It’s ironic how a dream house can turn into a nightmare. I’ve heard too many horror stories. But the one I’m about to share could have easily been avoided.

It seems that a local doctor, determined to build his dream house, applied for a construction loan. Now a construction loan is a loan you draw on as needed  … and only pay interest on what you borrow. Since it was determined that the finished house would be valued at $1.7 million on completion, the bank gave him a construction loan for 80% … or $1,360,000.

A year and a half later his house was finished in more ways than one. The market had dipped severely. The completed home was now appraised at $300,000 less. And that would have been bad enough. But here’s the rub.

The doctor in question hadn’t gotten a construction-perm loan … which would have automatically converted to a permanent loan once construction was finished to pay off the construction loan. Instead, he was now faced with finding a permanent loan for 96% of the new value to pay off his construction loan…and no lending institution even in good times will make a loan that size with so little equity.

Now, the doctor in question has the option of facing foreclosure on the dream home he’d just built … or coming up with enough cash to bring the new loan down to 80% of loan-to-value. In short, he was suddenly on the hook for about a quarter of a mil just to be able to get a permanent loan!

So why am I sharing this particular horror story. Two reasons … both sadly ironic. First, I learned about it when a competitor of mine, another Realtor, called me for advice. It happens all too often …  because few Real Estate professionals are also Mortgage savvy. Second, had the doctor been properly advised to begin with, he wouldn’t have had the problem. With a construction-perm loan he’d have been covered, even with the dip in value.

Unfortunately, the end of this story has yet to be determined. But the moral is clear. Numbers don’t lie. But sometimes people do. So don’t just take anyone’s word that you’ll find the right loan when the time comes. Consult an expert up front and your dream won’t become the proverbial nightmare.

I recently read an article by a mortgage consultant advising home sellers against putting all the equity they gained from the sale into their next home. He emphatically suggested they stay more liquid, and make their money work harder in another investment vehicle.  As I recall, the word DIVERSIFY came up frequently…as did the phrase, FINANCIAL ADVISOR. His bottom line: “Borrow the biggest mortgage you can reasonably afford and put your other money to work elsewhere. Or, if you’re not selling, harvest your equity in with an Equity Repositioning Refinance…and put that money to work.”

PLEASE! I have 20-odd years of mortgage experience. But I would NEVER tell a client that. Having worked both sides of the market (Realtor® & mortgage broker), I know all too well what happens to amateur investors and people with too little equity in their homes. We all do. They’re dropping like flies out there right now.

The reality is, that man had a not-so-hidden agenda. He wanted all the refi money he could “reasonably” make. And the buyers who listened probably aren’t feeling too secure right about now. A heavy mortgage in this market is a killer. You wind up paying for the house several times over in interest. Your biggest asset can be easily lost if you get hit with a job loss or a heavy medical expense. And the stock market is a crapshoot if you don’t know what you’re doing.

My bottom line: be careful who you listen to. All too frequently mortgage “consultants” are interested in selling not consulting. And “financial advisors” are frequently securities pushers with a fat commission in sight.