My wife and I were looking to purchase a home in a different Dallas suburb due to it's high quality school district. We had an existing home $350k that was completely paid off. We were looking to purchase a home for about $530k in the new area. I was asset rich, but cash poor. I was considering turning my existing property into a rental (investment property) and buy the new home as a primary. My goal was to try to keep the primary home mortgage to a minimum (as who knows how much longer primary mortgage deductions will continue to be allowed for tax purposes). It made more sense to move the debt onto investment property as that is unlikely to ever be impacted by any government budgets tax rule changes. To make this happen, I contacted Texas Lending to see if I could pull equity out of my existing home and then use that as a down payment for the new property. Alternatively, if this was not possible, I was going to do a 80/20 financing on the new property and then sell my current property to pay off the loan and possibly look for smaller properties to purchase as investment properties in the future if I wanted to proceed with that approach.
I was told at the time that going with the 2 mortgages made complete sense and I filed an application for both properties (2 application, each costing $490 to file). Both properties had appraisals made and the loans were proceeding. Then, I get a phone call from my broker that there is a problem. It seems that one cannot take out an equity loan out on an investment property (as my current home would be turning into one). Still don't quite understand why and why the broker did not know this when we first discussed my situation. But, I did not push this issue further. Consequently, the broker basically suggested changing the terms of the application to make my current home a primary residency cash out and the new home as a investment property. This threw a few wrinkles into my plans.investment property mortgages don't get the same rates as primary properties. So, I would be stuck with a long term mortgage with terms above the norm. Worse however is that this change is illegal and is considered mortgage fraud. If you fully plan on not staying in a primary residency for the next year, you cannot take out a primary equity mortgage on a property you don't plan on living in. I did not know this was illegal at the time (but, as my lawyer tells me, not knowing something is illegal does not mean you don't go to jail). Moreover, when people go to jail, they generally don't go after the broker or the banker, just the guy who signed all the forms. Anyway, I would not have known that this was illegal until there was a glitch with the underwriters, having my broker asking me to delay the close by 3 weeks (1 week before the planned closing date). At the time, I was frustrated with the date change, so I made some inquiries with other lenders. Each of the lenders told me that my prior mortgage was illegal. I confirmed this with my lawyer who confirmed this with his real estate attorney. Basically, if you go to Texas Lending with anything other than "cookie cutter" standard mortgages, be aware that the brokers are not aware of mortgage law. Sadly, I'm out $1000 from this fiasco and almost lost the new house from their delays. I plan on reporting them to the Texas Real Estate Commission. Not that I believe they will do anything about it. Just that when a business recommends that you pursue a strategy that is illegal so that they can make the deal happen (i.E. Get their commissions), they are not looking after you as a customer (Especially if following said advice can land you in jail). I would have done the 80/20 choice which was my Plan B instead.
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