Home Buying in Los Angeles>Question Details

raf521, Home Buyer in Los Angeles, CA

Does this mean if we get pre-approved we terminate the Contingency? Even if we later get a loan denial letter?

Asked by raf521, Los Angeles, CA Sat Feb 9, 2013

"The Mortgage Contingency shall terminate upon the occurrence of the following: Purchaser receives preliminary approval on or before Contingency date.".

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Gabriella Godde’s answer
You need to sign off on the contingency after 17 days usually from what your contract states. Getting approval does not automatically remove your contingency. Gabriella Godde 661-713-3460
http://www.mwfav.com
0 votes Thank Flag Link Sat Feb 9, 2013
raf521, thanks for the follow up information.

Just so you know, Fannie Mae will approve loans up to a 49.99% debt ratio and Freddie Mac will approve loans up to a 54.99% debt ratio. However each lender is free to make their own more restrictive guidelines, and the one you are talking to just happens to limit it to 45%. We work with lenders who will go up to 49.99% debt ratios, so if yours is being calculated at 48% there is a chance it could work out with us (or a different lender who allows higher debt ratios). Fannie Mae & Freddie Mac don't always approve debt ratios over 45% though, it takes someone who is pretty well qualified. Having a 30% down payment, and if your credit is good & would have some leftover money in the bank after closing, then that would definitely put you into that category so there could be a good shot. You also mentioned you had a $212/mo vehicle loan, so did the loan officer discuss paying off to reduce your debt ratio to 45% or less? You could reduce your down payment to 20% and then you'd have funds freed up to pay off that loan. These are just some possible ways for you to still get approved and buy this home... that is if you still want to.

And yes, you definitely have a say in the matter... you are the one buying the home. Stop thinking like that.

The builder is in the business of building & selling homes, they aren't in the business of using tricky contracts to screw people out of their earnest money deposits. Most (not all) real estate agents who represent the builder aren't great agents, which is why I always recommend you get your own agent even if the builder says they have one for you. It's a little late for that now, but it doesn't mean you have to discuss things with the seller's real estate agent... you can go direct to the builder.

You have choices:

1. You could pursue some of the creative methods I mentioned to help reduce your debt ratio and qualify for the loan with your current lender
2. You could find a new lender who allows higher debt ratios
3. You could throw in the towel and kiss your $13k goodbye
4. You could spend money on an attorney and try to get your $13k back (which you wouldn't get all of it, the attorney likely will be asking for 30-40% of that figure as part of their compensation)
5. You could ask the builder to clarify what their definition of a preliminary approval is (which you haven't said if you've did or not), and potentially get all of your $13k back

I hope you try options 1, 2 & 5 before you try options 3 or 4.
1 vote Thank Flag Link Wed Feb 13, 2013
Thank you so very much!!! You have been very helpful. We have not yet asket seller to clarify their definition. We will try your options and hopefully it will work out for the best.
Flag Wed Feb 13, 2013
In a standard CAR purchase agreement, the contract that is commonly used by all real estate licensees, the loan terms are discussed under item 3H. You should refer to Item 3 H(3) in regards to the loan contingency period. A pre-approval is not a funding commitment nor is it a final loan approval by your lender. You must obtain the final loan approval during the specified number of days in this section (17 days per contract). And if you don't, then you must either buy more time by requesting an extension or cancel the agreement. If and when you are denied of final loan approval and you cancel the contract right away then you are entitled to get your deposit back providing the seller signs off on the cancellation. Since your earnest money deposit is at stake at this time, you may want to seek legal advice.
1 vote Thank Flag Link Sun Feb 10, 2013
Van - you have explained this as I understand it to be true. I wish there were more practical real estate agents/brokers such as yourself. Thank you for weighing in here as Raf the new build buyer is really getting jerked around by his team...
Van - i'd like to know your opinion on whether a new construction home buyer really needs a buyers agent or not? feel free to reply here on reply to me via my personal email or phone.

thanks!
Flag Fri Dec 26, 2014
A "pre-approval" is not the same as a "preliminary approval" in my opinion. A preliminary approval would be more along the lines of a conditional loan approval, i.e. after the underwriter reviews they issue a conditional approval to let your loan officer & you know what remaining items they need in order to issue the final approval.

What is the underwriter calculating as your current debt ratio, and what are they requiring your debt ratio to be under? Are you using conventional or FHA financing? If conventional, has your loan officer looked into paying a lump sum of PMI vs. the traditional monthly PMI? That is one way to reduce your debt ratio. Another is if you have any car loans that you've been paying on for a year or more, is to refinance them over a longer period because that way the lower payment will be used (you can always still make the higher payment and pay them off in the same amount of time you are currently scheduled to pay them off in though).

Shane Milne | Lending in all 50 states | NMLS #81195
shane@thebesthomeloans | 949-273-4161 direct
1 vote Thank Flag Link Sat Feb 9, 2013
Originally loan officer gave us 43% debt ratio that is until he sent us a good faith estimate and we shot up to 48%. Bank will allow max 45%(maybe). We don't have any credit cards, but we have a recreational vehicle $212. We believe it's a conventional loan. We are giving 30% down so no PMI. I don't think we want to build anymore, because now we are having trust issues with loan office, realtor and builder. But we don't really have a say in the matter now. Also being a new construction, we would have to go through his whole process again in 5-6 months!!!
Flag Wed Feb 13, 2013
Pre-Approval has nothing to do with the loan contingency in the California Purchase Contract. Please contact a local Realtor who can walk you through the process and explain the contract to you.
0 votes Thank Flag Link Sun Jul 13, 2014
raf521 did you get the earnest money back?
0 votes Thank Flag Link Fri Jul 11, 2014
Please clairfy a few points so that we may all learn from this.

