Sponsor Requiring Use of Preferred Lender
I’m getting ready to purchase a condo in a four unit converted brownstone. I received the contract and everything looks ok except for one thing – I’m obligated to apply for a mortgage at a lender specified by the sponsor. If I receive a commitment from the lender, I MUST accept the mortgage. I’m taking this to mean that I’m not allowed to get financing from any other lender (assuming I’m approved by the preferred lender). Is that even allowed? Have you seen any stipulations like this before? Thanks for your help!
thegraduate
in Financial Services 12 years and 6 months ago
10
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10 replies
serpentor | 12 years and 6 months ago
You should get a lawyer before you sign, no matter what. But I wouldn’t accept a contract that required me to work with one lender. That is definitely an unsual clause. It seems crazy to do all your mortgage shopping before you even sign. Obviously, you want to get pre-qualified, but we wound up going back and forth between banks comparing terms and rates and closing fees (which varied by a lot) before we settled anything. At one point we had a mortgage broker who was really jerking us around and we wound up going straight to a bank instead. I wouldn’t want to get into a position where you just have to take whatever BS the lender dishes out.
cate | 12 years and 6 months ago
thegraduate, maybe you are looking for “The Take It on Faith Condo”? http://www.nytimes.com/2012/11/18/realestate/the-take-it-on-faith-condo.html?pagewanted=all
brokelin | 12 years and 6 months ago
And, if you can talk to their financing bank, and get a commitment letter before you sign the contract (or simultaneously with it, I guess it would have to be), then maybe you could avoid having to put this in the contract…though you’d need to talk to your attorney carefully to make sure the contract can’t leave you hanging, bound on the contract if the financing doesn’t in the end come through.
brokelin | 12 years and 6 months ago
oops… continued…or be sure that the info you gave the other bank is clear about how much you are putting down to get the rate they’d otherwise give you, and be sure it is based on your credit score and any other things in their underwriting that affect the rate you’d get on a long, and then, if you really want to buy there, perhaps adjust up another fraction or two to account for the increased risk to the lender, if the talks with them (if they are talking to your attorney, or if not, see if you can find out what lenders who do this do to account for the increased risk in these cases) say they do price loans higher for this reason, and if so, figure out what you could live with (only agree if you can refinance down the line whenever you want with no prepayment penalty, I would want that), and make the offer to write the terms you will accept into that the contract, and that the contract is void if the terms of the loan they offer you aren’t those or better.
brokelin | 12 years and 6 months ago
Ok, find out if this is legal (from a lawyer experienced in real estate financing matters.) What your first answer told you is why it is in there, and so maybe you have to apply, but it may or may not be legal to make you take their financing. Second, you can also write in terms on the mortgage – that the percent has to be below X, fixed for 30 or 15 years, if that’s what you want, for x number of years if you want adjustable (though who would in this low interest rate environment), and any other terms you care about (again, consult with attorney and mortgage finance person to determine the terms you care about. Also, pay attention to excess mortage bank junk fees – write in a limitation on fees you pay to the bank to make the loan.) If they aren’t trying to stick you with a loan with worse terms in the market than you could get otherwise (and this shouldn’t be the sponsor’s aim, their aim is to sell housing), then the sponsor and financer may be amenable to amending the contract to write in the terms you will accept, and if otherwise, you can reject the financing and get out of the contract. (This isn’t that unusual – in other places where people are bound by the contracts they make the offer with, I have heard of them writing in an interest rate they will accept – I mean, who wants to be bound to take a 10% rate in a 4% interest rate environment? It is too open-ended to say you will accept any mortgage you get, if you haven’t lined up your financing yet on terms you like, so people elsewhere do put a maximum mortgage rate they will accept in contracts elsewhere.) Maybe you can say they have to match what you could get on your own, but it might just be easier to determine what you could get and write those terms in – that way, you don’t have to go applying for the other loan (unless you really want to borrow from some other lender), and getting one to approve you might be difficult, as pointed out above, if the place is not fully sold yet. (If the other units are selling and closing first, then other lenders may not have a problem with it.) Anyway, maybe think about specifying the