Q: My buyers have excellent credit, no debts and a lot of money in the bank, but the lender can’t fund the loan because it’s missing one piece of paper from the appraiser. All contingencies have been removed. Can the buyers still get their deposit back? –Juanita
A: I hear and completely understand your frustration. Virtually everyone who knows anything about real estate agrees that the lending guidelines of the subprime era — when no-money-down, no-assets, no-income documentation and bad credit were all OK — were just too loose.
I, for one, am of the opinion that no one can take a loan that a lender won’t give them, so from that perspective, you can see how the lenders’ own behavior in funding loans without appropriately qualifying borrowers played a major role in creating the housing crisis we’re now feeling our way out of.
Unfortunately, the lending industry’s recognition of how subprime lending contributed to this housing debacle has not resulted in a mature, reasoned conversation about what lending guidelines are appropriate, keeping the risk of the borrower defaulting at a minimum while still allowing creditworthy borrowers to obtain loans and keep the housing market moving.
Rather, we’ve seen a knee-jerk reaction resulting in the sorts of bizarre conditions and conundrums you now describe, where a home sale can be blown and thousands of dollars of buyers’ deposit money are lost over bizarre requirements.
(For example, a buyer’s kid’s report card or seemingly sensible mandates that are, nonetheless, entirely out of the buyer’s control — like a sheet of paper from an appraiser who has already appraised the property at the purchase price but has no relationship with the agents or mortgage brokers involved, so sees no reason to be responsive to these last-minute lender requests.)
I haven’t seen any data on this particular issue, but I would hazard an educated guess that the percentage of homebuyers who lose their earnest money — the good-faith deposits they put down on their homes — has doubled, tripled or even quadrupled over the last four years, since lending and, particularly, underwriting guidelines have tightened.
The sequence usually works like this: Buyers put their deposit money down, usually around 1 percent of the purchase price, but it can vary, when they make the offer. This is done, customarily, to show the seller that the buyer is serious or in earnest about the transaction — a reasonable assurance for the seller to require, as the seller generally takes the home off the market and forgoes other prospective buyers when accepting an offer.
As a standard practice in most markets, once the buyer has received loan approval — not the preapproval most buyers have in hand before they make an offer, but an actual loan approval — and after the lender has reviewed the contract, the appraisal has come in at the purchase price or higher, and the property’s condition has met the lender’s approval, the buyer will (a) increase the deposit, sometimes to 3 percent of the purchase price or more, and (b) remove contingencies.
Even though I’ve been known to describe contingencies as a buyer’s legal right to back out of the deal, more precisely speaking, removing contingencies does not remove the buyer’s ability to back out of the contract; courts across the country have long refused to force a buyer to buy a home that the buyer does not want.
However, if the buyer does back out after removing their contingencies, in most contracts the buyer forfeits the deposit money.
In some states and under some contracts, the amount the buyer forfeits is capped at a certain amount. In other situations, though, the buyer can actually be held liable for any damages incurred by the seller in reliance on the buyer’s contingency removal.
If, for example, the property’s value declined steeply while the buyer had the property tied up and the seller could prove that another qualified buyer had been turned away in the interim, in the absence of a liability-limiting clause in the contract, a court might actually hold a buyer responsible for the lost profits the seller incurred.
Unfortunately, in light of these legalities and standard practices, there is a big bottleneck in mortgage lending right now, whereby lenders make obtaining loan approval tough, and getting loans funded even tougher.
The underwriters on whose authority the mortgage funds are released are frequently imposing additional requirements, like those you mention, virtually at the closing table, holding the funds hostage until the new conditions are met, despite the fact that meeting them is often outside of the buyer’s control.
And no — in most cases, there is no contract clause that mandates the return of the buyer’s deposit in these cases, even when the failure to fund is truly no fault of the buyer.
The only options a buyer has in this situation are to (a) kill the deal and forfeit the deposit (perhaps negotiating with the seller to see if the seller will have mercy, given the situation, and accept less than the full deposit), or (b) close the deal.
As frustrating as it is, continuing to ratchet up the pressure on the appraiser has often worked for me in these situations, and I have even resorted to escalating the appraiser’s nonresponsiveness to the underwriter/funder. The underwriter/funder can often get the required materials that a buyer, agent or broker cannot.
The other way I’ve seen this play out is that if a seller issues a notice to perform, or desires to urgently cancel the transaction because another buyer is standing by, the seller is sometimes willing to voluntarily release the deposit to get the buyer’s agreement to cancel the transaction so that the seller can move forward with a new buyer.