Posted on 07/17/2005 11:51:46 AM PDT by ken5050
I'm posting this for any insight or expertise anyone might have regarding obligations/responsibilities of a mortgage committment letter, as applies to the following situation. A good friend of ours is selling her home, and as of this afternoon, she has a big problem..
Here's the details. I should mention this is in New York state, as I believe laws and regulations vary from state to state...
She had an accepted offer on her home. The buyers both work, Fortune 500 companies...upper middle manager types...it was a corporate relocation for one of them...Contact was drawn and signed. At the time the offer was accepted, buyer's broker gave seller's broker a fax of a pre-approval letter from a mortgage broker, saying that they were approved for a $ 1 million mortgage..they were putting $300,000 down.
It should be mentioned here that both R/E brokers have excellent reputations..they have worked together in the past..on both sides of deals..never any problems as far as representations clients have made through them.
So, contracts were signed, 10% down placed into escrow. A mortgage contingency clause ( NOTE: I do not have a copy of the contract, so I assume it's a standard boilerplate) was included in the contract, at the request of the buyer's atty. Seller's atty did not object. Inspection occured..house got a clean bill of health. Buyer had ordered title coverage..the survey and inspection was completed. Tentative closing was set for end of July( this month). Our friend is moving into a condo,( which she purchase AFTER accepting the offer on her home) on which she has already closed and done extentive renovation work..in excess of $40,000.
Seller's atty had asked buyer's atty for the formal mortage committment letter, to schedule the closing..
It is my understanding that a pre-approval letter is based upon two factors...the borrower's credit history and the ability of the borrower's income to carry the mortgage. The formal committment letter includes these factors, as well as the appraisal ( which had also been completed and came in at the agreed price. FYI.. I don't know who ordered the appraisal, the lender or the mortgage broker?), the title search, and the C of O.
The seller's atty hadn't received a reply to the request, until this week, when the buyer's atty called to say they were being declined by the lender. No reasons were available. I ather there were a ton of phone calls flying, and late Friday the buyers were told then would be receiving a letter. This came yesterday, from the primary lender, saying they had been declined because of a poor payment history.
The buyer's atty then called the seller's atty asking for a two week extention ( there was a 30 day period in the mortage clause in the contract, which had just expired) which was granted. Then this morning, the seller received a call from her broker, saying that the buyers were so surprised and distressed by this sudden turn of events ( they really wanted the house) they were pulling out of the deal.
Our friend is going nuts, and I'm confused. I think she has a valid case to keep the escrow money. I'm going to list the questions and issues that confuse me....
1. I can't undertand how a mortgage broker ( and this is a broker, and not a primary lender directly) can issue a comittment letter WITHOUT first running a credit check on the prospective borrower. Isn't that normal procedure? If so, can the mortgage broker be sued? It's malpractice as I see it. For anyone who knows anything about mortgage brokers..is there a procedure to follow? If none, as a corollolary, it would seem that pre-approval letters aren't wportht he paper they're printed on..
2. I don't see how they can back put of the deal without trying further best efforts to obtain a mrotage.I t might have to be from a sub-prime lender, and/or it would cost them a higher rate...but that's not the seller's problem. She was acting in good faith, and should be able to therefore keep the escrow payment. Am I wrong in this assumption?
3. My strong inclination is to tell her to get legal advice, and not aquiesce to just letting the buyers off the hook. My suspicion is that her atty erred in agreeing to include a mortage contingency clause in the contract. If the buyers were pre-approved, why put it in. IMHO, the only exceptions should shave been been the inspection, the title, and the appraisal..now, I'm not sure if her atty will be willing to forcefully advocate for NOT returning the escrow.
Doesn't most R/E law assume that BOTH parties are making a good faith effort? That's what I always understood. Therefore the buyers are obligated to move heaven and earth to try and get a mortage under most any terms/conditions, and not just be able to walk away..unless they forfeit their escrow. My friend has been harmed. Thanks for reading. I'd like to be able to offer our friend some constructive support tonight. Any guidance or insight anyone might have would therefore be appreciated.
If you need anymore details, or have questions or ned clarification, just ask..I'll try to find it out...If you'd prefer to reply via Freepmail, feel free to do so. I'll be out for the rest of the afternoon, will check back and reply to all early this evening..Many thanks..
They aren't. They DO NOT guarantee a mortgage, which is where many, many people get confused. They are based on preliminary applications only. Anything can happen between the issue of a commitment letter and the closing of a deal. No lender will guarantee funding at the beginning of the deal, which is why the letters are useless.
Mortgage brokers are notoriously unscrupulous, and are not even regulated in most states.
If the buyer had thirty days to obtain a mortgage, they can back out with the first decline. They are under no obligation to try to obtain a mortgage from every available lender who will talk to them.
Additionally, if the earnest money was deposited with an out if the buyer was unable to obtain a mortgage, the buyer in this case will get it back. However, in my state earnest money cannot be released until both parties agree to that and sign for its release to a particular party. So, if that is the case in NY, your friend does not have to sign to release it to them until she can speak to an attorney just in case.
IMO, your friend is out of luck. Of course, I do not live in NY, and the laws might be different there.
1. Pre-approvals are not approvals.
2. Contingency clauses can be absurd. It is possible to put in 'subject to the agreement of my partner' without even specifying that your partner is you cat. If there is a contingency clause, they can more than likely wiggle out of it without any problem.
I tried to buy a much less expensive house back in '97. Yes, pre-approval means absolutely nothing. I also asked for additional time, and it was granted.
After the first rejection, the sellers' agent said something about the sellers carrying the financing but that never materialized. I finally pulled out of the deal. My down payment was returned in full.
Thanks....
Pre-approvals say that assuming all else is good, you're OK for the loan. However, things can happen including but not limited to:
-Appraisal insufficient or unacceptable
-Loan officer issued pre-approval without properly calculating a parameter that an underwriter deems unacceptable
-credit re-pulled and credit score drops
-Unacceptable terms of purchase agreement
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