Why Do I Have To Apply For The Mortgage Company’s Loan When I Am Trying To Buy A Short Sale From Them?

I was talking to my Realtor today, and heard some interesting information.

She is helping a young couple and their kids relocate from another state.  They have a fairly limited budget, and are trying to stay under a $150,000.00 purchase price.  This couple has been pre-qualified through a lender they chose, and have a pre-qual letter, so they can purchase up to that $150k mark.

They found a house they like, and decided to put in an offer on it.  The house is owned by Countrywide Mortgage, and they had a little surprise that went along with the offer.

They told the couple that they would have to fill out a Countrywide mortgage application before the offer would be considered!

Now, I know that times are tough for mortgage companies.  I know they have taken a beating.  But this seems really extreme.  Let’s take a look at what this does:

1)      The couple applying for the loan are going to take a hit on their credit scores.  Queries against your report that are similar in nature, such as several mortgage applications within a short amount of time, are considered ‘shopping’, and do not ding your credit.  However, since this couple qualified several months ago, the new app will be a big hit.  It is only 5 to 20 points, but if that drops their credit scores a bracket, it will affect other rates that they may be eligible for.

2)      The original mortgage company may be out of luck on this loan.  Countrywide may win the mortgage, and that means another company loses business.  Normally I am fine with this, but not if the application is coerced and is not what the couple intended to do originally.

3)      This adds extra time to the whole process.  This couple is relocating for work (he is in the military and is being re-assigned), and they have to move quickly.  Now they make have to stay in temporary housing for several months, much longer than they had hoped, before their place will be available.

4)      Unless the mortgage company is being really generous, the purchaser might have to pay for the privilege of filling out yet another loan application.

Why would a mortgage company do this?

Well, financially it makes a lot of sense.  The mortgage company has taken a loss on the principle of the house.  Let’s say this was originally a $180,000.00 loan.  It now sells for $150,000.00.  That is a $30,000.00 loss, correct?  Well, not exactly.

The first several hundred payments on a property are largely interest.  If this house had a $1,000.00 payment for, say, 5 years, $60,000.00 would have been paid out.  Let’s be conservative, and say that $40,000.00 of that was interest (that is pretty conservative).  In that case, after the mortgage company paid back their expenses and the interest they had to pay on the loan from their financers, it probably made a profit on that interest of $20,000.00 or so.  My numbers aren’t exact, obviously, but they make a profit on every payment.  Otherwise they wouldn’t be in business.

They also wrote off the bad debt on taxes.  That takes even more away from their loss.

They had to eat some bucks on the short sale.  Fine.  That is part of doing business.  Now they are looking to make money back.

When a short sale happens, the original lender loses any monthly profit on the loan, unless, of course, the new loan is through them as well.  They want that loan!  The new buyer has to qualify, of course, but if they can hang on to the loan they can make up some of the loss.  So, it makes perfect sense that they want an opportunity to get the loan.

I can see why they do this, but I am not happy about it.  Any time I have to fill out additional paperwork, take a credit score hit, and get nothing out of it other than the privilege of being able to buy something, I feel wronged.  This is a business practice that feels predatory, and I would hope that enough people boycott companies pursuing this practice that it will soon come to an end.