Mortgage closing guarantees are practically worthless
With late closings so common in real estate, a number of lenders are offering an on-time mortgage closing guarantee that promises borrowers cash if the loan closes late.
But these guarantees are full of loopholes that leave lenders plenty of wiggle room to get out of paying up on the pledge.
"I think these types of guarantees sound good and are generally well-intentioned," says Gary Parkes, a loan originator for Acopia Home Loans in Atlanta. "However, I think they are essentially for marketing purposes."
Parkes says it’s understandable these guarantees have many caveats. Lenders are only responsible for some of the steps in closing a home loan. Each of the other parties involved can cause a delay in closing.
The several closing guarantees we examined offer plenty of ways in which you won't get paid if your closing is pushed past its scheduled date.
Virginia-based lender Aurora Financial offers an on-time closing guarantee of $1,000 if borrowers can match the many demands. Borrowers must:
- Have two years of W2 income from the same job.
- Have filed tax returns on time for the last two years.
- Provide all requested income and asset documentation.
- Have a credit score of at least 680.
- Be taking out an FHA or conventional loan for $200,001 to $625,500.
- Plan to occupy the property as their primary residence.
Self-employed borrowers, condominium purchases, investment properties, second homes, short sales and foreclosures don’t qualify for the guarantee.
The guarantee also won’t apply if delays are caused by problems with appraisals, payoffs, titles, homeowners associations or mortgage insurance.
In other words, Aurora isn’t going to credit you $1,000 if the delay isn’t its fault.
Alabama-based BBVA Compass offers a less-generous guarantee that promises to reimburse your appraisal fee of up to $500 if you close late. It has a similar but more comprehensive list of restrictions:
- A borrower who feels he or she is owed the guarantee money must request it within five business days after closing.
- You will invalidate the guarantee if you change the loan product or term or if you shorten the closing date from the original contract.
- BBVA says it must receive all third-party documents five business days before closing. These documents are out of the bank’s control and may be out of your control, too.
Citi Mortgage offers the most generous guarantee we found at $1,500. This lender guarantees to close your loan by the date specified in your purchase contract as long as that date is at least 30 days after both your application date and your purchase contract date.
If the loan closes late because of a delay by Citibank, you’ll get the money, but if it’s another party’s fault, you won’t get anything.
Why loans close late
Most late closings occur because lenders are abiding by tougher lending guidelines, says Mark Bower, a top-producing loan officer at Oak Mortgage Group, a boutique home loan bank in Texas.
"The 2008 mortgage crisis was a financial 9/11 for our country," he says. "Before 9/11, getting on a plane was easy, and before the crisis, stated-income/stated-asset lending was commonplace.
"Obviously, that was a bad business practice. Investor guidelines are now like security to get on a plane."
The buyer’s failure to deliver all required documents to the lender in a timely manner is the most common reason for closing late, says Sep Niakan, a real estate broker with HB Roswell Realty in Miami. Homeowners associations can also take too long in submitting important information like the lender’s questionnaire or master insurance information.
Niakan says another problem is that overloaded underwriters are taking too long with loan approvals, and more often than not their response is a conditional approval. The buyer or homeowners association must then fulfill those conditions before the loan can close.
But, since lenders often aren't the reason a loan closes late, they have little to lose in offering on-time closing guarantees.