Q: Are you aware that many veterans who held home purchase contracts with Veterans' Administration-backed mortgages were rudely shocked recently to find that the 8 per cent commitment they thought they had was suddenly 8.5 per cent? Shouldn't the lending institution have been explicit about their unilateral ability to raise the interest rate to any new VA limit, even during the existence of a buyer-seller contract? How can this arrangement - between the Veterans' Administration and the lender - suddenly upset a contract between two other parties, usually in favor of the seller and against the buyer? As you know, when the Veterans' Administration raises their rates, usually the seller ends up paying fewer points and the buyer ends up paying a higher interest rate.
A: It's a real shock to wake up on Monday morning with the news that your 8 per cent mortgage has suddenly, unilaterally and arbitrarily, been raised to 8.5 per cent.
Unfortunately, if you read the fine print of your loan application with your VA mortgage lender, you will find that lenders are unwilling to commit themselves to a firm rate, but will only approve the interest at the "prevailing rate" established by the Veterans' Administration at the time of settlement. Generally speaking, if the rates are raised (as they were recently), you may have to accept the higher rate.
But you do have a number of alternative courses of action.
First, you could refuse to go to settlement, since most standard real estate contracts state that the contract is contingent on the ability of the borrower to obtain the financing spelled out in the contract. If your contract says that you will obtain a loan of 8 per cent, and you are unable to obtain such a loan, you may be able to back out of the contract and receive your deposit back in full.
Personally, I don't recommend this, since the 8.5 per cent Veterans' Administration-backed loan is clearly less than the going rate for conventional loans. By the time you find another house to purchase, inflation will have taken its toll, and you will be paying much more for your new house.
Examine your contract carefully. Usually, the standard contract states that your seller will pay a specific number of points to enable you to obtain a VA-backed loan. A point is one per cent of the total amount of the loan. Generally, when the VA raises the rate, the points to the seller should go down.
Why should your seller obtain a windfall benefit by paying less points, if you are required to pay a higher interest rate? Here, it is advisable to talk to your mortgage lender. The lender is interested in yield. This means the total of the interest rate, plus the points which you the buyer and the seller are paying. Often, if the seller has agreed to pay a set number of points, you will be able to negotiate with the lender to keep your rates low.
For example, you entered into a contract for an 8 per cent loan, VA-guaranteed, and you agreed to pay one point, and your seller agreed to pay four points. Shortly before settlement, the rates are raised to 8.5 per cent, and the lender is only requiring the seller to pay two points. Since your seller is already committed to pay up to four points, you can discuss this with your real estate agent and ask your lender to give you the lower interest rate, since their yield will remain the same.
You should keep in mind that when you make application for a loan, there is not binding contract between you and the lender until they send you a loan commitment letter, which you must accept in writing. At At Thattime, here is a contractual relationship between you and the lender. You should insist on receiving a loan commitment letter spelling out the terms and conditions of your loan well in advance of settlement.
If you are buying a house and intend to obtain a VA-guaranteed loan, you should also insist that your seller agree on a specific number of points at the current market rate. The number of points the sell is willing to pay should be spelled out in the contract itself. You can contact a number of mortgage lenders before you sign a contract to determine the going rate.
Benny L. Kass, a Washington attorney, answers questions through this columns.Write him in care of the Real Estate Section, The Washington Post, 1150 15th St. NW, Washington 20071.