GAR Financing Loan Denial Letters Revisited

GAR financing contingencies, including Conventional, FHA, VA and USDA-
RD, include a very specific, time limited provision regarding Loan Denial
Letters. If your buyer is denied a loan and the buyer can legitimately use
the denial to terminate and get their earnest money back, don’t forget to
timely send the Loan Denial Letter or the earnest money might go to the
seller instead.
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These are the steps to be taken and the rules to follow.
1) The Buyer must notify the Seller (Seller’s agent) of the loan denial
within the contingency time period. Use the GAR Notice form F816
and ask for a Read Receipt.
2) The Buyer must provide the Seller with a Loan Denial Letter from the
lender within seven (7) days from the date of Notice. It’s ok if the 7
days falls outside of the contingency period, but the notice of denial to
the seller must be within the contingency time period. The reason for
the additional 7-day period to produce the Loan Denial Letter is
because lenders may not be timely. It may take days for the lender to
produce the letter. If the lender does not produce the letter within the
7-day period, the finance contingency is completed and the Buyer
can lose the earnest money. In effect, the sale becomes a “no
financing” sale and the buyer’s earnest money is at risk if the buyer
does not close.
3) A Loan Denial Letter must be for the Loan(s) described in the
Finance Contingency. If the interest rate in the contingency says Not
greater than 5.00% for a 30-year term, getting denied for a 15-year
term at 6.00% doesn’t work. A buyer may apply for different loans;
however, the denial of other loans may not be a basis for a buyer to
terminate.
4) If there was an Approved Lender, the denial letter must be from that
Approved Lender.
5) A Loan Denial Letter from a non-institutional mortgage lender (private
lender) cannot be the basis for Buyer to terminate this Agreement.
6) The Loan Denial Letter may not be based solely upon one or more of
the following 4 reasons. However, even though one of the 4 reasons
may apply, if the buyer has an additional legitimate reason to
terminate, such as insufficient income, then the “solely” provision
makes the Loan Denial Letter valid and allows the buyer to terminate
without penalty.

o Buyer lacks sufficient funds other than the amount of the
Loan(s) to close;
o Buyer not having leased or sold other real property (unless
such a contingency is expressly provided for in this
Agreement);
o Buyer not having provided the lender(s) in a timely fashion with
all information required by lender, including but not limited to,
loan documentation, Official Wood Infestation Reports,
structural letters, well tests, septic system certifications, flood
plain certifications and any other similar information required by
lender (hereinafter collectively “Required Information”); or
o Buyer making purchases that adversely affect Buyer’s debt to
income ratio.

February 24, 2023