Do I Really Have a Mortgage Loan Approval?

Under the terms and provisions of section 8. FINANCING of the most recent versions (04/2017) of both the “AS IS” and the “Standard” FR/BAR Contracts*, buyers seeking the protections afforded in these financing contingency clauses must “use good faith and diligent effort to obtain approval of a loan meeting the Financing terms (“Loan Approval”) and thereafter to close this Contract.” Keep in mind, for purposes of this blog, that nowhere in section 8. FINANCING is there a requirement that the Loan Approval be in writing. The primary reason for this is the fact that, in the context of residential financing, very few lenders indeed actually produce and deliver a written Loan Approval.

Nevertheless, in the course of the Buyer’s use of diligent effort to obtain Loan Approval during the Loan Approval Period, the Buyer will have timely furnished all documents and information and paid all fees and charges requested by the Buyer’s mortgage broker and lender in connection with the Buyer’s mortgage loan application. Moreover, the Buyer will have kept the Seller and the Broker fully informed about the status of the Buyer’s mortgage loan application, and loan processing. As a consequence, the Buyer will then typically be informed that s/he has “earned” a Loan Approval from the lender. In most cases, the notification will not be in writing, but rather will be given over the phone or in a brief email without any elaboration.

After popping the champagne corks, the Buyer begins to wonder just what “kind” of “Loan Approval” has actually been given? If the Buyer is lucky enough to have received a written “Loan Approval”, the Buyer more closely reviews it and is surprised to find that the approval is actually a “Conditional Loan Approval”! Well, what makes it “conditional”? After first locating a magnifying glass, the Buyer finds buried at the bottom of the last page [taken from an actual written loan approval and enlarged for purposes of this blog so that it can be read]:

TERMS:
Acme Home Loans [not the actual name] reserves the right to cancel or suspend this Notice of Conditional Approval (“Approval”) at any time. Reasons for cancellation or suspension include, but are not limited to, incorrect or incomplete information, change in product availability, and change to underwriting conditions. This Approval is a conditional underwriting approval only. This Approval can and will be canceled if all conditions are not satisfied. Additional conditions may be required. . . Acme Home Loans [not the actual name] reserves the right, prior to the close of escrow, to issue a Statement of Loan Denial at any time (emphasis added) if it is discovered that: any information provided in connection with the Borrower’s loan application is incorrect or incomplete, there is any adverse change in the Borrower’s credit, outstanding obligations, or employment, the value as rectified by an appraisal review or the condition of the property securing the loan raises concerns regarding the value of the property in relation to the amount of credit requested.

It does not require a law degree to understand that there is enough wiggle room in that paragraph to enable a lender to get out of a conditional loan approval if it wants to.

Paragraph 8(b)(iii) of the Contract requires: “Upon Buyer obtaining Loan Approval, Buyer shall promptly deliver written notice of such approval to Seller.” And, under 8(b)(v): “If Buyer fails to timely deliver either notice provided in Paragraph 8(b)(iii) or (iv) [that Buyer is unable to obtain Loan Approval], to Seller prior to expiration of the Loan Approval Period, the Loan Approval shall be deemed waived, in which event this Contract will continue as if Loan Approval had been obtained.”

What is a buyer to do? If the Buyer sends notice of receiving the Conditional Loan Approval, the financing contingency is deemed waived. If the Buyer fails to send notice of receiving the Conditional Loan Approval (because the Buyer does not believe s/he has an unconditional Loan Approval), the financing contingency is likewise deemed waived.

The prudent course, under circumstances where there is any doubt about the sufficiency of a “Loan Approval” – either written or oral – the Buyer should comply with the Contract requirement, notifying the Seller of the exact form of “Loan Approval” obtained AND include a reservation of rights, such as: notwithstanding my receipt of a Loan Approval from my lender, the Buyer does not waive but rather reserves all rights and protections afforded under Section 8 of the Contract though the last day of the Loan Approval Period.

Further still, if a buyer has any reservations about the sufficiency of a Loan Approval, it would likewise be prudent to seek an Addendum to Contract that enlarges the Loan Approval Period to a time that the Buyer is certain that the Loan Approval cannot be withdrawn.

Accordingly, as always, should you have any questions with regard to a Loan Approval – conditional or otherwise – we urge you to contact one of the attorneys at Berlin Patten Ebling, or consult with your local real estate attorney, for additional guidance.

* the FR/BAR Residential Contract For Sale and Purchase, and the “AS IS” Residential Contract For Sale and Purchase (approved by The Florida Realtors and The Florida Bar)

Sincerely,
Berlin Patten Ebling, PLLC

Article Authored by Mark Hanewich, Esq. mhanewich@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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