Do I Really Have a Loan Commitment?

When a buyer requests a financing contingency, the standard contract requires the buyer “to use good faith and diligent effort to obtain a written loan commitment for the Financing.” There is pervasive confusion about what indeed a “Loan Commitment” looks like. Every lender approves loans in different ways, which mean it is very hard to define with certainty what a Loan Commitment really is.

Based upon our reading of the contract, we know that under the standard contract, a Loan Commitment must contain at least the following:

  1. It must be in writing;
  2. It must describe the type of financing (conventional, FHA, VA, etc);
  3. It must describe if the rate is fixed or adjustable;
  4. It must define the initial interest rate; and
  5. It must identify the term.

Other than these five items, the standard contract gives little guidance as to what constitutes a Loan Commitment.  For example, what if the Loan Commitment has contingencies? Or worse yet, what if the Loan Commitment contains verbiage that says, “the approval remains subject to such other terms and conditions as the lender may require, in the lender’s sole discretion.”

The truth of the matter is that in the residential world, rarely will a borrower ever see a true “Loan Commitment,”  as the contract contemplates, i.e. one that contains only the five items referenced above and which  is subject only to an appraisal or the satisfaction of typical property related conditions. Normally, a lender approval will be full of contingencies, caveats, and conditions that make it very easy for the lender to withdraw the Loan Commitment.

So now you ask, what do I do if I have something that looks like a Loan Commitment under the contract?  The simple answer is to NEVER tell the seller or seller’s agent that you truly have a Loan Commitment until you have an attorney review it, and even then, most attorneys will tell you that you do not have a true Loan Commitment. We feel that this is an issue the FAR/BAR committee might choose to tackle, since even the mere mention of a Loan Commitment could cause the buyer to waive its financing contingency and risk losing the Buyer’s deposit.

To be safe, we recommend the following additions be made to the contract at execution:

  1. Add language that allows the Buyer to terminate the contract if the Loan Commitment terms are not acceptable, in the Buyer’s sole discretion;
  2. Add language that allows the Buyer to terminate the contract at any time prior to closing if ANY contingency in the Loan Commitment is not satisfied; and
  3. Add language that allows the Buyer to terminate the contract if the lender fails or otherwise refuses to perform under the terms of the Loan Commitment for any reason.

And if all else fails and you cannot get these items built into the contract, do NOT confirm that you have a Loan Commitment until the Buyer’s attorney has confirmed that it is indeed a true loan commitment, subject only to (a) an appraisal, and (b) property related conditions, as the contract contemplates.  As always, if you have any questions about Loan Commitments and/or waiving the financing contingency in general, we urge you to consult with your real estate attorney.

Sincerely,

Berlin Patten Ebling, PLLC

Article Authored by Evan Berlin, Esq. eberlin@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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