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Closing Cancelled At Last Moment

Ask the Real Estate Lawyer: Real Estate Law Q&A

REM # LAW 682

By Ilyce R. Glink and Samuel J. Tamkin

Summary: A young couple was on the way to owning their first condo. On the morning of the closing, the lender calls to say they will not be able to make the loan because the building is a condominium conversion. Ilyce and Sam give the reader advice on how to recover their many expenses and how to avoid this homebuyer nightmare.

Q: My son and his new wife were moving to a one bedroom condominium which was part of a building conversion of 24 units. This is their first home purchase.
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They were approved by their lender, they submitted all paperwork that had been requested, the appraisal was completed, and they were scheduled to close.

On the day of the closing, the mortgage broker called early in the morning to say that the paperwork for the closing “had not arrived and that they were not ready to close just yet." After lots of calls that day, they were told that the lender would not be able to close that day.

Later that day, the manager of the mortgage lender called once again and told my son that they could not close the deal because the underwriters would not approve the loan because of something to do with the fact that the unit was a condominium conversion.

They now have to either find another lender, find another more “suitable” place to purchase, or rent and forget about purchasing at this time.

In the meantime, they had to pay $100 a day for the truck they rented to move their things and the cost of hotel rooms until such time as they can make one of the three choices. It seems to me that someone at the lender should have known long before the scheduled closing that this property was not going to qualify for a loan.

What is the lender's liability for costs connected with a failed loan application? Could someone make a case that the lender has liability for the costs associated with the postponement of moving into a home? What about picking up the $100 per day for the extra days of the moving truck? The hotel bills for the extra days? The anguish and frustration with now having to essentially "start over" with either a new lender or a new property?

This doesn’t even include the frustration that my wife and I and three other family members feel since we drove to their city to help them "move in". Does the Realtor have any liability in this situation? What recourse, if any, do they have and where should they start?

A: What happened to your son is a homebuyer’s worst nightmare: You get approved for a loan and then the lender reneges on the day of the closing.

Some states are actually passing legislation to make lenders liable for damages if they fail to close in your situation. Your son did everything he was supposed to do.

The only thing that might have helped would have been to make sure that the lender was aware that the property is a condominium conversion and that the loan officer has the ability to approve a loan in this type of development. Sometimes this is a problem with new construction and condo conversions, which is why the developer often has a mortgage lender he or she works with to assist buyers in the purchase.

Generally the breakdown in communication in new construction purchases is between the mortgage broker and the end lender. It’s possible the mortgage broker failed to properly document the file as a condominium conversion and the loan ended up in the wrong department of the end lender.

You are right that the mortgage broker and end lender should have known that a loan in this type of development would not be approved from the very beginning.

The Realtor does not seem at fault here and, other than perhaps recommending the lender, did nothing wrong. It is up to each buyer to make sure the lender meets his or her needs, including the rate offered, fees charged and other issues in making the loan.

As far as going after the lender and mortgage broker, your son will need to make sure he has in his possession the written approval of the loan from either the mortgage lender or the mortgage broker. One of them should have issued a written commitment to funding the loan.

If they did, the commitment should have listed some conditions for closing. Presumably, these conditions were met and the issue of the “condominium conversion” was new at the closing.

That loan commitment may be your son’s basis for recovering costs and damages from the mortgage broker or even the mortgage lender. He and his wife should sit down with an attorney who litigates cases and who has experience in new construction litigation.

Your son should call the bar association in the city in which the property is located. Your son should not have been placed in the situation he was in due to the miscommunication or incompetence of either the mortgage broker and the mortgage lender, or both.

Your son might also be in luck, if his state has passed certain consumer protection statutes, particularly ones that relate to a lender failing to fund on the closing on the day of the closing.

If those statutes exist, your son may be able to sue the mortgage broker for these fees and even recover his attorneys’ fees. Some attorneys sue lenders under the deceptive practices statutes of some states and consumer fraud statutes. Others might recommend sending a letter to the mortgage broker demanding repayment of certain costs and fees. If the mortgage broker fails to pay, your son can file a complaint with the agency that regulates mortgage brokers in that state along with a complaint to the attorney general’s office.

There are times that these complaints actually get the mortgage broker’s to act and settle the claims. If their license is up for renewal, they may need to settle these actions before the license is renewed. A good attorney should be able to guide you through the process.

One last thought: The next time your son decides to buy a new construction condominium or a condo conversion, he should work with a lender that has closed on loans in that building or that the developer of that building has given as a recommendation for the closing.

While he may feel that there is a conflict of interest in taking the developer’s recommendation on a lender, it is in the builder’s best interest to make sure that a buyer who comes to the table to close has a lender that is equally ready to close.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com