Stuck In a Terrible Lending Situation

38 Replies

Hey BP,

My wife and I just closed this past week on a house that we are using as a rental. Throughout the entire process working with our lender, we told him over and over that this would be a non owner occupied house and that the mortgage needed to be for a rental.

He proceeded to write the mortgage as an owner occupied primary residence! This came along with a statement promising we would live in the property for at least a year!

We literally didn't find out he did this until a week and a half before we were scheduled to close!!! We immediately told him that the mortgage was incorrect and his response was that we should leave it alone because it would severely delay closing if we changed it. He said we could get a letter from the lender after closing stating that we could use it as a rental.

Fast forward to now, we have an owner occupied mortgage with two options: 1. Live in the house for a year (We don't want to and won't do this)

2. Refinance it into a investment property mortgage

Our mortgage was 80% LTV and now the new refinance requires 75% leaving us to come out of pocket for the difference. The lender also said that we have to repay closing costs to the tune of 4k!

This process has been absolutely ridiculous and I cannot believe they did this to us! Their mistake is costing us over 4k plus the extra hoops to jump through and headaches!

Each time we told them that we weren't at fault and we asked for an investment property mortgage it's basically our word against theirs and it goes nowhere.

They even had the nerve to throw out "Mortgage Fraud" as something they have to look into!!!!! I can't even wrap my head around this!

At this point we are working on trying to refinance and find the best deal we can.

We feel so betrayed and lied to and don't know what to do. Has this ever happened to anyone else and what can we do???

My actions would be...

1) Document everything in writing asap. Create a neat package of hand written notes, e-mails, process of events, etc.

2) Get in touch with a local RE attorney asap regarding immediate path forward.

3) Work on pulling together the 4k to convert the mortgage.

4) Look forward to this being a good story in a few months. It will be a nice kicker in your BP Real Estate Success Story

But the loan officer made his money ............ just like he wanted

@Nick Keesee, I think @Sam Jones is right! I Would most likely do what he recommends!

I had similar experience in the past but the "slight difference" was: Broker tried same thing on me as above, but I told him I will only close if loan is for an investment property! I was ready to walk out! So he fixed the loan in about 72 hours! This is a red flag and no deal is worth this much headache!

For next deal I would start scheduling appointment with, the VPs of small local banks with no more than 20 branches! They exist and they are pretty strait shooters and will tell you what you need to do to be able to deal with them!

I even did a cross colletarised an couple of SFR deal with them where they put up 75% of appraised value in a loan and accepted collateral in another property so it was a no money down deal! And none of them will ever pull on you a fast one like this guy did!

Good luck to you!

You shouldn't have closed. You should have said "fine, it will cause a delay". As soon as you closed you lost most of your leverage. The lesson here is that if anything is wrong, you don't close. A lawyer can make a very good argument that you did in fact commit loan fraud when you signed the forms for the OO loan knowing it was not. Your case now depends on proving you did that under duress.

Was the person you were working with an employee of the lender? Or a separate broker? Is he now denying what he told you before the closing? Do you have anything in writing or were all these just phone conversations?

Your state may have some department for mortgage broker licenses. If so, you may be able to make a complaint with them.

An hour and a couple hundred bucks with an attorney may be a good investment.

Jon Holdman, Flying Phoenix LLC

@Nick Keesee:

Sorry to hear about the convoluted actions of your lender. But, I am just curious: Could you have ased for a contingent upon clause to state that the property will be changed in the agreement to a rental property? I personally would have never closed with this lender, and would have taken action immediately. No telling how many times he as scammed people with his sneaky ways. My question to him is what's in it for him? He would have gotten his commission one way or the other.

I don't understand why you signed and closed on that loan. It sounds like you signed affidavits and statements that said the property is to be owner occupied. That IS loan fraud. Doesn't matter who told you to do it or what their advice was, if you signed docs with false statements you can't blame anybody for that.

I'd say report the brokers to your state RE dept. but then you'd be reporting yourself for participating. The time for that was before you closed and when you should have cancelled that loan. Nobody needs a rental prop loan so badly that they have to sign false statements. Get yourself refinanced out the owner occupied loan asap.

The real estate litigation attorney even if you just get some legal advice for a few hours is golden. Not a GP attorney but a specialist.

The attorney will cut through the crud. If the mortgage broker told you things only verbally then it's your word against theirs. Very hard to prove that in a court of law. It's doubtful by what you said that this mortgage broker gave you any written correspondence on what they said.

Regardless of what you were told at the closing you saw a document that read and was an affidavit for owner occupancy and signed it. The interest rates are lower on owner occupied properties because they know if something goes wrong you will fight for the place you go to sleep at night. Anything else you let it go easier. This is why lendesr give slightly higher interest rates and different structures on investment loans. By signing the affidavit you are saying you intend to occupy the property which gives you a better rate but then doing a bait and switch on the lender is fraudulent in their eyes. Once you closed on the property it's really hard to unring that bell.

I think what might help your case is the 20% down. You could state that if you were doing an owner occupant you would have went for less down payment. They could argue you paid 20% down to eliminate mortgage insurance.

