What Does It Mean to Pre-qualify for a Mortgage ?
In Washington State, several real estate buyers have sued their bank because they “prequalified” for mortgage loans and later failed to qualify for the loans. Under the law and the customs and practices of Washington State, they buyers lost some $175,000 n earnest money. The story, by Martha Neil is on ABAjounal.com (“Buyers Sue Bank: Bad Prequalification Cost Them Money”). That was Washington State but prequalification can be a problem also in Connecticut and New York.
Here at home, clients often expect a “speedy’ closing because they have “prequalified” for a loan. We have to explain that prequalification often means you have passed a quick credit check based on limited information. What gets you a mortgage loan is a “commitment” letter from the lender and that is based on a complete loan application, an appraisal of the property and other documentation. The delay for clients who expected a quick approval from their lender can be frustrating.
Even more frustrating, often the commitment contains “conditions.” In New York and Connecticut, the conditions can put buyers in a precarious legal position. The contract of sale usually includes a “mortgage commitment date.” On that date, if the buyer, in good faith, is unable to produce a mortgage commitment, the buyer can back out of the contract. If that date passes by and the buyer does not have a commitment, the buyer cannot back out of the contract and must either buy the property (with what funds?) or lose the contract deposit, usually 10% of the purchase price.
Now, what happens if the buyer has a commitment with conditions and let’s the date pass and then can’t meet the conditions? Technically, the buyer can lose the contract deposit. Most cases, in my experience, work out in the end. But, it in the interim there can be quite a bit of tension.
If you understand the limitations of “prequalification” and that there is still quite a bit of homework to do in order to get that loan, the entire process becomes more manageable.
