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Thursday, December 18, 2014

How Would Buyer Lose Earnest Money if He Did Not Qualify for a Loan?

So you are planning on buying a house in the coming year.  Good for you!  Are you paying CA$H ( I now spell ca$h like Ke$ha used to spell her name) or are you getting a loan??  If you're getting a loan, read on.  Also, if you are SELLING YOUR HOUSE, read on because you need to know this too.

Most Buyers do need to get a mortgage to purchase real estate.  A Buyer should be at least pre-qualified and better yet, Pre-Approved for the mortgage.  A pre-approval means that the Buyer has already made loan application and the Buyer's credit has been checked and approved, the Buyer's employment has been verified, and bank statements and necessary IRS returns have been reviewed and all that is needed to approve the loan is a property address and an appraisal.

The Buyer and Seller will agree on the amount of time allotted to the Buyer to get the loan approval in a Financing Contingency which will be an Exhibit to the Purchase and Sale Agreement.  This Exhibit will spell out the terms that the Buyer is applying for.  It will state the loan amount (as a percentage of the sale price, the term (duration of the loan) and the maximum interest rate (usually bumped up a little from the current interest rate as of the day everybody agrees and signs the contract).  This sets the bar for the loan so that it can be measured that the Buyer can get a loan based on the disclosed terms.

The length of time stated in the Financing Contingency is usually around 21 days from Binding Agreement. This means that if the Buyer is denied the loan from their lender within 21 days, the Buyer may terminate the contract without penalty and receive a refund of their Earnest Money IF the Buyer gives notice of termination to the Seller within the time allotted (21 days in our example) AND the Buyer's Lender provides a "Loan Denial Letter" within the allotted time (ex: 21 days).  The Loan Denial Letter MUST state the terms of the loan that was denied and the reason for the denial.

If the Buyer does not provide the a) termination notice AND b) Loan Denial Letter within the Financing Contingency time period stated in the Agreement, the Buyer would lose their Earnest Money (Seller keeps it for liquidated damages).  If the Loan Denial Letter states the reason the loan is denied is due to insufficient cash to close or that the Buyer must sell or lease their current property in order to qualify (unless an Exhibit to that effect was agreed upon as part of the original agreement) or the Buyer did not provide the required information to the lender in a timely fashion, the Buyer will lose their Earnest Money.

The best way to avoid any confusion or risk that a Buyer may not be able to qualify for the loan is to have the Buyer PRE-APPROVED for the loan from a reputable lender.  This makes the Buyer almost as good as CA$H.  And everybody loves CA$H!


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