This past June, we put a condo up for sale in Ohio. We’ve owned it for 15 years and use it about three or four months a year. We listed it for $100,000.
On the day after listing we got an offer for $98,000. The buyer also had a prequalifying letter from a lender, and the buyer wanted to close within 30 days. There were some “bumps” along the way due to the buyer’s failure to deliver some required documentation in a timely manner. In the meantime, the buyer posted a picture of the condo as his profile picture on Facebook and changed his address to the condo.
Our agent said because of the delays we’d have to move closing back a week. On the Friday before our closing, our agent’s assistant sent us a message that the last of his paperwork had been submitted. But the following Monday morning the agent called and said he’d made purchases and his loan was denied. In the meantime, we’d gone through enormous efforts to get the majority of our furniture, etc. to an auction house and of course what we got for it was not a whole lot. That’s probably to be expected, but I did lose some items that we could have sold on our own had we had more time.
An agent here in Florida told me that “prequalifying” letters mean nothing. A friend said her son was buying a first house and the agent “read him the riot act” and told him not to purchase a single thing prior to closing. I’d never heard of this situation before.
You may have not heard about this situation before, but it’s quite common. These days, a prequalification letter or a preapproval letter is quite meaningless. There’s a huge difference between a prequalification or preapproval letter and an “approval” letter or a “clear to close letter.”
What is a prequalification letter? The lender does a preliminary look at some very basic information for the buyer, crunches some preliminary numbers and writes up a prequalification or preapproval letter. If you look at the letter, you’ll see that the letter has a bunch of qualifications, limitations and conditions under which the loan may be denied. The prequalification letter might say that the letter is conditioned on the borrower meeting the lender’s underwriting guidelines, that the borrower’s credit information checks out, that the verification of employment comes back in good shape, that the property appraises out or that there aren’t any credit issues that affect the borrower.
Any one of those issues can kill a deal. In fact, you really don’t know that the buyer has his or her financing in place until the lender gives a “clear-to-close” letter. This letter tells the buyer and the seller, if the seller sees it, that the lender has cleared all the hurdles necessary to get ready for a closing and is prepared to fund the loan for the purchase of the seller’s property.
Frequently, a buyer will receive a loan commitment letter about 30 to 45 days after applying for a loan. That commitment letter will be a much more reliable indicator of the buyer’s ability to close on the home. Unlike the prequalification or preapproval letter, the commitment letter will indicate that the borrower has submitted just about all the information necessary to obtain the loan, the lender has (or should have) obtained an appraisal for the property and the borrower’s credit has checked out. To the extent information is missing or there are issues that need to be cleaned up, the commitment letter will have certain conditions that will need to be taken care of by the borrower or the bank.
Once all of those conditions are cleared, the lender can issue the clear to close letter.
We’re quite skeptical when we see a borrower who says he or she can close within 30 days of contract. That 30-day schedule is quite aggressive. We’re not saying that lenders can’t get it done, but we rarely see borrowers sign a contract, apply for a mortgage, get the loan approved and close within 30 days of the signing of the contract. You should know that buyers will frequently try to give a seller the impression that they are eager to buy a home and that they want to close as soon as possible. However, unless that buyer has the cash on hand to close, you generally can’t rely on that buyer to actually close within 30 days.
You know that you’re taking a risk with a buyer when you have to take actions to accommodate the buyer’s schedule (to your detriment) without the buyer risking much. We mean that if the buyer has put up some money under the contract but that money is not at risk, you have more to lose than the buyer — as you have learned. Contracts generally contain a clause that gives the buyer the right to walk from a deal if the buyer is unable to get his or her financing. If they can’t get financing, they get back the money they put down under the contract. The contract may detail how the buyer gives notice of their failure to get financing, and if they follow the contract, they can get their money back and cancel the deal.
In your situation, you should have insisted that you would not close on the sale of your home until your buyer gave you two or three weeks’ notice of the closing date and the buyer had received either a commitment for the loan with conditions that are commonly taken care of at closing or with the clear to close letter.
This way, you would have known that the buyer had his financing and you could proceed to make your arrangements to sell your things and find another place to live. As an alternative, you could have had your buyer waive his right to terminate the contract in case he failed to get his financing and you could have kept the deposit under the contract. That deposit might not have covered all of your expenses but, depending on how much your buyer put up, might have come a long way to help you out.
Finally, buyers can do really dumb things right before closings. Some leave their jobs, others finance car purchases, fail to pay a bill or apply for new credit cards. Each of these items can negatively affect the credit score for the buyer and can potentially kill the financing. Your friend is right, a buyer should do nothing with his credit until after the closing on the home.
Ilyce Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to Be Wildly Successful in Real Estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.