It is common for sellers in real estate transactions to require prospective buyers to obtain pre-approval for financing before the deal will go through. This is true even in cases where buyers potentially have the cash available to purchase a property outright, without needing a mortgage. But why is this practice so commonplace, and what happens if you do not have this provision in your real estate contract?
What Does it Mean to Get Pre-Approval for Financing?
Put simply, getting pre-approval for financing on a mortgage means asking a bank or other mortgage lender to give approval for a mortgage before the actual sale goes through. In other words, it is asking a bank to give an assurance that they will issue a mortgage for a particular house in the event that the real estate transaction is successfully completed. A buyer who completes this process will receive documents showing what kind of mortgage the lender is willing to approve, based on financial information provided to the lender.
Why Do Sellers Require Pre-Approval for FInancing?
There are several reasons why sellers will require pre-approval for financing, even when a buyer ostensibly has enough liquid assets to purchase a property without a mortgage. First, it helps to guarantee there will be money for the transaction, since banks rarely renege after they have already given pre-approval. Second, it helps to act as an anti-fraud measure, since lenders will conduct a check of a buyer’s finances to ensure their documents are legitimate.
What Happens if You Do Not Require It?
While requiring pre-approval on financing is not always required, a seller who fails to put this provision in their real estate contract is potentially opening themselves to certain risks. For example, there is a greater risk that a cash buyer may try to get out of the contract at the last minute due to a lack of funds. There is also an increased risk of being victimized by scammers who may be looking to purchase a property using fraudulent or forged documents.
What Should You Do?
To understand what works best for you and your transaction, you should speak to a lawyer with experience handling real estate transactions. They can help you evaluate your real estate contract and minimize any legal risks. That way, you can focus on buying or selling your property, rather than worrying about potential legal problems getting in your way.
At David J. Lorber & Associates, PLLC, we assist clients throughout New York who are looking to buy or sell real estate. We will guide you through the process and help you minimize your legal and financial risks. Call us at (631) 750-0900 or contact us online to schedule your Free consultation at our Setauket office.
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