Loan Approval: Which Pot of Risk Porridge is Just Right?

 

The Buyers discovered their dream cottage in the forest. It’s pricey and the neighbors are bears, but your Buyers are pre-approved and in this seller’s market the home will soon be under contract. As the Buyers’ realtor, you recommend that the Buyers tender an offer with a substantial earnest money escrow deposit (the “Deposit”) to demonstrate the Buyers are serious, and when the Buyers follow your advice the Sellers accept! Then the real work starts.

The parties’ contract was subject to a financing contingency. Pursuant to the FAR/BAR contract (the “Contract”), the Buyers must timely make a mortgage loan application and use good faith and diligent effort to obtain approval of a loan that meets the terms of the Contract (“Loan Approval”). Additionally, the Buyer’s must receive their Loan Approval 30 days after the Effective Date of the Contract.  Consequently, you begin to assist the Buyers throughout the transaction and the Buyers timely furnish all documents and information and pay all fees and charges requested by their mortgage broker and lender in connection with their loan application, however, their lender only tenders a “Conditional Loan Approval” and the Loan Approval Period is about to expire. It appears that the lender has not completed an appraisal of the residence that would allow the lender to approval the mortgage. There is also a change in the Buyers’ income due a CARES Act loan. Consequently, the lender has provided a conditional loan approval, not an actual loan approval as required under the Contract. The Buyers want this residence, but they cannot afford to lose the hard-earned Deposit. What should the Buyers do?

The Contract states that the Buyers can elect to either waive Loan Approval, and the Contract will continue as if Loan Approval had been obtained or terminate this Contract. So what does this mean? Essentially, the Buyers must decide to either (1) cancel the Contract and receive a refund of the Deposit, or (2) continue with the transaction as if the Buyers had obtained the Loan Approval placing the Deposit at risk if they do not close. Note that the Buyers may not unilaterally decide to continue the transaction; if the Sellers do not receive Buyers’ notice of the Loan Approval or reject the Buyers’ offer to move forward without Loan Approval, then the Sellers may exercise the unilateral right to cancel the Contract by delivering written notice to the Buyers within 3 days after the expiration of the Loan Approval Period. If Buyers do not provide notice of cancellation or elect to proceed without Loan Approval AND the Sellers do not cancel the Contract within 3 days after the expiration of the Loan Approval Period, then the parties shall continue with the transaction as if the Loan Approval was obtained by the Buyers.

Because of the preceding, the Buyers must examine their finances and reasons why the lender is issuing a conditional loan approval. If the loan were to be denied, would the Buyers be able to close on the Contract to avoid a Buyers’ default under the Contract? If he lender subsequently denies the loan and the Buyers cannot close, there are limited exceptions under the Contract that will allow the Buyers to retain the Deposit. If the Buyers do not meet the default exception criteria in the Contract, even if the Buyers did their due diligence as defined in the Contract to secure a loan, the Deposit may very well be forfeited to the Sellers!

This is only a cursory review of the Contract’s mortgage financing contingency and is by no means an in-depth examination of the Contract and its relevant contingencies. If it appears a contractual deadline will be missed that will put the Deposit in jeopardy, the parties of a Contract should be advised in writing to contact an experienced Florida licensed attorney to evaluate the transaction. Remember, there is real liability when a Contract dispute (not just deposit disputes) morphs into litigation between a buyer or seller, as the Contract provides for prevailing party attorney’s fees and costs. And as always, should you have any questions regarding the foregoing, please consult with your local and licensed Florida real estate attorney.

 

Sincerely,

Michael E. Schuchat, Esq.,mschuchat@berlinpatten.com

Berlin Patten Ebling, PLLC

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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