The attorneys deal with these things everyday and will give practical advice based on court room and case law experience.

No legal advice.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Sorry to hear about the situation, but how did the lender discover you were not OO the property?

I'm just interested for future reference. I've never had a lender check or validate anything post closing.

Originally posted by @Jon Holdman :
Your case now depends on proving you did that under duress.

There's this thing I call "escrow distress", which is often accompanied by loan app distress. Proving duress when voluntarily signing loan docs for a rental prop? I'd like to read the complaint on that case. :)

Kristine Marie Poe if you're saying that would be a weak defense then I'd agree.

Jon Holdman, Flying Phoenix LLC

Thanks everyone for the input.

@Jon Holdman The guy was an independent loan officer who just writes loans for the main bank.

We have email conversations proving that we told them multiple times that we were going to use the property as a rental and NOT live there. The loan officer even said in responding emails that he understood and that he wanted to change the homestead since we weren't going to live there.

The reason why we still closed was because the loan officer told us to. He said and I quote, "It's a grey area on how long you have to live there so just close as is."

The whole way that the lender found out was that we told them. We told them that it was a mistake and that we needed to get it fixed. We were trying to be completely honest off the bat instead of trying to go around their back. Mortgage fraud would have been signing the documents and then renting the property without telling them and we wouldn't have done that. Just trying to be completely truthful.

The document that was signed regarding the occupancy for a year said that the lender could give a written letter of approval to get around it and that's all we asked for. They acted like that wasn't even an option.

The lender offered to let us refinance right away and I'm considering calling them back and saying we spoke with an attorney (We have) and that we have written proof of informing our officer of our intentions and that they need to work with us on the closing costs.

I get the 75% LTV portion but not the 4k in new closing costs!

Fraud consists

  1. of some deceitful practice or willful device,
  2. resorted to with intent
  3. to deprive another of his right
  4. in some manner to do him an injury.

Here in my opinion your intent was to use the property as a rental, and NEVER ONCE hid that fact. The duty to read and understand what you signed will be a tough defense for the mortgage broker if you brought suit but never the less you sought waiver of the one year requirement promptly.

You have further communicated that fact to the lender which closed the loan on Thursday.

To this point you have behaved in a 100% ethical manner in my mind. Many would just say don't say anything and just rent it out.

What harm has been done to the lender?

Originally posted by @Jon Holdman :
@K. Marie Poe if you're saying that would be a weak defense then I'd agree.

Even if it's weak defense, I'd still want to read it. Better minds than mine come up with defense arguments.

The OP came and posted here after he realized he was going to have come out of pocket to fix closing on that loan. If he could have a gotten a NOO refi with no additional costs and an OK rate, this would probably be a non-issue.

The need to close on investment property with questionable loans or with brokers you don't trust....well, it's just not a need.

This happens quit often unfortunately. When I was a mortgage broker I would routinely lose the loan to another agent that offered a better rate, usually by pulling these kind of shenanigans. Rates and terms on these conventional loans are pretty uniform regardless which broker you use, it doesn't help much to jump broker for a better rate, not that that is what you did in this case. I presume this was a brokered loan and not a portfolio loan.

I'd have to look it up but as I recall a mortgage broker faces up to five years in prison by simply "coaching" a borrower to commit loan fraud on a federally related loan, if indeed this was a federally loan and not a portfolio loan. You might gently remind him of this and ask that he originate a new NOO loan at no cost.

Just a thought.

Originally posted by @Douglas Dowell :
Fraud consists
  1. of some deceitful practice or willful device,
  2. resorted to with intent
  3. to deprive another of his right
  4. in some manner to do him an injury.

Here in my opinion your intent was to use the property as a rental, and NEVER ONCE hid that fact. The duty to read and understand what you signed will be a tough defense for the mortgage broker if you brought suit but never the less you sought waiver of the one year requirement promptly.

You have further communicated that fact to the lender which closed the loan on Thursday.

To this point you have behaved in a 100% ethical manner in my mind. Many would just say don't say anything and just rent it out.

What harm has been done to the lender?

Have you ever been a lender? Signing loan commitments that say you are intending to live in the property when you are not prevents the lender from properly analyzing and charging for loan risk. That's harm in my world.

No doubt in my mind that most people, the OP included, do not intend to harm another when signing loan docs that are false. However, even without "intent to injure", people go to prison for signing loan docs that are false. Since the OP is already on the refi trial, and is trying to make good on this, it will likely work out in the end. But we can't go around defending ourselves by saying that our broker said to just sign it.

This "independent loan officer" is the one who goaded you into signing a document that was inconsistent with your intentions. I'll stand by the statement that you should not have closed. I understand the desire to move ahead, but closing is the critical event. Sometimes you just have to say "no" and walk away.

Because you have written documentation I'd pursue that broker for the costs of correcting the problem. I'd look into filing a complaint with the state and possibly suing him personally. It would be helpful if you had a witness who was present when he told you to go ahead and close. IMHO he was more concerned with getting paid than you. "Grey area" my hiney. That was a flat out lie. He definitely put you in a bad spot.

