FAQ VI: Why Isn’t There a Penalty When the Lender Can’t Deliver?
At any given moment across this country, hundreds and 
thousands of potential home owners are anxiously awaiting word from their Lender that the underwriting gods have given their final blessing and the wiring instructions have been sent and the money is on its way and the closing for the home of their dreams can be finalized. But what happens when the Lender doesn’t deliver? In Colorado, the Lender isn’t party to the contract and any liability for not closing on time is borne by the Buyer. With earnest monies typically 1% of the purchase price, there are literally thousands of dollars at stake if the Buyer can’t complete the transaction.
For example: Let’s say you’re buying a house for $300,000. You have likely put down $3,000 in earnest money. This earnest money is refundable based on certain contingencies built in to the contract. The most common contingency is the inspection. If the house doesn’t check out to the Buyers sole and subjective satisfaction, the Buyer can terminate the contract and is entitled to a full refund of the earnest money. The second most common contingency is the appraisal. If the house doesn’t appraise for the purchase price of the home, the Buyer is not obligated to go through with the transaction and earnest money should be refunded. A third type of contingency is what’s called “Loan Conditions”. This contingency is for the exclusive benefit of the Buyer in that if the Buyer cannot secure satisfactory financing to purchase the home by the Loan Conditions deadline, then the Buyer may give notice to the Seller and terminate the contract and receive a full refund of the earnest money.
But here’s the catch on Loan Conditions: The loan conditions deadline is invariably 10 days to 2 weeks out from closing. It usually occurs after the appraisal deadline and is most often the last contingency in the string of dates and deadlines in a typical contract. Rarely will a bank provide unconditional guarantees of funding that far in advance of a closing. After all, the bank won’t lend on a home if the Buyer becomes unemployed prior to closing. The Lender won’t lend on a home when a Buyer’s debt to income ratio changes dramatically prior to closing (never make any major credit purchases while under contract – especially new cars!). Therefore, the loan conditions deadline is really the deadline for the Buyer to determine if they’re willing to move forward in good faith that their Lender will perform as outlined in the loan application and good faith estimate. Seems like a worthwhile risk, right?
But what if, through no fault of your own, the Lender can’t get the funding done by the agreed upon closing date? Colorado is a table funding state which means all ownership and all financial transfers occur on the day of closing – not some nebulous escrow date in the next couple of weeks (as is the case in California). If the Buyer can’t perform on that closing date, the Buyer is deemed in default on the contract and subject to a loss of any earnest money placed in trust by the earnest money holder (the brokerage or title company). The contract is between the Buyer and Seller – the Lender has no obligation to perform. I can’t tell you how many times I’ve seen all parties at the closing table and the Lender has been delayed in providing funds sufficient to close. In most cases, it is in the Seller’s best interest to agree to extend the closing date. However, in an accelerating market like we’re seeing in Colorado’s mid-tier price points, the Seller may simply decline to extend the closing date, keep the Buyers earnest money and put the house back on the market and accept a new offer (perhaps for even more money) the next day.
Surely the Buyer has some recourse against the bank for failure to perform, right? Don’t hold your breath. They’ve got the money- they make the rules. Personally, I think there should be some way for a Buyer to seek compensation from a Lender that doesn’t perform – but that’s for a court of law to decide. In the meantime, if you’re thinking about buying a home and are shopping Lenders for the best rates – don’t forget to ask them what their on-time arrival percentage is. If you want to protect your earnest money, you’d better hope it is way better than the airlines’!
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