The stakes have changed in the world of mortgages, qualifying rules are more challenging, and an increasing number of consumers are being forced to apply for second tier and non-conventional mortgages. Non-conventional mortgages can be very risky propositions for borrowers. Shady characters can be found in every profession, some play very close to the line of legal and/or ethical standards and some seem to cross at least one of the two.
We recently discussed a situation in which a couple had obtained a second mortgage from a second or third tier lender. The mortgage was obtained to pay out some existing debts. But they lender determined they needed to complete a $5,000-bathroom renovation in order to “bring up the value of the property”, so the mortgagee (lender) held back $5,000 from the mortgage advance for “bathroom renovations”. Notionally the mortgagor (borrower) would get the $5,000 after the renovations were completed, unfortunately without the $5,000 they couldn’t afford to get the work done, so the actual funds received were short.
The other problem they had was they couldn’t afford the mortgage payments on the money they were borrowing at 12% interest. The mortgagee’s solution was to lend them the payments for the one-year term of the mortgage. So, not only did they get shorted $5,000 on the principal borrowing but they are now paying interest on the money borrowed to make payments on the money borrowed.
After one year, when the mortgage is up for renewal, they will need an even larger mortgage to replace the existing one, assuming the same lender is willing to take it on. At some point they will inevitably default or be unable to renew and the house will be sold out from under them. When that happens the $5,000 that was never advanced will probably disappear along with a whole of other costs that the courts have deemed to be unacceptable but must be challenged. Paradoxically, debtors in such a position can rarely afford legal counsel and are not well acquainted with their rights or the court system.
Sell the house while there is still some equity, pay out the creditors and use the remainder funds to put a deposit on a more modest dwelling. Remember that “lenders want to lend you money” so if you don’t qualify for a loan don’t get one, you need to take that rejection very seriously and contemplate other options before you jump on this kind of a deal. There are some great mortgage brokers out there, make sure you find one, they can hook you up with a good lender, if in doubt we can refer you to one.