When is a Loan Commitment Not Really a Loan Commitment?

As many of you are aware most borrowers receive a Loan Commitment from their lender setting forth the terms and conditions that have to be met in order for a loan to be granted/funded.  In most borrower’s minds, the Loan Commitment is the lender’s promise (commitment) to grant and fund the loan even though the Loan Commitment clearly indicates there are conditions that first need to be met.  Unfortunately, this mindset has caused unsuspecting borrowers to have their Loan Commitments terminated prior to closing thereby putting their deposit at risk.  

Pursuant to Section 18 (Standard for Real Estate Transactions) Standard “T” of the FARBAR Residential Contract for Sale and Purchase (“FARBAR Contract”) the definition of a Loan Commitment means a statement by the lender setting forth the terms and conditions upon which the lender is willing to make a particular mortgage loan to a particular borrower . . . seems pretty clear, right?  Keep in mind this provision essentially mirrors Florida statute.  The FARBAR Contract requires the buyer to deliver written notice to the seller that the Loan Commitment has been received.  Once notice is delivered to the seller and the FARBAR Contract does not close, the deposit shall be paid to the seller unless failure to close is due to:  (1) Sellers default; (2) Property related conditions of the Loan Commitment have not been met (except when such conditions are waived by other provisions of the FARBAR Contract); (3) Appraisal of the Property obtained by buyer’s lender is insufficient to meet terms of the Loan Commitment; or (4) The Loan is not funded due to financial failure of buyer’s lender, in which event(s) the Deposit shall be returned to buyer thereby releasing buyer and seller from all further obligations of the FARBAR Contract. 

Here’s the problem . . . if your lender provides you or your buyer with a Loan Commitment that contains conditions that are not met prior to closing, the Loan Commitment can be terminated with essentially no liability or recourse to the lender.  With that said, we encourage borrowers to review their Loan Commitments with their attorneys and/or financial advisors immediately upon receipt to make sure there are no vague or general conditions that could trigger a future termination.  We also encourage borrowers to avoid taking out additional credit cards, incurring additional debt, etc., after the loan application is submitted as most (if not all) lenders pull credit immediately before closing.  Undisclosed additional credit cards and additional debt could throw off debt to income ratios which will either delay loan approval or trigger the lender to deny the loan.

As always, if you have any questions concerning the foregoing, we urge you to consult with your real estate attorney.

Sincerely,

Berlin Patten, 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.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

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