I was about 24 years old when I bought my first home. The home was a tiny unit in a duplex. The purchase price was only around $43,000.
I remember sitting down with a lender before going house-hunting. The lender required two months of bank statements, my last two pay stubs, my Social Security number and approval to pull my credit. After seeing my assets and verifying my credit, they provided me with a pre-approval letter to show sellers.
Many people still believe this to be the standard practice. When sellers receive a loan pre-approval letter with an offer, they assume that a buyer has been checked out and verified for worthiness by the lender. It is surprising how little is required for a lender to issue those letters today.
I recently assisted a client in selling his home in Fairfax, Va. The home sat in a prime location, but it needed repairs and updating. My client was in financial trouble and in danger of losing the home to foreclosure. Time was of the essence. So we priced the home aggressively, seeking a quick sale.
After one day on the market, we received a very strong offer. The buyer’s agent informed me that their client had enough cash to purchase the home outright but that the client preferred to finance the deal, if possible. The offer included a pre-approval from a lender for the contract price. The offer was for full price, and they didn’t ask for any help with closing costs.
I informed my client of the offer. He was happy, but he wanted to wait a day to see whether any other offers came in. I advised my client that time was not on our side and that we should probably take the offer sooner rather than later. He still wanted to give it a little time.
I informed the buyer’s agent and was surprised by her response. She became very agitated and aggressive with me. She told me that she wrote us a strong offer and that she has never, in her 15 years in the business, seen anything like this. In my experience, a 24-hour review period is pretty common.
She talked to her client and called me back. She informed me that her client was angry and that if we did not accept their offer by three o’clock the next day, they were going to walk.
I was aggravated and wanted to tell her to take a hike, but I knew my client did not have the luxury of time. I informed my client of the ultimatum. I told him that it did appear to be a strong offer, and I advised him to take the offer prior to the deadline.
This goes against a personal rule of thumb I keep. I am very reluctant to work with another party who employs strong-arm tactics. A real estate sale is a transaction with two equal parties. If one party shows that they like to put themselves above the other and tries to use bully tactics to get their way, that propensity will persist throughout the deal and almost always creates more problems than it’s worth. I overruled myself based on my client’s urgent situation.
My client was in agreement with my advice, but he had questions about the strength of the buyer and asked what due diligence I had done on the buyer. I informed him that I did no due diligence on him. I told my client that it is not customary for the seller’s agent to ask for direct financials from a retail buyer. I don’t want to have access to his or her personal information that is contained on pay stubs and bank statements. I informed my client that that is the job of the lender and of the buyer’s agent. We have to rely on their professionalism. And I also explained that we have a pre-approval from a lender and the lender does the financial due diligence on their applicant.
My client went ahead and accepted the offer and informed me that he was taking his wife out to dinner to celebrate.
Less than two days after my client accepted the offer, the buyer’s agent called and informed me that the lender had declined the buyer’s application because the buyer did not have the necessary down payment. I was floored by the news, because the agent had specifically told me that this buyer had enough money to buy the home without financing if necessary.
I immediately called the lender to find out what had happened. The buyer had submitted a pre-approval for an 80 percent loan, and the contract stated that the buyer would bring a 20 percent down payment. Apparently, the buyer did not have the down payment. The lender told me that the buyer was relying on a gift for the down payment and it was not going to come through.
I asked the lender if they had any verification at all that someone had planned to give the buyer a gift. She said they did not and that they rely on the applicant’s word. I asked if they’d seen any financial information from the buyer prior to issuing the pre-approval, and she told me they had not. They were waiting for the buyer to make a full application.
Apparently, the lender pre-approved this applicant purely on the applicant’s word. And their letter states that the lender is relieved of any responsibility from false information provided by the buyer, which is standard. But I didn’t think it was standard for a lender to provide approval without any documentation at all.
The agent was very casual about the whole thing. She just said they’re withdrawing from the contract based on the financing contingency, which states that if the buyer’s financing application is denied, the buyer can cancel the contract without penalty. She said she can send me a loan denial if I want.
“Uh, yeah,” I said, “You need to send me that denial.” I further told her that I didn’t think this fell under the financing contingency. The buyer was not approved because of the lack of the down payment, which they stated on the contract that they had. I told her this was a material misstatement that my client relied upon to make his decision.
Neither the lender nor the agent informed us that the buyer was relying upon a gift for a down payment. When I see that a buyer has $100,000 in the bank, that is a strong indication of buying ability.
The buyer sent us a release stating that they wanted the deposit back, and we sent them a release stating that the deposit would go to the seller. We got in contact with the buyer’s broker and got their legal counsel involved.
It turns out that the agent never put the earnest money deposit in the escrow account, which we argued also violated her fiduciary responsibility.
The broker agreed to settle with my client for the amount of the contract’s deposit because of the mishandled funds but withdrew the offer the next day before my client signed the settlement agreement. They told us that they were reporting themselves to the Department of Licensing and said that if we wanted to pursue the deposit, that would be between the buyer and seller. Since the deposit was not in an escrow account, my client would have to sue the buyer in court.
My client was not in a litigious mood, nor did he have the financial resources to pay for attorney fees. He chose not to pursue the issue, but I think we had very strong legal footing to do so. It also helped significantly that we received multiple additional offers in the following few days.
Two of those offers also included loan pre-approvals. I called those lenders and asked them specifically if they had seen the applicant’s financials and pulled their credit. They both told me that they had put them through “desktop underwriting.” I pressed them to answer the specific question, and they continued to dodge the question with further vague terms until they finally told me that they had not yet received their financials.
Every loan approval I see states that the lender is not responsible for false information provided to them by the applicant. This is a reasonable position for lenders to take, but I think it is irresponsible for lenders to provide potential sellers with pre-approvals on buyers who have not provided at least minimal documentation.
It seems that it has now become common practice for lenders to provide pre-approvals to applicants without having done any verification or due diligence. A seller would be just as well served by simply asking the buyer how much money they have in the account, how much they make and what their credit score is.
With this market heating up and this spring poised to be very strong, sellers — especially those in multiple-offer situation — should be wary of loan pre-approvals. Ensure that you or your agent call the lender and verify that the buyer has made a full application with the lender. You specifically want to know if the buyer has provided bank statements (if they say they have a down payment) and pay stubs and whether the lender has seen the buyer’s credit score.
Buyers will help strengthen their position by taking the loan application process seriously and making an application quickly. Give the lender your documentation as soon as possible. And don’t let your agent tell you that the financing contingency is a “get out of jail free” card. The offer you sign is your offer, and it’s your deposit at risk, and maybe more.
The loan denial on the first buyer stated that they did not have the down payment. But it also said that the buyer had credit problems. It appears to me that the lender had not even pulled the buyer’s credit before providing them with an approval letter.
Justin Pierce is a real estate investor and real estate agent who regularly writes about his experiences buying, renovating and selling houses in the Washington area.