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Loan Approval Letter Declined

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

REM #LAW 696

By Ilyce R. Glink and Samuel J. Tamkin

Summary: A reader had a buyer for their home with a loan approval letter. The buyer's financing was then declined. Ilyce and Sam explain loan approval and commitment letters and discuss any recourse the seller may have.

Q: The buyer for my house received a loan approval letter from her bank.
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One month before settlement, the lender declined to loan her the money.

This is affecting the sale of three houses due to prior home sale contingencies. Do I, as the seller, have any legal recourse against the buyer's bank?

A: A seller of a property does not generally have the ability to sue another person’s lender for failing to provide financing to that other person. Your buyer might have the right to sue the lender, but you probably don’t.

You’d have to sit down with an attorney and discuss the specifics of your case. If there are unique circumstances that relate to your dealings with the lender or any other specific information that would give rise to your suing the lender, your attorney should be able ascertain whether you have a case.

The fact that one or more closings failed because the lender did not provide financing would not, in and of itself, allow you to sue the lender.

Let’s talk about the loan “approval” letter. It’s possible that the letter contained conditions that the buyer did not meet. If the loan “approval” letter was merely a prequalification letter that stated that the borrower could qualify for the loan but was subject to the usual approval conditions and underwriting requirements, the letter you may have seen was not a true approval letter.

When a lender approves a borrower for the purchase of a home, the lender will generally issue a commitment letter or an approval letter that specifically states the terms of the loan and certain conditions that need to be met by the closing date.

These might include making sure the seller can convey clean title of the home to the buyer, that the buyer is still employed, and that the buyer’s financial picture has not changed in any material way. Conditions for approval might also include having the buyer sign certain documents at the closing.

If you review the “approval” letter and it states that the buyer is approved subject to credit review issues, a proper appraisal of the property and verification of information, the letter does not commit the lender to loan the money. There are too many issues outstanding. The lender may have not even checked the buyer’s credit history, credit score or even verified any information provided by the buyer.

There is one interesting fact that needs to be explored: if the buyer received the approval letter and if your contract would have allowed the buyer to terminate the contract if she did not receive financing, but the buyer did not terminate the contract, the buyer might be deemed to have defaulted under the contract when she failed to close.

If the buyer failed to close and the buyer was in default, you may have the right to sue the buyer for breach of contract and recover your damages or even retain the earnest money deposit that may have been given when the contract was signed.

Talk to a real estate attorney about the specifics of your case for more information.

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