Refi's always have a stack of costs. You could try negotiating with the lender doing the refi to get some of them knocked down. But you don't have much leverage.

The document that was signed regarding the occupancy for a year said that the lender could give a written letter of approval to get around it and that's all we asked for. They acted like that wasn't even an option.

The fact the lender has the ability to a waiver of the occupancy requirement doesn't mean they have an obligation to do it. As far as they're concerned it probably isn't an option, even though the documents say they could if they wanted to. They just don't want to.

What harm has been done to the lender?

@Douglas Dowell the lender was given documentation for a loan for other than the stated purpose. Had the details of the loan been accurately represented to the lender they would not have made that loan. They might have made a different one, but they would not have made the loan @Nick Keesee received. The lender was deceived. If Nick doesn't move in they can call the loan. Just not renting it is inadequate. The documents Nick signed said he would move in. If he doesn't, the loan is in default.

Jon Holdman, Flying Phoenix LLC

@K Marie Poe...I understand your point generally.

I disagree that Nick "Signed a document knowing it was fasle". His first mortgage experience was lead astray by a hungry mortgage broker in my opinion.

More factually: he has not rented out the property...and his intent is and was known. Therefore the harm you claim has not in fact occured.

Originally posted by Account Closed:

I'd have to look it up but as I recall a mortgage broker faces up to five years in prison by simply "coaching" a borrower to commit loan fraud on a federally related loan, if indeed this was a federally loan and not a portfolio loan. You might gently remind him of this and ask that he originate a new NOO loan at no cost.

Just a thought.

I like this idea. Even if it's not a federally insured loan, tell the broker to find you a new loan at no cost to you or you'll report his expedient behavior to the RE commission or district attorney or whatever. Even if it's your word against his, he does not want anyone to investigate this.

Originally posted by Kristine Marie Poe:
Originally posted by @Jon Holdman :
Kristine Marie Poe if you're saying that would be a weak defense then I'd agree.

The need to close on investment property with questionable loans or with brokers you don't trust....well, it's just not a need.

Of course we don't trust him now but we had no idea all along that this would have happened. We thought he knew what he was doing and talking about so it had nothing to do with closing a questionable loan.

Just curious. How much is the mortgage for? If it's under 50k, and you've got at least 100k in your 401k, just borrow the money from yourself and pay the mortgage off. At least now, you're the bank, and the tenants are paying you the interest. Chalk it up as a hard lesson learned and move on. We've all made bad decisions at some point.

@Jon Holdman I agree that the lender was given documentation for an owner occupied loan. However, Nicks aggressive engagement seeking waiver of the one year owner occupied rule or seeking the lenders guidance obliterates any claim of fraud.

Sure they can call the loan. But fraud? Not so much.

Originally posted by @Douglas Dowell :
@K Marie Poe...I understand your point generally.
I disagree that Nick "Signed a document knowing it was fasle". His first mortgage experience was lead astray by a hungry mortgage broker in my opinion.

More factually: he has not rented out the property...and his intent is and was known. Therefore the harm you claim has not in fact occured.

True, Nick hasn't rented out the property. But he hasn't moved into it either. :) OO loans and rates are based on lender history with OOs living in the property. If he doesn't move in, the lender has every right to claim harm.

@Nick Keesee What kind of insurance policy did you end up closing with? Did the broker procure the quote or you? Make sure your policy isn't for an owner occupied property and that you are covered while you are vacant or if the property needs rehab. I mention this because I switched to a new agent a few properties ago and last week he issued a policy for an occupied property, knowing full well the property will be vacant for a minor rehab and while it's on the market. It's the last time I'll use him as it's not his call to try to save me money by writing a policy that won't cover me.

Did broker complete the 1003 (loan app) or did you? Did you check the NOO box? If so, I think you are in the clear with all docs downstream.

Originally posted by Kristine Marie Poe:
Originally posted by @Douglas Dowell :
@K Marie Poe...I understand your point generally.
I disagree that Nick "Signed a document knowing it was fasle". His first mortgage experience was lead astray by a hungry mortgage broker in my opinion.
More factually: he has not rented out the property...and his intent is and was known. Therefore the harm you claim has not in fact occured.

True, Nick hasn't rented out the property. But he hasn't moved into it either. :) OO loans and rates are based on lender history with OOs living in the property. If he doesn't move in, the lender has every right to claim harm.

@Nick Keesee What kind of insurance policy did you end up closing with? Did the broker procure the quote or you? Make sure your policy isn't for an owner occupied property and that you are covered while you are vacant or if the property needs rehab. I mention this because I switched to a new agent a few properties ago and last week he issued a policy for an occupied property, knowing full well the property will be vacant for a minor rehab and while it's on the market. It's the last time I'll use him as it's not his call to try to save me money by writing a policy that won't cover me.

Technically I did move in. We have been living in the property as we perform rehab work ourselves.

The insurance policy was a landlord policy. It basically covers the whole gamut of everything that could happen.