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Q:
I have owned my home
for many years and have recently tried to refinance my
old mortgage to obtain extra money for personal use.
Though my credit is good, I was turned down by the
mortgage company because of ""excessive late
fees." For years I have always tried to pay my
mortgage payment within 30 days of a due date, with
only one or two exceptions. In every case, I have
included the late fee asked for on my payment stub and
have never had any problem with my existing lender.
The late fee problem is the only reason for the
rejection of my loan. Why would a lender care if I was
never really late and always paid the late fee?
A:
In previous columns I
have stated that most lenders don’t keep your loan.
When your loan is consummated, it is gathered with
dozens or hundreds of other loans and resold on the
"secondary market." The lender is, in fact,
selling a bushel basket full of loans. When a farmer
sells a bushel of apples or oranges they need to be
the same, i.e. Macintosh apples or navel oranges, of
equal size and ripeness. In the case of home loans,
the bushel basket needs to be full of single
family/1-4 unit owner occupied loans. The borrower
must meet specific credit guidelines, including not
more than a certain number of "lates" in
the last 12 months. Once in a while a loan with lates
can be accepted with a letter of explanation, but many
lates will probably not be accepted, as "one
rotten apple can spoil the barrel."
If you are planning to buy a new
house or refinance your existing loan, pay particular
attention to this advice. Make certain that your
credit is good and that at least the last 12 payments
have been paid on time. "On time" means
before a late fee is due. If you have so-so credit or
a series of lates, a lender may still accept you but
not resell your loan in the bushel basket. |
The loan offered you, however, will
probably have an interest rate or points higher than
the loan that would have been offered you in the first
place. Though I am aware that many payers get "a
few weeks behind" and can’t seem to catch up,
there are certainly other, smarter ways to solve this
problem.
Let’s assume, for example, that
your monthly payment is $1,000 per month. A late fee
of $50 is due on any payment past the 15th
of the month. You have paid seven payments late out of
12, and have paid $350 in late fees. If, as you
indicated, you pay within 30 days, you have actually
paid $50 each time you were late just to "borrow
$1,000" for two weeks. Though this only
represents 5%, it represents 5% for, theoretically, a
14 day loan. This actually represents an interest
rate of approximately 129% for your 14 day loan. Not
only have you paid this once in the above example, but
seven times. A better solution would be to borrow an
extra $1,000 on your credit card, even at 18%, i.e.
$180. Not only would this be less than the $350 you
have already paid in late fees, it would have
eliminated your problem. An even better solution, if
possible, would be to borrow the money from your
parents at 10%, i.e. $100. Though your parents might
not even charge you the interest, my suggestion is
that this be a "business proposition" and
you still save $250 with NO LATE FEE.
Hopefully the above advice will
save some grief in the future for those of you who
truly believe that the lenders are greedy and prefer
the late fee. In some cases this is true and in some
case it is not. In most cases, however, it will
seriously impact your ability to obtain a good loan in
the future.
Peter Rosenthal
VIP Trust Deed Company |