Loan Fell Through Day Before Closing

If your loan fell through the day before closing, then you’re in a really tough situation where you may very well lose your contract deposit if you absolutely need financing to be able to close.

If however you’re able to close all cash or quickly find a back-up lender, and you happen to be buying in a market like NYC where either party typically has 30 days leeway on the closing date, then you may indeed be able to procure a backup solution in time.

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Can the bank really pull out last minute?

Yes. Even though you have a comforting mortgage “commitment letter” from your lender, notice the fine print stating all of the conditions of closing and outs for the bank.

Here are a few excerpts from a recent commitment letter issued by a major, national bank that’s very active in the home lending space:

We will honor this commitment to the best of our ability. If there are any material changes in your financial status, the information you provided in your application, or the condition of the property, that would cause your loan to no longer meet applicable regulatory requirements, the terms of this loan commitment may be reconsidered or withdrawn.

Note that even if you provide and do everything they ask, they will still only “honor this commitment to the best of our ability.” Not so reassuring when you’re about to close on a home.

If your loan fell through day before closing, then you may lose your contract deposit except under certain scenarios. What to do & more.

Here’s another excerpt that’s worth reading, which goes over what happens in the case of modifications or withdrawals:

We may withdraw this approval or modify the terms of this Commitment Letter if:

  • Any information is presented that has not been revealed to us previously

  • You don’t close your loan on or before the Commitment Letter expiration date found on the first page of this letter

  • The specific loan program for which you’ve been approved is discontinued

We are not obligated to extend the expiration date of this commitment. Should you require a commitment date extension, you may be charged a fee and will be responsible for any costs if the extension requires loan documents to be updated.

If you have a Rate Lock agreement, we may modify the terms of this commitment if you do not close your loan by the Rate Lock-in expiration date that appears in your Interest Rate Lock Agreement letter.

Please contact us immediately if:

  • You have any change in income

  • You decide on a different property

  • You cannot deliver required documentation

  • Your closing date needs to be changed.

Any of these circumstances may require you to provide additional documentation and may cause the terms of this commitment to change or to be reconsidered. We will contact you to explain the updated requirements, and your loan maybe resubmitted for credit approval.

This mortgage loan commitment is also based on the assumption that you will provide everything requested in the Commitment Letter, other documentation requested, and the information is complete and legible. If not, we cannot guarantee final approval of your loan.

Pro Tip: Be transparent and honest with your lender from the start. Don’t hide any information. Get the remaining documents they need per the commitment letter as soon as possible, as commitment letters will often state that “if we don’t hear from you, we may cancel your loan.”

What not to do before closing

The best piece of advice during the mortgage loan process is to don’t do or change a thing. If your bank has issued you a commitment letter, then they’ve underwritten you and approved your credit at that point in time.

This assumes that nothing significant changes or happens in regards to your credit profile, income, assets prior to closing.

This is why commitment letters will often have something similar to the following excerpt:

Our loan commitment to you is based on the product and terms we discussed, as well as information you provided, including your current income, credit rating, debts and property condition. Please do not apply for additional credit until your loan is closed, as this may affect the approval of your loan.

While this may appear to be common sense, it can be easy to forget when you’re looking to get a new credit card or something else as innocuous.

Don’t lose your job or switch jobs

Just because you’ve sent in your paystubs and employment verification letter doesn’t mean you’re off the hook. The bank will call your employer typically the day before closing to verify that you are still employed there.

If they find out that you’ve been laid off or fired, then most likely you’ll be one of those searching for what to do when your loan fell through day before closing.

In fact, most commitment letters will have something like the following excerpt:

While we’re reviewing your financial documentation, we’ll also be working behind the scenes to ensure we have things like:

  • Verification of your employment

  • A property appraisal report that supports your loan amount

  • A property title report

Don’t apply for new credit or run your credit

This may seem obvious, but it can be easy to forget when that store clerk asks whether you want to save 20% by signing up for their store branded credit card.

Or, when your bank or other financial institution casually offers you a free credit monitoring tool on their website, where the fine print says you’ll allow them to pull your credit report.

Also, don’t run up your credit card balance with large, one-off purchases when you’re waiting to close. Doing so will increase your credit utilization which may negatively affect your credit score. Just wait a bit before you book that sick Galapagos cruise.

All of this is terrible because every time you do a hard credit pull, your score will go down. The more pulls, the worse the hit. Don’t affect your credit score and profile before you close!

Pro Tip: It may be harder to hold still for months or even years if you are buying a pre-construction or a new construction home. Just remember, there are special risks to buying a new construction home to be aware of!

What to do if your loan fell through the day before closing

If your loan fell through the day before closing, then you’re in deep trouble if you need financing in order to close. Even if the seller is generous enough to give you an extension on the closing date, you’re highly unlikely to get a second lender lined up in time.

Even if you’ve parallel-tracked with a back-up lender, you usually won’t be able to get a clear to close from this back-up lender in such short notice.

Furthermore, why did the first lender back out last minute? If it had something to do with your credit profile, or the collateral, then there’s a high amount of doubt that a back-up lender will be able to come through when the first one couldn’t.

All of this will weigh on the seller’s mind if you ask for an extension on the closing date in a desperate attempt to seek financing.

Sure, there’s the possibility that you could try to find a “hard money” lender to lend you money at a high interest rate, but will that lender even approve you given the higher interest charges?

More likely than not, the seller will simply cancel the deal and keep your deposit for defaulting on the contract. If you’re lucky, a nice seller may return your contract deposit, or at least some of it after deducting carrying costs incurred by the seller during your failed loan process.

When you can close all cash if necessary

If you are able to close all cash if necessary, there’s a chance that the seller would consider extending the closing date if you are able to gather up the funds quickly.

This may not be possible if you did not prepare for such an outlier event happening the day before closing.

Remember that it can take up to 3 days for trades to settle if you need to sell equities, and there may be daily transfer limits between accounts.

Of course, in markets like NYC where contracts use “on or about” language for the closing date, this is much easier as either party customarily has 30 days leeway on the closing date exactly for situations like this.

However, in states like Florida where standard Realtor contracts specify an exact closing date, or use “on or before” language, then buyers will have much less leeway in terms of how long they can delay closing on a house or condo.

Pro Tip: Your bank account will typically have daily wire transfer limits in place unless you’re a high net worth customer. However, you can typically get around these limits by going in-person to a bank branch to make a wire transfer in person. You can estimate what your closing costs as a buyer in South Florida would be by using our closing cost calculator for Miami.

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Do you have a funding contingency?

A funding contingency is a contract contingency that protects the buyer in the event that their lender is unable to fund the purchase on closing day.

This contingency can come in real handy in the event of an unexpected job loss after contract signing, but before a closing occurs, and makes sure the buyer can walk away from the contract with his or her deposit.

As you can imagine, funding contingencies are rare to see because they add an out to the contract that lasts all the way until closing.

In fact, custom contract contingencies like a funding contingency are only seen in markets like New York where contracts and contract riders are highly customizable.

In other states like Florida where standard Realtor purchase contracts are used, there are no places to “fill-in-the-blank” for custom contingencies like this.

Pro Tip: Remember that a financing contingency is not a funding contingency. A financing contingency, often called a mortgage contingency, is quite common in all markets. A funding contingency, which effectively protects the buyer if a bank withdraws its commitment letter prior to closing is extremely rare to see.

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Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided. Hauseit LLC is a Licensed Real Estate Broker, licensed to do business in New York under license number 10991232340. Principal Office: 244 Fifth Avenue, Suite 2950, New York, NY 10001.

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