Protect Your Buyers! Required Notice of Intent to Proceed with Loan Application

There is a requirement in the Conventional, FHA and VA Loan Contingencies that a buyer is required to notify the seller of any mortgage lender to whom Buyer has sent a notice of intent to proceed with loan application, along with the name and contact information for the loan originator. 
 
Further, in another section of all 3 loan contingencies, there is a qualification that in order for a buyer to terminate without penalty based upon an inability to obtain the Loan(s), the buyer must have fulfilled all of the applicable requirements in the exhibit.
 
Therefore, buyers can get their earnest money back with a denial letter ONLY if they have sent the Notice of Intent to Proceed with Loan Application to the seller!
 
Put another way, if the Notice of Intent to Proceed with Loan Application was not sent to the seller, the seller can legally keep the buyer’s earnest money even when the buyer was denied a loan within the allowed time period.
 
This requirement is not new. It has been in the loan contingencies for at least the last 2 years.  What’s new is that we are now seeing that sellers are using an omission of the notice as a reason to keep earnest money, even when there has been a loan denial within the relevant time period and a good denial letter.
 
Add The “Notice of Intent to Proceed” to Your Process
Protect your buyer clients. You should add “Send Notice of Intent to Proceed with Loan Application” once they commit to their lender to your process.  This is another step in the process, it is also another way to demonstrate your value to your client by managing the time limits and requirements to make sure clients are protected.
 
It works both ways. On the other side, if you are representing a seller as a client and you did not receive a Notice of Intent to Proceed with Loan Application from a buyer that did not qualify for a loan and is terminating for that reason, you are obligated to inform the seller of the option to retain the earnest money. Once again, this is another way to demonstrate your value to your client.
 
Relevant Language
You can find the relevant language in the Conventional Loan Contingency at numbers 6 and 8 and in the FHA and VA Contingencies at numbers 5 and 7. This is what to look for:
Buyer to Notify Seller of Intent to Proceed.
When it is known, Buyer shall promptly notify seller of any mortgage lender to whom Buyer has sent a notice of intent to proceed with loan application and the name and contact information for the loan originator.
 
Use of Approved Mortgage Lender and Loan Denial Letter.
Buyer may terminate this Agreement without penalty based upon an inability to obtain the Loan(s) only if Buyer fulfills all of the applicable requirements set forth in this Exhibit.  (at the bottom of the section)