Eggs in one basket is not how to borrow

[bankworking]

SC buys house for about $200,000. Pays an okay amount, probably 10% down, and a few years later the 1st mortgage is sitting at $177,000. In the meanwhile, has run up $40,000 worth of credit card debt... that SC is fine with, because they were just doing that temporarily until they had everything finished, because they just know their house is now worth at LEAST $225,000.

...

...

*sigh*


Now, SC is looking to borrow that $40,000 against the house on a home equity... the variable rate line of credit with interest only payments, of course, not the fixed rate/term loan. And the long term plan is to THEN refinance the 1st mortgage a year or two down the road to roll both the 1st mortgage and the home equity line of credit into one mortgage.

There is... a LOT... of risk in this idea. Never, never, never, NEVER get into a variable rate loan where your big plan for getting out of it is to refinance your house. Talk about a foreclosure waiting to happen.

But I'm not even dealing with the nightmare down the road.


Current loan request gets approved,despite the 96% loan-to-value (at SC's stated value of the home), probably because the underwriters didn't talk to the SC and hear the big plan for how to eventually pay it off. I get the loan for processing, groan a little, (actually a lot) and put in for the appraisal with fingers crossed. After all, sometimes the market value DOES increase that much. sometimes the customer really did find that good deal or put in the right type of work to actually have an impact on the value of the house.

Appraisal comes in... $203,000.

Oh the hissy fit! That's practically what they paid for the house. They spent all this money on the house. See that $40,000 in credit card debt. That went into the house! (Well, mostly.... umm...)

Yes, and the appraisal found 8 similar houses that sold with an average price of $215,000, and every. single. one. of the houses that sold over $205k was marked as in notable (5-10k worth) better condition than your house with at least a half-finished basement and other superior qualities that made the comparison value of your house... well, $203,000. It actually was one of the clearer appraisal reports I've seen. They didn't have to stretch out to older sales or distant neighborhoods, and most of the sold houses were cookie-cutter similar.

I could practically read the appraiser covering their own ass as I read the report as well. Poor appraisers. They have to go see the SCs in their own homes.

Anyway. Appraisal. Let's have a little lesson on market appraisals:

1) Your market appraised value does not equal price you paid for house + cost of work put into the house
2)Your market appraised value doesn't even equal price you paid for house + the value of the work put into the house.

Market appraisal = how does your house, in rather general terms, compare to similar houses that have sold in the past 3-9 months. And it's a whole more like a stock price for your neighborhood than a consideration of what your home is "worth"

So, no, you don't get to roll that $40,000 of credit card debt into the house. You don't get to have an interest only payment to help to get your budget back in the red. (yeah, I heard about those extra monthly expenses that don't show in the loan debt to income numbers and make you in a lot worse shape than the credit report reveals).

And I'd feel sympathy if you weren't patronizingly asking me to try to explain how we could go with such an inaccurate appraisal company. And when you burst into tears, I'd feel really sympathetic if your explanation of why you need this loan didn't involve a whole lot of talk that indicated you ran up those credit cards on purpose because the plan was to do this and now you have to be able to do this because YOU got yourself into this mess.

I go through the appeal process of an appraisal as well as the option of getting a new appraisal (cost paid upfront, non-refundable, and NO we will not allow you to choose that appraiser you know of who tends to estimate high)

And then SC demands to know if they are just wasting their time trying to fight this with us or if they should just go elsewhere. (Love the threat to go elsewhere when I'm the one telling them that I can't do the loan. )


I let SC know that they might as well do the appeal because it doesn't cost anything, but it probably will not change the value and a new appraisal probably will not change the value by more than the 5k fluctuations or so that comes from appraisals having an opinion element to them, and they are welcome to try elsewhere, but frankly, I can't think of any lenders nearby who are likely to even DO 96% loan-to-value on a home equity line of credit, because most just don't go that high. A fixed loan, maybe, but not an interest only payment.


I did NOT tell the SC that I didn't think WE should have approved the home equity, but word is that our loss figures are too low, (which is a bad thing for a bank... losses happen in loans and if losses are too low it means the bank is turning away people too much... which is bad for customers too as not all riskier loans really are. gotta believe in people on occasion.) so we're approving things we used to take more care on.


Never, never, never get into any type of loan/debt dependent on a refinance to pay for it. You should always make certain you can afford the loan you have, not the one you want.

[taxguykarl]

$217k in debt with a house (am I correct in assuming no other assets?) worth $205k, if that.
You hit it on the head, bw. That is a foreclosure waiting to happen.
BTW, excellent explanation of appraisals. At least the custy has one that may be usable for a property tax appeal (I speak from experience there).

