Loan Approval Letter Versus Loan Commitment Letter

Q: I purchased a home that was for sale by owner earlier this year. The seller had me to sign an addendum to our sales contract that stated: “The Purchaser shall provide a loan letter of commitment from a mortgage lender to cover the financing listed in the contract. This letter should be sent to the Seller no later than 5:00 pm on the 15th day from the date of ratification of this contact. If the above mentioned letter is not delivered at the stated required time, then the Seller may, at the Seller’s sole option, void the contract and release the Purchaser’s earnest money deposit to the Purchaser immediately.”

Within 15 days of signing the contract, my mortgage broker had sent the seller my loan approval letter, but the seller refused to accept it as a commitment.

Then, my broker sent the Seller another letter from a national lender bank showing that my loan had been accepted. Still the Seller stated that it was not a commitment letter.

Then my broker sent the Seller my mortgage company’s guarantee letter agreeing to pay the seller for any delay in the closing due to the lender’s fault and assuring the Seller that the loan was approved. The Seller refused to accept this as a commitment, canceled the contract and sent me notice that I could get my deposit back.

Is this real estate fraud? Is it legal for the Seller to cancel the contract? If I sue, what are the chances I’ll win in court?

A: To answer your first question, the seller is not committing a fraud, but is probably in breach of the contract. You delivered a loan approval letter to the seller and the seller was looking for a loan commitment. For all practical purposes the approval letter you sent the seller is the same as a commitment letter. Maybe the seller got seller’s remorse and was just looking for a way out of the deal.

A loan approval letter will generally state that the borrower is approved for a loan and will fund on the loan upon satisfaction of certain conditions. A loan commitment letter will state that a lender commits to fund on a loan upon the satisfaction of certain conditions.

Both of these types of letters are routinely used by lenders and most people involved in real estate closings will accept either type. Unless your approval letter had so many conditions or was so vague as to give the seller pause, the seller should have accepted the letter.

While you didn’t provide more information about your approval letters, it seems your mortgage broker was quite accommodating in getting to you information to give to the seller.

If you want to pursue the purchase of the home and sue the seller, you can. Always remember that litigation is expensive and time consuming and results are never certain. Talk to a litigator that has handled numerous breach of contract cases and discuss your legal options and what it will cost you to pursue them.


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