Legal? Yes. Highly Unusual? Yes.
Normally the title company prepares a HUD-1, which must be approved by the lender. The lender conveys a list of conditions that must be met prior to issuing a Clear to Close. They follow this or accompany this with the documents required to be signed (occasionally without the warranty deed and other disclosures) plus a list of instructions to be followed at closing called funding conditions. Once all documents have been executed by buyer and seller and copies provided back to the lender, the lender issues a funding number identifying that a wire has been ordered to fund the executed transaction.
Some lenders include in their audit procedures re-verification of employment or credit scores and lately have been exercising this procedure prior to funding.
Satisfying all conditions by buyer, seller and title normally is enough to get funding, but if the internal audit conducts a re-verification of some item and it fails, then funding is withheld. This has happened before because a verbal re-verification of employment went to an old office number and the old department did not know that the employee had moved to a different department. In your case we can only guess what caused the funding to be halted.
If the re-verification was the problem, the loan processor can dig into the procedure and find out what the problem was, and potentially can cure the re-verification by giving an updated contact number for employment. If the re-verification was for credit, this could have been caused by the buyer's purchase the day before closing of some furniture items on credit causing his score to drop. This may not be curable.
Your recourse is limited when the problem is financing to what is called out in the contract addendum for third-party financing.

Home
In most cases the only way a short sale is successful is if you have a professional negotiator involved...a Realtor, attorney, etc. In most cases something can always be negotiated...

GREAT QUESTION:

Yes lender can decline any loan, no fault to buyer. Not knowing all particulars of "why's" difficult to make any further comment. Have you listing agent detail and explain your executed contract.

National Featured Realtor and Consultant, Mortgage Loan Officer, Lecturer regarding Credit Repair
Lynn911

Dear McKinney Home Seller,

Unfortunately for you, as the seller, the lender can decline approving the loan, through closing up until funding of the loan. There are several protective measures I take for my clients which result in a very high closing ratio! However, if your selling by owner, while you can do that, unfortunately, statistics show that only a few of the FSBO (for sale by owner) transactions actually make it to the closing table of the many deals put together. You have a couple of options, one is that you could extend the contract with the buyer in a kick-out clause in case you get another buyer in the meantime, while allowing your current buyer to see if they can get a loan from another lender. I have helped clients with this before, while one lender dragged their feet and didn't fund, I encouraged him to switch to my preferred lender and he closed & funded on his house I sold him, just one week later! The second option is to release his earnest money according to the terms of your contract and put your house back on the market.
I am sorry this happened, I can imagine how titilating this must be to be right at closing and then not fund.
My aggressive and proven marketing strategies delivers homesellers across Collin County to 97-100% of list price in 60 days or less. If you want to sell it fast, call me today! Nicole Arenas, 214-991-9507
(If your not already listed with another broker)

Nicole Arenas, Real Estate Consultant
Listing Specialist
Top Producing Realtor http://www.nicolearenas.com
Blog: http:activerain.com/nicolearenas
Tel: 214-991-9507
Email: nicolearenas@ymail.com

Hello Home Seller,

I would expect that if you read the buyers loan paperwork there is most likely wording allowing the mortgage company to do this. I would doubt that they would decline financing without the ability to do so. Of course this is really a matter for the buyer to explore with a RE Attorney if they feel the mortgage provider is reneging on a valid contract. I've been through a number of financings over recent years and have seen clauses allowing mortgage companies to cancel for nearly any reason. Unfortunately with what is going on today mortgage providers are more apt to exercise those rights than not.

Emmanuel J. Scanlan
PS Inspection & Property Services LLC http://www.psinspection.com
214-418-4366 (cell)
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