Closing Cancelled At Last Moment
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM # LAW 682
By Ilyce R. Glink and Samuel J. Tamkin
Summary: A young couple was on the way to
owning their first condo. On the morning of the closing, the lender calls to
say they will not be able to make the loan because the building is a condominium
conversion. Ilyce and Sam give the reader advice on how to recover their many
expenses and how to avoid this homebuyer nightmare.
Q: My son and his new wife were moving to a one bedroom condominium which was
part of a building conversion of 24 units. This is their first home purchase.
(article continues below useful links)
They were approved by their lender, they submitted all paperwork that had been
requested, the appraisal was completed, and they were scheduled to close.
On the day of the closing, the mortgage broker called early in the morning
to say that the paperwork for the closing “had not arrived and that they
were not ready to close just yet." After lots of calls that day, they were
told that the lender would not be able to close that day.
Later that day, the manager of the mortgage lender called once again and told
my son that they could not close the deal because the underwriters would not
approve the loan because of something to do with the fact that the unit was
a condominium conversion.
They now have to either find another lender, find another more “suitable”
place to purchase, or rent and forget about purchasing at this time.
In the meantime, they had to pay $100 a day for the truck they rented to move
their things and the cost of hotel rooms until such time as they can make one
of the three choices. It seems to me that someone at the lender should have
known long before the scheduled closing that this property was not going to
qualify for a loan.
What is the lender's liability for costs connected with a failed loan application?
Could someone make a case that the lender has liability for the costs associated
with the postponement of moving into a home? What about picking up the $100
per day for the extra days of the moving truck? The hotel bills for the extra
days? The anguish and frustration with now having to essentially "start
over" with either a new lender or a new property?
This doesn’t even include the frustration that my wife and I and three
other family members feel since we drove to their city to help them "move
in". Does the Realtor have any liability in this situation? What recourse,
if any, do they have and where should they start?
A: What happened to your son is a homebuyer’s worst nightmare: You get
approved for a loan and then the lender reneges on the day of the closing.
Some states are actually passing legislation to make lenders liable for damages
if they fail to close in your situation. Your son did everything he was supposed
The only thing that might have helped would have been to make sure that the
lender was aware that the property is a condominium conversion and that the
loan officer has the ability to approve a loan in this type of development.
Sometimes this is a problem with new construction and condo conversions, which
is why the developer often has a mortgage lender he or she works with to assist
buyers in the purchase.
Generally the breakdown in communication in new construction purchases is between
the mortgage broker and the end lender. It’s possible the mortgage broker
failed to properly document the file as a condominium conversion and the loan
ended up in the wrong department of the end lender.
You are right that the mortgage broker and end lender should have known that
a loan in this type of development would not be approved from the very beginning.
The Realtor does not seem at fault here and, other than perhaps recommending
the lender, did nothing wrong. It is up to each buyer to make sure the lender
meets his or her needs, including the rate offered, fees charged and other issues
in making the loan.
As far as going after the lender and mortgage broker, your son will need to
make sure he has in his possession the written approval of the loan from either
the mortgage lender or the mortgage broker. One of them should have issued a
written commitment to funding the loan.
If they did, the commitment should have listed some conditions for closing.
Presumably, these conditions were met and the issue of the “condominium
conversion” was new at the closing.
That loan commitment may be your son’s basis for recovering costs and
damages from the mortgage broker or even the mortgage lender. He and his wife
should sit down with an attorney who litigates cases and who has experience
in new construction litigation.
Your son should call the bar association in the city in which the property
is located. Your son should not have been placed in the situation he was in
due to the miscommunication or incompetence of either the mortgage broker and
the mortgage lender, or both.
Your son might also be in luck, if his state has passed certain consumer protection
statutes, particularly ones that relate to a lender failing to fund on the closing
on the day of the closing.
If those statutes exist, your son may be able to sue the mortgage broker for
these fees and even recover his attorneys’ fees. Some attorneys sue lenders
under the deceptive practices statutes of some states and consumer fraud statutes.
Others might recommend sending a letter to the mortgage broker demanding repayment
of certain costs and fees. If the mortgage broker fails to pay, your son can
file a complaint with the agency that regulates mortgage brokers in that state
along with a complaint to the attorney general’s office.
There are times that these complaints actually get the mortgage broker’s
to act and settle the claims. If their license is up for renewal, they may need
to settle these actions before the license is renewed. A good attorney should
be able to guide you through the process.
One last thought: The next time your son decides to buy a new construction
condominium or a condo conversion, he should work with a lender that has closed
on loans in that building or that the developer of that building has given as
a recommendation for the closing.
While he may feel that there is a conflict of interest in taking the developer’s
recommendation on a lender, it is in the builder’s best interest to make
sure that a buyer who comes to the table to close has a lender that is equally
ready to close.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com