This is a very important clause in the contract. The loan approval deadline is a crucial date that you need to pay attention to note on a calendar. When you have the buyer, make the buyer and lender aware. Get updates from the lender as the date gets closer. If a buyer does not feel confident and a lender has not provided a loan commitment by the deadline date, it is VERY IMPORTANT to take action. The action might be getting the loan commitment period extended or it might mean informing the seller that the buyer is unable to get financing after using diligence and good faith.
What is diligence and good faith?
Though these do not have exact definitions, some examples are:
- The buyer needs to apply for the loan amount on the contract. If the buyer wants to apply for a different amount, an addendum should be presented to approve of the different amount. For instance, if an investor is buying a property and made it contingent on 70% financing, and a lender said she didn’t need to put down that much and applied for 80% financing, the buyer is in violation of the contract and not practicing good faith.
- Providing all documentation requested by the lender in a speedy manner is an example of diligence.
What does the Buyer (you, if working with the buyer) need to do PRIOR to the loan approval/financing period expiring?
The buyer need to provide WRITTEN notice PRIOR to the expiration/deadline:
- Provide WRITTEN notice that the buyer HAS received loan approval. If it is a conditional loan commitment, state so in the written notification.
- If after using good faith and diligence, the buyer has NOT received loan approval (loan approval plus satisfactory appraisal/valuation), Buyer can provide WRITTEN notice to terminate the contract. Careful here and make sure all ducks are in a row– you should have been following up throughout the loan process to make sure the buyer was doing what the buyer was supposed to do (and the lender).
- If buyer has NOT received loan approval but feels confident in buyer’s ability to obtain the loan, provide WRITTEN notification that buyer does not have the loan approval but is confident in the ability to receive loan approval and proceed to closing.
What happens if the loan approval deadline passed and the buyer didn’t provide WRITTEN NOTICE?
If written notice (any of the three options above) has not been provided prior to the expiration, it is considered a CASH transaction/no financing contingency. This means the buyer needs to close or the escrow money could be at risk. There is a saving grace if buyer cannot close due to seller default, or due to property related conditions of the loan approval (excluding appraisal unless contingent on appraisal).
NOTE: If the buyer failed to provide written notice, the seller has a 3 day window after the loan approval deadline where a seller can cancel the contract and return the buyer’s deposit.