KASS: How to handle a financing contingency

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Q:     We are buying our first home, and there is a financing contingency. We had 30 days to get a loan commitment. Immediately after the contract was signed by the sellers, we applied for a mortgage loan from a large commercial bank. We just received a prequalification letter and submitted it to the seller. The contingency will expire in five days. The seller said this is not a loan commitment. Is he correct and if so, what should we do? LaKeisha.

A:   Dear LaKeisha: Unfortunately, your seller is correct. The prequalification letter is not a firm, binding loan commitment. Typically, home buyers contact a lender before finding their dream house so they will have a good idea of how much they can afford. Once you formally make application for a loan, even with the pre-qualification letter in hand, the lender will most likely require more information, such as bank statements, pay stubs, or other documentation proving you can qualify for the loan. According to Professor David Reiss, a real estate law professor at the Brooklyn Law School, “Pre-qualification is not a binding agreement. It is one of a number of real estate myths that should be understood.”

I suggest you immediately go back to the seller and explain you thought you had a loan. I would ask for a two-week extension of the financing contingency. If it is granted – and it must be in writing – explain the situation to your lender and make sure you get a real commitment within that two-week time period.

On the other hand, if the seller will not agree, you have three alternatives. First, walk away from the deal, and advise the seller in writing that you are exercising your rights to cancel pursuant to the financing contingency. If the seller really wants to sell – and there is no one currently looking at the property, the seller may change her mind and grant the requested extension. Second, before the five-day contingency expires, try to convince your lender to give you a real, positive loan commitment letter. And third, you can decide to move forward beyond the contingency and hope that the lender will come through before the scheduled closing. This, of course, is risky. If you do not get the loan, you can lose your deposit. In fact, depending on what rights the seller has in the contract, you may also be sued for damages due to a breach of your contract.

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ADDITIONAL INFORMATION:

I mentioned Professor Reiss had a list of real estate myths. In addition to the prequalification letter, here are three others:

1. “Home buyers must put down 20 percent.” According to Reiss, there are a number of alternatives so potential home (and condo and coop) buyers should shop around. Of course, you should understand that the smaller the downpayment the higher the mortgage interest rate will be.
2. “My bank knows me, loves me and will give me a deal.” I suppose that may be true if you are President Trump, but according to the professor – who talked with mortgage bankers – the mortgage you will get will be virtually the same where ever you shop. Most lenders get their money from the secondary mortgage markets, and the rate they pay is the same.
3. “I’ll close in 30 days.” That used to be true, but when new loan closing rules were adopted by the Consumer Financial Protection Bureau (CFPB), the average time between contract and closing (escrow) is now 45-50 days.