People hoping to buy homes often prepare before ever viewing a property. They secure mortgage pre-approval to know how much house they can afford and to make their offers more compelling to sellers.
Despite those efforts, real estate transactions can fall apart, leaving buyers without housing and possibly at risk of losing their earnest money. Lenders who offered letters of pre-approval may decline to finance a mortgage, especially if circumstances change between when the buyer sought pre-approval and when the closing occurs.
Can buyers facing the loss of earnest money hold lenders accountable for refusing to honor pre-approval letters?
Pre-approval is not the same as approval
A pre-approval letter is not a binding financial commitment. It is simply an official notice that a person or couple can theoretically qualify for a specific amount of mortgage financing. It helps buyers estimate their buying power and predict their monthly budget. It is not a promise of financing, and lenders can easily withdraw pre-approval when financial circumstances change.
Job loss, the excessive use of credit and other complications can justify a lender revoking pre-approval and refusing to finance a mortgage. In most cases, buyers have no recourse in that situation. If they do not have the right provisions in the offer they initially submitted, they are theoretically at risk of losing their earnest money, in addition to becoming unable to complete the transaction.
Working with a real estate attorney to include the right details in an offer or purchase agreement can reduce the risk of a financing issue causing lost funds and other buying setbacks. A lawyer can help people understand pre-approval, financing roadblocks and the language in dense real estate contracts that may otherwise leave them more exposed than they realize.