Here's a new twist on an old story: Home buyer agrees to use Home Builder's mortgage company and the Builder agrees to "pay" for the title insurance policy. But that's not the twist, that's an everyday occurrence, is it not? Depending upon where you live and local customs for who pays what, title insurance can get a little pricey. In Texas for example, a title insurance policy on a $200,000 note might cost a couple of thousand dollars or so. So who wouldn't use the Builder's mortgage company?

You might not if the rates are too high. Builders mortgage companies don't have a corner on the mortgage market. Their rates can't typically be lower than anyone else's given the same playing field. If your builder agrees to pay your $2,000 title insurance charge, then you can be assured that the interest rate has been increased a tad to cover the $2,000 or the price of the home will take care of that same $2,000 thank you very much.

But the new twist is this: If the buyer doesn't qualify for the mortgage then the buyer gets his earnest money back, right? Fair enough, and certainly common in most contracts. A buyer can make an offer contingent upon getting loan approval. The potential buyer gives the seller some money in good faith to hold the deal while the buyer tries to get approved for a loan.

If the buyer doesn't get approved, the buyer typically gets their earnest money back.

But what if the buyer who uses a builder's mortgage company to get the $2,000 title bonus finds that the loan they qualify for is a lousy loan? What if the rates and fees are too high? What if there's a prepayment penalty on the deal?

I got an email earlier this week from an unfortunate gentleman who made an offer to buy a new home. There was an incentive to use the builder's mortgage company so he took it. Unfortunately, he couldn't qualify under conventional terms so the builder's mortgage company submitted him on a subprime loan where his debt ratios were approaching 50. That means that, before taxes, his house payments were nearly half of his gross monthly income. Before taxes. Stop for a second and compare that to your monthly salary. Makes you sweat, doesn't it?

He didn't want the loan so he tried to back out and get his earnest money returned. The Builder said, politely, "No."

"Why not?" said the buyer.

The Builder said, "We got you approved using our mortgage company. There's nothing in your contract that says you are required to be approved on any particular loan program. The contract says you will apply for the loan and if we get you an approval, you'll buy the house. We got you an approval. So buy the house."

Sure enough, his contract didn't spell out the terms of his financing. Most good Realtors will spell out common financing terms in an offer. If current rates are at 6 percent for a 30 year fixed and you're borrowing $300,000 on a $400,000 home, your Realtor will typically make that part of your offer. You agree to buy the house if you can get an approval for $300,000 on a 30 year fixed at 6 percent or better. If you can't get an approval, you get your earnest money back.

But that's not what this poor soul did. First, he wasn't represented by a Realtor but then again he thought, "Why do I need a Realtor, I know where I want to live and how much I want to pay?"

And second, his contract said nothing about the terms of his approval, it merely said "If you get approved, you'll buy the house and if you back out we keep your earnest money."

Heck, anyone can get a mortgage these days, it just depends on the rate and terms. His rate and his terms were terrible … but there wasn't anything he could do about it.

I told him I couldn't help him and that he might need to contact an attorney but from what he told me there wasn't much else he could do. He told me he could quit his job so he couldn't qualify any longer and I told him there were loans out there that didn't require income or employment verification that the Builder's mortgage company probably knew about.

I'm sure this is an isolated incident and isn't part of any national plan to screw people out of their deposits. But if anything it's a wake up call. And I'm not the first one to say this but:

1. Use a Realtor when buying a house because it doesn't cost you anything and might could save you thousands.

2. Read the contract and don't sign anything you don't understand.

Published: December 30, 2005

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.