Johnny and June Newcomer are first-time homebuyers and have applied for a loan to finance their purchase. Initially, the lender requests income verification, credit verification, rent verification, employment agreements, bank statements, and tax returns. The Newcomers work diligently to provide all necessary documentation on time. However, the day before the loan approval period expires, the lender notifies the Newcomers that they are unsatisfied with the documents provided and requests additional documentation with supporting details. The Newcomers, unaware they have missed the loan approval deadline, work to gather the remaining information. The Newcomers are ultimately denied, cancel the contract, and the seller makes a claim for their earnest money deposit. Unfortunately, this scenario is a common occurrence in residential real estate transactions. This week’s blog discusses the loan approval deadline and how the claim could be avoided.
The Loan Approval Deadline
Section 8(b) of the Standard and AS-IS FAR/BAR Contracts provide buyers with the option to have a financing contingency. The financing contingency provides a period of time, typically 30 days, for a buyer to apply for a loan and to obtain approval for said loan. During this process, the buyer is required to use good faith and diligent effort to obtain the loan approval, including the timely submission of the loan application, the timely furnishing of all documents and information required by the lender, and paying all fees and charges in connection with the financing. As the loan approval deadline approaches, it is prudent that the buyer is adequately informed of their options.
What Are the Buyer’s Options?
If loan approval is not obtained by the loan approval deadline, the buyer can: (a) request an extension of the loan approval period; (b) terminate the contract; or (c) proceed to closing. Suppose the buyer decides to terminate the contract. In that case, they must provide written notice to the seller before the loan approval period expires and, provided the buyer is not in default of the contract terms , will be refunded the deposit. If the buyer is confident in their ability to obtain a loan and decides to proceed to closing, they must similarly provide written notice to the seller of their intent to move forward. Failure to provide such notices would eliminate the financing contingency and transform the contract into a cash transaction. This means that the buyer would no longer benefit from the automatic extension afforded under Section 5(a) of the contract and, if the buyer is unable to close, would forfeit their deposit to the seller.
Many homebuyers are unprepared for the extensive documentation required throughout the loan approval process and easily lose sight of their loan approval deadline. As their agent, it is important to ensure that the buyers are aware of their deadlines and options once the deadline approaches. Should you have any questions regarding the abovementioned matters, please do not hesitate to contact your trusted local real estate attorney.