Was this a contract with a builder for a new home?

Did you use a contract supplied by your realtor (presumably the standard California real estate contract) or a contract that the builder provided?

Was the realtor you worked with your agent or was he representing the builder? In other words, did you go to a model home of the builder's company and work with an agent there? In which case the agent may legally be representing the builder, not you.

Did you sign an agency agreement with the realtor with whom you were working? If not, is the agent legally a subagent of the seller? (In North Carolina, if you don't sign a buyer agency agreement, an agent working with you may be legally bound to represent the seller's interest.)
0 votes Thank Flag Link Wed Feb 13, 2013
Contract was with builder for new home. Builder provided contract. Realtor was our agent. He was representing us legally.
Flag Wed Feb 13, 2013
From what you said I honestly don't think you'll lose your earnest money deposit because you do not have a preliminary approval from a lender, you have a PRE-APPROVAL from a loan officer. What I would do if I was you you, is get the builder to define what a preliminary approval is to them. If they say it's something that has been reviewed by an underwriter then you are fine in my opinion, because when the underwriter reviewed they didn't approve. You need to be smart about this, and that doesn't necessarily mean hiring an attorney, but it does require logical thinking. Obviously the big question is what is a preliminary approval?

Do you even want to buy this home anymore? I asked you a series of questions related to your financing which you never answered (either here or through a private message).

Shane Milne | Lending in all 50 states | NMLS #81195
shane@thebesthomeloans | 949-273-4161 direct
0 votes Thank Flag Link Wed Feb 13, 2013
Well, we met with an attorney. We were hit with the bombshell that we will lose our $13,000 if not approved. We feel devastated, because it seems now that we are not going to be approved! From the beginning our loan officer and realtor told us we would not lose our money if denied. Our realtor just told us it was not his job to read our contract! So what was his job? Why do people have realtors if not to help with the process of buying a home? We are so, so devastated it is our hard earned money!!! This realtor was a so called friend. Our contingency will end in 2 weeks and we are lost.
0 votes Thank Flag Link Wed Feb 13, 2013
Thank you all. We think it will be wise in our part to seek legal counsel. We are in a situation where my realtor and loan officer says one thing and seller another. When asked about the contract and its terms no one is giving us a straight answer. We, the buyer, are confused with all the legal verbatim in contract. The truth is we think all parties just want to make the sale, because seller is telling us our only option if bank doesn’t approve is to build the house!!!! Are they crazy???how can we do that without funding and we have to give another 5% on Feb. 27(contingency date)!!! We would lose all of it when the house is ready in six months and we still don’t get approved. We asked SEVERAL times before signing, if not approved by contingency date, would we be entitled to our deposit and they clearly said YES. How can they now say no?
0 votes Thank Flag Link Mon Feb 11, 2013
It sounds like that it was either your real estate agent or/and your loan agent negligence who made a misrepresentation.

Although, I would suggest that if you really want this property, work it out with the seller and bring a co-signer or pay down some of your debts to qualify for a loan.

Otherwise, get a real estate attorney to represent you to get your deposit back.

Good luck.
0 votes Thank Flag Link Sat Feb 9, 2013
It looks to me like you are at risk of losing your deposit. hat loan officer was irresponsible for signing that letter that way and your agent should have kept the loan contingency in place until the loan was funded.

The escrow company will probably require your signature to release the deposit to the seller, so you have some leverage to negotiate... I would expect to have to pay something... (but you can negotiate so you don't lose the whole amount)

Best of luck!

Ron
0 votes Thank Flag Link Sat Feb 9, 2013
Thank you everyone for answering!!! Let me explain our situation a little further. We are under contract for a new construction home. We got a pre-approval letter from our mortgage loan officer. We thought he had actually sent all the info to the lender who then issued the letter. Well, now that it seems it will not go through due to our debt ratio, we found out he issued the letter manually!?!?!!? the seller is saying since we got a pre-approval letter, even if we get a bank denial letter before our contingency is up we lose our 5% down payment!!! We read over the contract and it states "The Mortgage Contingency shall terminate upon the occurrence of the following: Purchaser receives preliminary approval on or before Contingency date." What does it mean? We are so panicked!!! Of course our realtor had told us we would receive our money back if we got denied before our 30 days were up. Please HELP.
0 votes Thank Flag Link Sat Feb 9, 2013
Hi Raf

Before you start the purchase process get your Pre Approval.

You are quoting items from the CAR contract, I see above in your question.

Loan contingency can be removed only if you are Approved for a loan.

Banks such as Wells Fargo are giving Approval Letters not just a
Pre Approval.

Keep in mind with any purchase offer, you have to put down an
Earnest deposit of 1-3%, this amount is at stake if you do not
Handle your Loan Process correctly.

Also work with your Realtor closely, right now sellers are looking at only
Strong offers with few to no contingency.

Good luck
Perry
Web Reference: http://www.ruthandperry.com
0 votes Thank Flag Link Sat Feb 9, 2013
No. Get a pre approval so you know what your budget will be, if you're in contract already then refer to your inspection and contingency period to see what terms you agreed to when your offer was accepted.
You have 21 days for the loan contingency on a standard contract.

Good luck
0 votes Thank Flag Link Sat Feb 9, 2013
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