mortage terms you will accept from their lender, and not getting another mortgage. Figure out what terms you could get in the market – mortgage brokers know this about 4-units – and, in my experience, with 4-unit coops at least, mortgage brokers are the way to go to find out who lends to the small buildings (unless you have access to private banking, like through your job – sometimes those terms are great.) There are certainly a bunch of banks out there that lend to 4-unit coops – you find them through mortgage brokers. Condo should be similar, as the risk to lenders in small coops and condos are similar. The lenders mortgage brokers find you tend to be portfolio lenders, meaning they keep the loan and don’t sell it (to Fannie, Freddie, or some other securitization), and so they can set their own underwriting standards. The rates are just as good, though they are often a bit higher (small fraction of a percent) on a four unit building (at least for coop underwriting) than for the same loan to a purchaser buying in a larger building. Banco Popular was the portfolio lender (almost 15 years ago) who lent me 90% on a four unit coop and held the loan the whole time I owned the place – and there are others out there that mortgage brokers can find you – they are hard to find on your own. I’m talking for finding out terms they offer on buildings like yours – if the lender’s bank is not shady and gives you similar terms to what you can get from others, I wouldn’t have a problem with it, I don’t think. Though if everybody does have the same lender going in, I’d have to think through whether there was a risk to the coop’s stability. II can’t think of why that would matter to the coop off the top of my head, but I would ask and think about that question.) Obviously, there is a risk to the lender to have such a concentration of loans in one small building, which is why most lenders who lend in buildings of this size will only lend to one purchaser in the building at a time. Since the risk to the lender is higher, I would be wary that the lender will be increasing the interest rate a lot over the going rate to cover their increased risk to it if all four purchasers borrow from them. If not, and if I were the lender, if other loans closed first, I would be happy to let you choose another lender, as that would reduce my exposure to risk in that building. Of course, all this negotiation requires some good people (your attorney, or real estate agent if there are any in here) negotiating on your behalf. And in my one attempt to negotiate with the sponsor of a four unit condo when buying (not on financing, but on other issues with finishing the work on the building), they were not inerested in negotiating, so I walked. So be prepared to hear they won’t change it. I’d never agree to a contract that didn’t specify the terms I would accept from a mortgage lender – I’d choose whether I wanted a 30 or 15 year fixed, figure out what the rate would be from others on a four unit condo, adjust up a fraction if you are putting down less than 20 or 25%,
dylan621 | 12 years and 6 months ago
Small condos are easier than coops but there are banks that won’t lend to a condo building with less than 5 units and you need a FNMA waiver for a conforming loan.
Putnamdenizen | 12 years and 6 months ago
I had thought it was small CO-OPs which were hard to finance, not CONDOS. In fact the NYTimes article on that subject recently had a thwarted co-op owner essentially convince his fellow shareholders to convert it to a condo to get a new mortgage.
daveinbedstuy | 12 years and 6 months ago
dylan is right. But, the more important point he makes is that it may be hard for you to get a mortgage for this type of condo. Try not to be so closed minded without investigating. What are the terms that the sponsor’s bank is offering??? This may be the easiest and best way to go.
ejalbk | 12 years and 6 months ago
Have your attorney put in language that allows you to look for your own lender first and the sponsor’s as a fallback.
dylan621 | 12 years and 6 months ago
Although I haven’t seen the contract, those types of provisions usually do not preclude you from using another lender. The point of it is to protect the sponsor so that you can’t go to XYZ bank, be declined and then pull out of the contract. The sponsor’s preferred lender has already agreed to lend to this building so if you can’t get a mortgage from a different lender then you have to use the sponsor’s preferred lender rather then walk away from the deal. This is particularly important in your case b/c it is difficult, though not impossible, to get a mortgage in a four unit condo and may be further complicated if you want to close before the building is 100% sold. So, absent that provision, it would be too easy for you to walk away from the deal b/c the bank you apply to won’t lend to your building and get out of the contract due to the mortgage contingency. If you go through with signing the contract, and you don’t want to use the sponsor’s lender, be prepared to do some leg work talking to various banks and mortgage brokers to find one that will lend to your building.