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Mortgage Q&A: Glitches spark settlement nightmares

Q.We will be putting our house on the market in the next month and are wondering about the risks of a coinciding-settlement transaction. We need the equity in our current home to purchase a new one and cannot possibly carry two homes.

Our real estate agent said that having coinciding settlements is common and that we shouldn’t worry about it. But if one of the loans doesn’t close, wouldn’t it leave us all homeless?

A. Coinciding settlements occur when a home’s seller settles on that transaction on the same day as the settlement of the home he’s buying. The same settlement attorney typically is used and the necessary proceeds from the sale of the first house go directly to the seller of the second home.

While coinciding-settlement transactions are, indeed, common, I’m not sure I agree when your agent says not to worry, because you are correct: If one transaction doesn’t close, all parties involved are in a big mess. Here’s how a nightmare scenario could play out.

You ratify a contract to sell your home for $400,000, scheduled to close at 10 a.m. July 30. After paying off the mortgage and paying sales commissions, you expect to net $100,000, which will go toward the down payment on a new home.

You then find your perfect move-up home and agree to buy it for $500,000. The $100,000 proceeds from your sale are to be used for the down payment and you apply for a $400,000 mortgage. You apply for the loan, jump through the necessary hoops and finally get approved and “clear-to-close” on July 20.

Of course, the approval is subject to evidence that your existing residence has sold and settled and that you netted a minimum of $100,000.

You then realize that no one has contacted you recently regarding the status of your buyer’s loan. In fact, you recall that the purchase agreement called for a 20 percent down payment that was contingent upon the sale of your buyer’s existing home, which also is under contract.

Ten days go by and the dreaded phone call comes from your agent. She informs you that your buyers couldn’t get their loan because the buyers of their home didn’t get their loan.

Then the dominoes fall.

The folks purchasing the home that your purchasers are selling couldn’t get their loan, which means your buyers can’t get a loan to buy your house, which means you can’t get your loan because you were unable to settle on your existing home.

What’s worse is that this can happen at the last minute when furniture is already in the trucks.

I feel lucky that this has never happened to me in 25 years. And even though it’s infrequent, it does happen.

Here are some tips to help you avoid such a situation.

Regarding your loan, get credit approved immediately. Don’t wait for the appraisal to come in before the application is submitted to underwriting. Provide all the paperwork requested by the loan officer in a timely fashion and never try to hide anything.

If the contract on the home you are purchasing is contingent upon the sale of your home, make sure you obtain a strong pre-approval letter from the lender handling your buyer’s loan. Also make sure the buyer adheres to the deadline for the removal of the financing contingency, which is determined when the contract is drawn up.

The bottom line is that using a capable and competent loan officer is crucial. The best way ensure you are working with a competent lender is to seek out a recommendation from a trusted source who has had experience with the lender.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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