A Cautionary Tale: Lender Letters

A Cautionary Tale: Lender Letters

The Lender Letter

A Loan Commitment Letter is something that Buyers should get before they even start looking.  Some will meet with a lender, do a pre-qualification type of application so they know what they can afford, and the letter will follow shortly thereafter.  Regardless, it’s a must have when submitting an offer.  If I receive an offer without one, we always counter that Seller’s acceptance is contingent upon receipt within, say, 24 hours.

Even then, it’s not a slam dunk.  This is the “Cautionary” part:

Sometimes it’s really just a pre-qualification letter, because there will be conditions to meet before the lender will actually “commit” to funding the loan:  e.g., verification of income, verification of employment, review tax returns, verify source of funds, explain some adverse credit item, etc.  For this reason, you will want to call the lender and ask a few questions.

Here’s what I like to know:  Did the lender run a Tri-Merge Credit Report (3 reporting agencies) or an in-file (just one agency)? What verifications have been completed, and what conditions need to be met before sending the file to underwriting?  There almost always are some, and usually the lender has already figured out what they need to satisfy them. Just ask.  How long is it taking to do an appraisal?  This will tell you if the dates in the Contract (loan approval, closing) are realistic.

Believe it Or Not – a True Story

So, we listed a beautiful home, and received a strong offer including a very positive letter from a lender (located in CA).  The Buyer, while mostly retired, had several income streams, plus enough savings to pay cash for the property if necessary.  This was all very reassuring, and I spoke with the lender who said everything looked great, subject to verifications.  No big deal, so we signed a contract.

Then this happened:  during verification of income, it turns out that one of the income sources used for the pre-qualification had ended several months earlier.  Now the buyer no longer meets the ratios to qualify!  And since the contract was contingent on financing, we then received notice from the Selling Broker that the Buyer is wanting to terminate the contract.  Shouldn’t someone have known about this earlier?  You’d think so, but too late now. Can we keep the earnest money? Doubtful.  There’s nothing in the Colorado Real Estate Contract that explicitly protects the Seller against this kind of eventuality. Sometimes these things happen in spite of all the due diligence.  

How We Fixed It

Actually, the Lender pulled this one out of the fire. Since the Buyer had lots of retirement savings, they were able to set up distributions from a 401k to replicate the missing income. Did you know you could do that? Here’s a good article on  How A 401k Works After Retirement.

Pretty slick.  I knew you could use a lump sum from a 401k to buy a house, but this is the first time I’ve seen this approach. The Buyer qualified and we closed the transaction.  All’s well that ends well, but this Broker (and his Seller) was mildly traumatized.

Lessons:  When choosing to work with a Buyer who needs financing, make sure they’re really pre-qualified or pre-approved.  Know the difference, and talk to the lender about where things stand right now.  Make the Loan Approval Deadline as soon as possible, but realistic, based on what you know about how much time is going to be needed for 1) the appraisal, 2)  loan processing and 3) underwriting (usually several business days after conditions are met, appraisal is done and file is complete). These are the things you can control, so make sure you do.

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