quote from @Steven Whipple:

    No, the raised rate is where they want to lock it. I'm thinking of seeing if I can't find another lender. 


     I'd talk to another lender.  

    0Reply
  • Arsen Atanasovski
    Investor · Rochester, MI · Member since 2017 · 1k+ posts · 584 votes
    2y

    I would look for another lender that is not normal underwriting, other things can change but not rates

    0Reply
  • Christie Gahan
    Investor · Hillsboro, OR · Member since 2016 · 304 posts · 153 votes
    2y

    Hey, Steven!  Congrats on all of your hard work so far.  As this is your first deal, I wanted to share a few things.

    1. It is OK to back out of a deal.  Nothing to feel awkward about.  

    2. Do not fall in love with a deal, there will be another one.

    3. Always have more then one source looking for financing. It's good to be able to call someone else and say, "Can you beat this?".

    4. When you are looking to buy, there are a lot of people around you that get a pay doy.  The mortgage broker gets paid when you buy.  The realtor gets paid when you buy.  The title company gets paid when you buy.  A contractor or property manager may get work / a pay day when you buy.  You need to stop and remember that all of these people that you are talking to are getting a pay day regardless if you make any money.  ( Hopefully you are with high integrity people, but there is always a bias because they get a pay day if you buy.)  Steven, there is no guaranteed pay day for you.  

    I don't know enough details on your loan situation to say if it is good or bad.  It is really weird.  I don't get the part about the underwriter saying it looked like predatory lending.  I hope your mortgage broker is a person of outstanding character but the fact is, he or she would be getting a double pay day in this scenario.

    1Reply
  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    2y

    So if you're through inspection phase and you would still qualify for the loan, even at the higher rate, then wouldn't you be in default if you walk?  If you're still in inspection phase and can walk away for just the cost of a home inspection, that may be an easy decision.  If you'd be in default where seller can sue you for damages above earnest money and real estate agents can sue for commissions, then you may want to consider those potential costs before making your final decision.  I'd get at least 2 more estimates from other lenders before walking away, if you have the time.  Those closing costs sound very high.  

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  • Logan LaperriereBusiness Member
    Real Estate Agent · Grand Rapids, MI · Member since 2023 · 333 posts · 124 votes
    2y

    Hi Steven,

    Does your Purchase Agreement have a financing contingency? if so does it state a maximum rate you are willing to pay? If you do have a financing contingency so may still be able to back out of the deal without losing your EMD.

    If you would still like to move forward with the deal reach out to other lenders and see if their rate and closing costs are lower. 


    Good Luck!

    0Reply
  • Steven Whipple
    OP
    Member since 2024 · 19 posts · 16 votes
    2y

    We do have a financing contingency. 

    I've talked with the broker and he seems to think he can get the loan back down to where it was originally quoted. I'll be talking with another lender on Monday.

    2Reply
  • Logan LaperriereBusiness Member
    Real Estate Agent · Grand Rapids, MI · Member since 2023 · 333 posts · 124 votes
    2y

    I am glad you were able to get things figured out. Situations like these are why contingencies are so important. 

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  • Timothy Hero
    Lender · United States · Member since 2020 · 1k+ posts · 499 votes
    2y

    Is the $9k closing costs including escrow? I have clients all the time tell me "closing costs is super high!". But between my broker fee and the lenders fees, it's usually 2-3% of the loan amount.

    They're ignoring the $7k escrow for taxes and insurance, for example.

    As for the rate adjustment, yeah, it's messed up move on the lenders part, but lets look at the math... $41/month. That's the difference. I'm not saying it's ok, but I noticed the smaller loan borrowers look the percentage change in rate and not the $ amount. I've had borrowers pull a lower credit than expected and rate increase by .25% on a $70k loan and he said the deal doesn't work anymore. The difference in his payment was $14.58...

    Your main focus should be the closing costs. Find out if the $9k is escrow included.

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  • Hannah WollmershauserBusiness Member
    Lender · Orange County, CA · Member since 2024 · 21 posts · 8 votes
    2y

    If you have time then I would definitely speak to another lender. Terms should not be changing so late in the process. @Chris Seveney is absolutely correct that there is no guarantee you will be able to refinance, especially at the exact rate you are looking for. I hope all goes well with this and if you have any questions and/or need assistance feel free to reach out. 

    [email protected]949-844-7270
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