How to Make Lemonade From a Lender’s Lemons

Even if you have been selling houses your entire adult life, there’s always that jolt of excitement whenever someone makes an offer; it’s even more exciting when you accept. While this signals the homestretch of the process, things can knock the process off course; things like your Buyers loan gets denied. While that sense of joy and excitement has reasonably faded, it is not time to throw in the towel. This article will briefly discuss your options when your would-be buyer gets a thumbs down from their lender.
Lenders reject mortgage applications for a bevy of reasons, which is why most buyers get pre-approved mortgages so they know how much credit the lender is willing to extend on a home purchase; this, in turn, informs the buyer of “how much house” they can afford. Sure, a pre-approval is not a guarantee, but it is a lot better than flying blind. Banks will reject an application for a loan for reasons that include: (1) a home appraisal says the home is not worth as much as the buyer is willing to pay; (2) the buyer simply does not have enough money for their down payment; (3) COVID destroyed the buyer’s industry, and they are now unemployed; (4) the buyer’s debt-to-income ratio is untenable; and (5) the buyer’s credit score does not meet the lender’s requirements.
Once the would-be buyer fails to get a loan, they are free to walk away if you are so inclined. The question then becomes, “do I have to return their deposit?” If you are not familiar with the term, “earnest money” is a display of commitment to the deal; this money is held in Escrow but is released when a buyer fails to qualify for a loan. Purchase agreements come in two flavors: purchase-agreements with financing contingencies, and purchase agreements without financing contingencies – if it is the latter, or if they have removed their financing contingency in writing, you will likely be able to keep the buyer’s earnest money. Of course, if they were not qualified for a loan, they may need the money more than you do – this is a decision you will have to consult your moral code about before making it.
Of course, if the buyer is not approved for a loan, there is no rule that says you have to walk away from them; particularly when there is no other interest in your home (homes that stay on the market for too long become slightly toxic, many people suspect there is something horribly wrong with a home that can’t sell). You are free to work with the buyer and extend timelines to allow them to find a lender who will approve them, or you could make some improvements to your home and get the property reappraised. At its core, your creative solution will need to be based on the reason your would-be buyer was denied in the first place.
At the Chernov Team we understand that knowledge is power, and knowledge of how to make lemonade when a lender hands you lemons is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.