[Shyla]

I would love to do some updates on my house. But I can't afford it and I don't think the price of my house has climbed more than about $10,000. I bought when prices were high before the collapse. I was never under water but there's no huge value increase either. So in 12 years not a ton of change. How can they think a short time plus new countertops (or whatever) equals $25,000?

[bankworking]

At least the custy has one that may be usable for a property tax appeal (I speak from experience there).

'fraid not. Tax assessment is already lower than the purchase price. Eventually,it'll get raised on them as the county catches up.

[earl colby pottinger]

Market value

Some people don't understand what market value means.

My mom and I bought my house (I was co-owner when she died) for $167K six years ago. The Toronto market is hot, hot, hot, so when I sold the house last November I got $380K! And today if I held our I probably could have got $425K.

However, my health is not good, and I was worried that I could not properly take care of the house.

Why did I worry?

A friend had her son buy his house on a street where all the duplexes were of the same layout. His next-door neighbor sold her house last year for $340K. Thinking he was in the money and could get a loan against the house. So he had an appraiser in, the value given for his house .... $250K!

While his neighbor had taken care of her house and upgraded the flooring and kitchen, he had just let things go ... result ... his house lost value in a market where just about everything had double or tripled in price.

In the case of the OP's home owner, I bet a lot of the money (debt) went into things that other people did not want (example painting a room black or purple) or as mentioned the basement was only half done. An empty basement is seen as a blank canvas, a finished basement as a usable asset.

A half done basement means you either have to rip everything out before you start on you own vision or you finish it but since you have to find items that fit what is already installed you have a lot of work ahead of you. Who wants that?

[Pixelated]

This is an interesting thread, particularly to a lifelong apartment dweller. At some point we will be putting Mom's house on the market, and it is up to brother (her Power of Attorney) what to do with the house in terms of work. House and grounds could use a LOT of work, but how much of a rise in price that would mean, I have no idea.

[Blue Ginger]

what to do with the house in terms of work. House and grounds could use a LOT of work, but how much of a rise in price that would mean, I have no idea.

Best advice would be to have a couple of agents do appraisals as the house is now and ask them what they would recommend fixing/painting/replacing to increase its value.

If the yard is a bit overgrown, definitely get that fixed up a bit. It's amazing the difference just mowing and pruning can do.

And take out any heirloom/favourite plants before it goes on the market - 30 day settlement meant we didn't have a chance to take mum's ferns and black boys (a type of Aussie fern but I don't know it's proper name). The new owners had killed them within a couple of months even though we ask them to let us know if they didn't want them and we'd come back and take them.

Washing down walls can also make a big difference. You don't always have to paint them.

[EricKei]

If the yard is a bit overgrown, definitely get that fixed up a bit. It's amazing the difference just mowing and pruning can do.

Aye. First impressions can be HUGE -- So, an afternoon (for a larger place) or a couple of hours (for a postage-stamp yard) spent can help to give a potential buyer the impression that you actually give a damn about the place.

[Captain Neon]

Yep, I have a former landlord that seems to think his amateur kitchen and bathroom remodels make his $60K house worth $140K. Fiberglass faux tile kitchen floor that he literally placed on top of the old linoleum, shabby chic milk paint cabinets, and unleveled concrete countertops that cracked. No venting in bathroom for steam created after installing tub shower so paint peeling in bathroom. Tub unusable as a tub because the shower switch permanently stuck in shower mode. Bathroom sink cannot be used as a basin because the stopper pull is blocked by poorly planned moulding. Bathroom linen closet has no door and only partially painted.

It may be worth $140K after someone dumps $80K redoing his renovations, replacing the rotting front porch, replacing the leaky windows, professional tree surgery, remove unusable garage door and relocate garage door entry to alley so garage can actually garage a car, and significant clean up of "professional" landscaping. I think the "professional" landscaping was the same "professional" that did his kitchen and bathroom remodel.

[taxguykarl]

WOW, Captain. With that kind of DIY fail, I wonder if an appraiser would value that at the initial $60k.

[Alpha Strike]

I did NOT tell the SC that I didn't think WE should have approved the home equity, but word is that our loss figures are too low, (which is a bad thing for a bank... losses happen in loans and if losses are too low it means the bank is turning away people too much... which is bad for customers too as not all riskier loans really are. gotta believe in people on occasion.) so we're approving things we used to take more care on.

I'll preface my question by saying I'm always been a renter and never bought a home, so I'm a bit naive with these sort of things. That being said, why would a bank willingly want more loss? Isn't it supposed to be prudent and careful in how it loans out its customers money? Aren't its policies supposed to be towards reducing loss and not incurring it? And couldn't a bank turning people away simply mean they are correctly identifying overly risky situations - like the one you wrote about?

[Captain Neon]

WOW, Captain. With that kind of DIY fail, I wonder if an appraiser would value that at the initial $60k.

