If you are purchasing a home, and need financing (a loan/mortgage), there will be a deadline in the real estate contract by which you need to secure that loan. This deadline is called the Loan Contingency Deadline or the Loan Commitment Deadline.
Many homebuyers are unaware of this deadline in their contract, or do not understand what it means, letting it pass without getting the proper approval from the lender. Letting this deadline pass can have significant financial consequences.
Before we get into what happens, let’s go over a few necessary definitions to better understand the process of getting a loan:
- Pre-qualification: Pre-qualification is based on your overall financial picture (income, debts and assets) and merely reflects the loan amount for which you might be approved. Being pre-qualified does not mean that you are approved for that loan. In fact, you could pre-qualify, but ultimately not be approved for the loan.
- Pre-approval: After doing an extensive check on your financial status and credit score, the lender will tell you the loan amount for which you are pre-approved. This is the amount the bank will lend to you, with some conditions. Note, the bank has not yet agreed to give you the loan. Pre-approval is subject to an internal bank process called “underwriting.”
- Loan Commitment or Loan Approval: If you are pre-approved, or in some cases after underwriting is completed, the lender will issue a loan commitment or loan approval letter. This letter states how much the bank is willing to lend to you and on what terms. This “commitment” is typically subject to a number of conditions that you must meet prior to receiving the loan. If the conditions are not met, the lender is not obligated to provide the loan.
For example, the lender may agree to give you a loan, but only if the property appraises for at least the purchase price. The lender may also require certain documentation prior to guaranteeing the loan. Thus, a loan commitment is not much of a commitment at all, depending on what it is subject to.
- Final Commitment: Lending banks do not typically provide this letter unless you ask for it. It states that the lender is providing you a loan and is only subject to you signing the documents at closing (assuming you have no significant, downwards financial change between the date of the letter and closing).
Unfortunately, we have seen a number of clients who thought they had a loan “approved” or “committed” by their bank, only to find out after the loan contingency deadline had passed and the bank decided not to make the loan.
This puts the Buyer in a very difficult position – they do not have the necessary financing, and are not able to get terminate the contract. They cannot purchase the property, must breach the contract and lose their earnest money. The breach may also subject the Buyer to damages and the Seller’s attorney’s fees if the Seller opts to forgo the earnest money as a settlement.
When one hires an attorney, their legal counsel can encourage lenders to get their appraisals done, finish their underwriting and issue commitments or approvals early, subject only to those documents that need to be signed at closing.
Staying on top of deadlines, advising clients of the risks involved in proceeding without a final commitment from the lender, and helping clients make informed decisions whether to terminate without liability, if possible and desirable, is an important role only an attorney can play in a home purchase transaction.
If you are purchasing a home, and need assistance understanding your loan documents, please call our office at 314.862.2237 or contact us through this site.