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Just what is a "loan approval"? part 1
Dear John,
You and I have talked in the past about difficulties with the precise definition of "loan approval," and it seems a new chapter is opening -- this time with your fingerprints on the cover.
Attached is language drafted by your firm, retrieved from a local real estate contract. Knowing how active your firm is, I expect to run into the same paragraph ("SECTION 4.b", attached) soon from other brokerage firms.
In the friendliest possible way, I'd like to continue our conversations about loan approval, especially as we have to respond to borrower queries triggered by your (and other, similar) language.
The approval issue is always the same: to what degree can a seller rely upon a satisfied loan approval condition? Sellers want a guarantee, and borrowers and lenders want reasonable flexibility.
Since I fall into the latter group, you might expect that I believe in the flexible approach. Not, however, out of self-interest, or laziness in producing timely loan approvals on which sellers can rely.
Here's why.
1. I've never seen nor heard of an "unconditional" loan approval or commitment. All are conditioned, at a minimum on the borrower's financial situation continuing unimpaired from approval to closing. Causes of deterioration and withdrawn approval, all out of the control of the buyer: job loss (involuntary transfer or separation, employer bankruptcy), previously undiscovered credit trouble, no matter how erroneously reported (final credit checks are often run on the morning of the closing), lien, or litigation.
2. Definitions. No nit-picking intended. Your language mentions approval conditions which are allowed (those under the buyer's control), then "the lender's loan commitment" (conditional? unconditional?), and last "lender's unconditional loan approval." Which is it?
Most of us understand an approval always to be conditional on loose ends, but a reasonable assurance of intent to close; while a commitment assures readiness to close excepting only deterioration in borrower or collateral.
3. "Loose ends." Typical approvals contain a dozen conditions segregated into "prior to closing/funding" and "at closing." The latter are housekeeping (borrower to sign documents, etc.), though these conditions can cause delays, even at closing (proof of source of down payment funds is the most common cause of delay). The former, "prior to's" are the deal killers. Some files are approved with prior to's which cannot be fulfilled; many, if not most files are approved with prior to's which can be met in time to close with very little risk to the seller.
4. "Under borrower control" doesn't work as well as you may hope. Routine conditions: "borrower to provide tax returns, K-1s, S-1s; YTD P&L; or historical bank statements showing source of down paymentÉ." All theoretically under borrower control, and among the most dangerous post-approval conditions.
5. The practical effect of your paragraph is to create contracts which are readily voidable by the seller (handy in the presence of a back-up contract at a higher price), or which force buyers into unwisely waiving their loan condition protection. Another effect is controversy: in which of the zillion unconditional-conditional outcomes is there a lawsuit over earnest money?
6. I understand the collective wish of seller, broker and buyer for a guaranteed closing. Insofar as loan approval is concerned, I don't think there is such a thing. A wiseguy might say that that's why we have closings at the end, not the beginning.
Also, nothing in "unconditional" language relieves the listing agent of the burden to qualify not just the buyer, but the competence of the lender as well. Forfeited earnest money at the end of a failed sale is seldom in the best interest of the seller.
7. Sellers, buyers, and brokers are most concerned about loans which lenders declare approved which are (1) not actually approved, or (2) only partially so, or (3) on impossible conditions. Any deal can fail through unforeseen circumstances and in the best of faith by all parties. How about words to this effect in your paragraph, replacing all but the loan lock waiver: "Upon loan approval, buyer shall disclose to seller any 'prior to closing/funding' loan conditions."
Most lenders are already making such disclosures, and encouraging discussion among all parties about the difficulty and timing of getting the last conditions removed.
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