He paid $85K for the place when it was a nice middle class neighbourhood at the height of the housing boom. The $60K is my estimate based on what I know to be wrong with the house from 5 years ago and what he was asking after we moved out.

I had a friend inquire about the house after we moved out, and to hear the landlord talk up the place it had recently been renovated by Nicole Curtis. He got pretty pissy when she asked if she could contact previous tenants [us] about the house since he hadn't actually lived there for a few years. There were nicer houses in nicer neighbourhoods selling for about $75K.

[Ironclad Alibi]

I'll preface my question by saying I'm always been a renter and never bought a home, so I'm a bit naive with these sort of things. That being said, why would a bank willingly want more loss? Isn't it supposed to be prudent and careful in how it loans out its customers money? Aren't its policies supposed to be towards reducing loss and not incurring it? And couldn't a bank turning people away simply mean they are correctly identifying overly risky situations - like the one you wrote about?

A few years ago in the US the more liberal political atmosphere resulted in banks being required to make home loans to less credit worthy parts of the population in the name of economic equality (or some such thing). The loser loan standards resulted in the recent housing foreclosure crisis in which many people loss their homes. In that environment banks had to have a certain loss rate to demonstrate they were complying with the programs in place at that time.

A detailed discussion of these policies and their results probably belongs Fratching.

[bankworking]

I'll preface my question by saying I'm always been a renter and never bought a home, so I'm a bit naive with these sort of things. That being said, why would a bank willingly want more loss? Isn't it supposed to be prudent and careful in how it loans out its customers money? Aren't its policies supposed to be towards reducing loss and not incurring it? And couldn't a bank turning people away simply mean they are correctly identifying overly risky situations - like the one you wrote about?

Keep in mind that home equity loans are more like car loans or even personal loans in how they are approved than they are like a 1st mortgage. And for Car loans/personal loans, a lender should have a certain amount of losses, because s**t happens. People lose their jobs or have a disaster or something fails. A lender wants to limit risk, sure, but not entirely. The bank makes money on risk. So, from the bank's pov, if losses are too low, they are turning away money.

From the borrower's pov, sometimes they are getting out of a bad situation and the application just isn't going to look perfect. Our bank had pretty good rates. If we give the loan, most likely it's going to be a better deal than some online lender or whatever that the customer might be able to get elsewhere. So, it's also a customer service issue to try to take a chance on borderline cases, especially when the loss ratio supports that you can afford to take a chance and believe in the customer a touch more.

Losses, of course, are paid for by the interest earnings on the loans. I heard our loss ratio recently was less than a 3rd what we budget for.

[Pixelated]

Best advice would be to have a couple of agents do appraisals as the house is now and ask them what they would recommend fixing/painting/replacing to increase its value.

If the yard is a bit overgrown, definitely get that fixed up a bit. It's amazing the difference just mowing and pruning can do.

And take out any heirloom/favourite plants before it goes on the market - 30 day settlement meant we didn't have a chance to take mum's ferns and black boys (a type of Aussie fern but I don't know it's proper name). The new owners had killed them within a couple of months even though we ask them to let us know if they didn't want them and we'd come back and take them.

Washing down walls can also make a big difference. You don't always have to paint them.

I'll mention that to my brother (he's Mom's Power of Attorney), about having agents do an appraisal now.

Yard is not terribly overgrown but that's only because it's winter. Mind you there are still the mortal remains of last year's weeds everywhere ...

Oh man, I'm sorry to hear about the ferns and black boys. My grandfather had some lovely plants in his backyard, but they are plants that can be bought at most greenhouses (bleeding hearts and so forth). Losing something that's hard to find must be tough.

The closest thing we've ever had to heirloom plants here were the five-foot-tall Scotch thistles that were thriving last summer. They looked unnervingly like something from Day of the Triffids. The lawn desperately needs some rolling, it is full of small bumps and hillocks that aren't really visible through the grass, but make mowing a real bitch, especially in early spring when the property needs mowing twice a week!. Gonna see if I can strike a deal with brother this summer: "Mom" pays half and I pay half to get somebody else to mow the damn lawn.

Aye. First impressions can be HUGE -- So, an afternoon (for a larger place) or a couple of hours (for a postage-stamp yard) spent can help to give a potential buyer the impression that you actually give a damn about the place.

We have a corner lot, so it is much too big for me to manage all the yard care myself. If I can strike the above-mentioned deal with brother, I will promise to do some garden work -- rip out the weeds, plant annuals, keep the place tidy, and so on.

Yep, I have a former landlord that seems to think his amateur kitchen and bathroom remodels make his $60K house worth $140K.

Trust me, any work done on this building will be done by professionals. I'm having enough trouble installing a new smoke alarm (trying to screw a couple of screws into the ceiling gives me a whole new level of respect for the guy that painted the ceiling of the Sistine Chapel).