Many factors have to be considered when your lender backs out of a mortgage before you can take action against them. Here are a few that this reader and I want you to remember.   

Q: I’m writing in regards to your response to a reader’s question that was published in my local paper several months ago. The question was, “Should I pursue a lawsuit against the builder because the company recommended a lender and the lender backed out three days before closing? The builder decided to keep my earnest deposit even though I wanted to close.”

I’m a mortgage banker and do wish a clearer perspective had been presented regarding the mortgage angle of the question. Lenders don’t “back out” of providing a loan – that statement is based not only on the flow a loan application follows as the lender works on it but also on compliance regulations that govern how that process must be handled. This buyer likely didn’t have a full loan approval to begin with and ultimately it wasn’t issued as the loan application was denied. Some aspect of the loan application didn’t meet underwriting requirements – as you noted in your column, this could be due to the buyer’s particulars or the property’s.

Federal compliance regulations require that whenever a mortgage loan application is denied, a written notification of and reason for the denial must be mailed to the applicant. That ensures the information is provided to the applicant even if they have the misfortune to work with a loan officer who doesn’t want to call them with bad news.

Since the builder opted to keep the earnest money deposit, it would appear it was the buyer’s particulars that were the problem – it also indicates the loan was essentially doable but the buyer opted not to proceed with the loan application (perhaps rather than denying the loan the lender had to adjust the terms or make a counter offer based on information that turned up in the course of processing and underwriting the loan). As you know, standard contract language protects the buyer in the event they don’t qualify for financing and allows the earnest money deposit to be returned to them (unless this portion of the contract was crossed out).

Additionally, there are plenty of other lenders out there – while the builder recommended a lender to the buyer, nothing prevents the buyer from talking to other lenders. I tell my customers it’s good for them to talk to more than one lender – at the very least it will allow them to ensure the information and quote they’ve got is good and at the very best they may find there’s a better option out there for them. At any rate, even if this buyer chose not to talk to other lenders before the loan denial they can still do so afterward. They may find a lender who’s able to accommodate their application or who can at least provide an explanation that will help them understand what they need to do in order to proceed.

A: Thanks for your insight into this question. We find it quite helpful to receive another perspective on an issue that we addressed earlier and are pleased to share your thoughts with our readers.

What many readers don’t understand is that we sometimes have to make assumptions when we’re not given all the facts by the writer. As you noted in your comment, this particular buyer may have tried to deflect some of the blame for his inability to obtain financing onto the lender or the builder.

In the original question, the buyer failed to get his financing approved when buying a newly constructed home. The lender had been recommended by the lender and when he didn’t get the financing, the buyer lost his deposit.

One of the issues you raised was whether the buyer had the right to terminate the purchase contract due to the inability to obtain financing. While most purchase contracts have that language, the buyer must abide by the strict terms of the provision to terminate the contract. So, if you have the right to cancel your deal, you better do it according to the terms of the contract.

The first thing that buyers forget is to cancel by the date set in the contract. If the contract gives you until November 15 to cancel, you had better cancel by that date. If the contract requires you to give notice to the seller in writing by fax or certified mail, you had better give them notice in that exact way, otherwise it’s as if you didn’t give notice at all.

We don’t know if this buyer failed to give notice properly, if the seller encouraged the buyer to stick it out, whether the lender strung the buyer along, if the buyer failed to provide the right documentation, or if the buyer’s credit score changed at the last minute.

Nonetheless, we appreciate your comments and agree that good lenders have to abide by a process that sometimes takes longer than we’d like and that may require documentation or verifications that buyers may be unable to provide, ultimately resulting in a loan application being declined.