If your home loan is denied while you’re in escrow, you must take steps to resubmit the loan or find a co-signer. You must also notify escrow and the sellers that the escrow will be delayed or even cancelled under some circumstances. In some cases, depending on the contract, you may lose your good-faith deposit. If you think you have alternative finance options, request an escrow period extension in writing.
In purchase contracts is usually a contingency that specifies a time period in which you have to qualify for the home loan. If you fail to qualify in that time period, you may cancel the contract and get back the good faith deposit you submitted when you opened escrow. This is a negotiable contingency that must be agreed on at the onset of the contract. The standard contingency time frame is 17 days but can be anything the buyer and seller agree to in the contract.
If your loan is denied after it has been underwritten, then ascertain why it was denied and determine any alternatives. For example, if the issue is income, you may want to bring in a co-signer. If the issue is insufficient assets, you might request a gift from a relative or friend. You might also try a different type loan. For example, if your loan application was for a conventional loan, you may want to try a Federal Housing Administration loan since the qualification requirements are less stringent than a conventional loan.
Un-Winding the Deal
If you have to back out of the deal, give written notice to all parties concerned including the sellers and the escrow company. If you’re able to request a cancellation within the contingency time period for the home loan, also request a return of the good-faith deposit. If you have to cancel after the time period has expired you should contact your real estate broker to find out your alternatives. Escrows cannot release a good-faith deposit until both you and the seller agree in writing.
Give yourself plenty of time in escrow to qualify for the home loan; many unknown variables can affect your loan qualification. Also, get pre-approved by the lender before entering escrow, so you’ll know you can close on time.