When A Lender Reneges On A Pre-Approval

by | BiggerPockets.com

It has become common for builders and real estate agents to require a pre-approvedqualification or pre-approval from a lender prior to working with them on the purchase of a home. This is done so that the builder or agent doesn’t spend a lot of time with someone who will not be able to get a loan. It also helps the potential buyer by letting them know home much home they can afford at the beginning of the buying process.

Pre-qualification and pre-approval are not the same thing.  A pre-qualification is just a quick snapshot of the potential buyer’s position based on income and credit. It merely tells them how much money they might be able to borrow based on the information that they provide. A pre-approval is different in that it goes much further. The lender will generally go through the verification process. In addition to checking credit they will verify income and employment and perform other parts of the underwriting process. A pre-approval is the lender’s way of saying that if the property appraises at a value that meets their criteria of loan-to-value and the buyer makes the required down payment, the loan is approved.

Not So Fast

The collapse of the real estate market and price drops in many areas have caused lenders to decline loans for many buyers who had been pre-approved. This has caused problems for both buyers and sellers. A buyer finds a home that they like and puts a deposit down and the seller is happy to have found a buyer. Both are surprised when the bank denies the very loan that they had pre-approved because of changes in the real estate market.

In Las Vegas there has been an epidemic of this happening in the high-rise condo market. Buyers who had been pre-approved had placed many of these luxury condos under contract. However, in the time between contract and the completion of construction real estate prices had plummeted and the lenders refused to honor the commitment. The developers have been left holding the bag on many completed units. Buyers who had arranged their own financing rather than use loans arranged through the builder have lost substantial deposits in many cases because they were unwilling or unable to complete the purchase. This situation has forced many of the projects into bankruptcy or left them teetering on the brink of insolvency.

Turning It Up A Notch

It’s bad enough when this happens to an individual who is trying  to

Image via Wikipedia

Image via Wikipedia

purchase a home. It’s even more problematic when it happens to a companythat is building a $3.1 billion resort. Fontainebleau Las Vegas had secured commitments from multiple lenders on the $800 million in financing that was needed to see the project through. Unfortunately the lenders decided to pull the plug on the project just as it is nearing completion. The lenders include some of the biggest names in the industry such as Bank of America, JP Morgan Chase, Deutsche Bank, Royal Bank of Scotland and Barclays Bank. At stake are 3,300 construction jobs and over 6,000 jobs when the 3,815 room resort opens in October of this year. The developer has filed a lawsuit (article) in an effort to get the lenders to honor their agreement.

This is just the latest blow to Las Vegas. The area had been rocked by the stoppage of the $4.8 billion Echelon Place and problems with the $8.7 billion City Center project. The area is one of the hardest hit by the recession with unemployment over 10% and at or near the top of the nationwide foreclosure rankings. Just as area residents are wondering “what else could go wrong” something does.

The difference between involvement and commitment is like ham and eggs. The chicken is involved; the pig is committed. – Martina Navratilova

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  1. This “fibbing” of the mortgage industry creates distrust in the business of helping renters own through “rent to own”, namely Lease Option or Rent to Own.

    Before 2008, as a Tenant Buyer, if you had a 12 month lease with and option, you paid you lease payment on time, your income, D/I ratio was reasonable, length of job reasonable, credit payment reasonable, you most times as a RE Investor could forecast that the Tenant Buyer could get financing for that house.

    Now, with the 1) government intervention of Government Mortgage Agencies 2) lenders spooked and not lending, 3) appraisers using REO Sales for comps (short sales completed), regular consumers from the middle class can not count on mortgage banking being reasonable.

    What I offer on a Rent to Own is the Tenant Buyer has:
    – 36 months to get the house
    – the Sales Price is tied to a new appraisal at time of exercise; no one gets screwed
    – if the Tenant Buyer rents from me for 36 months, but GETS DENIED for a mortgage, and he – she obeys the lease, keeps the place tidy, allows reasonable inspections, etc, they get their option money back IF they move out and leave the place rentable, and….
    – if he – she chooses, a Private Financing Instrument (e.g. Agreement for Deed, Wrap – AITD, etc) with another 36 month term, and a balloon payment will be offered if they choose to stay in the property. All Option payments will be credited to a new sales price.

    If the REI reassures the Tenant Buyer that even if they do not get financed, you have THEIR HOME FINANCING SOLUTION, the REI will generate word of mouth that the REI is reputable.

    If the REI needs cash, the REI can always sell the Lease Option House to a Retirement Investor from a Self-Directed IRA. The IRA can borrow 70% with 30% down from the IRA.

    To minimize tax, it is always advisable to wait 366 days to get a 15% tax rate on the gain of the sale.

  2. You definitely paint a bleak picture of Las Vegas but it’s not as bad as you make it out to be. I know I am biased because I live and work in Las Vegas but our local real estate market is doing fairly well considering. Yes we lead the nation in foreclosures but just as quick as they are coming onto the market, they are being sold.

    Most of the cities that occupy the list for most foreclosures are seeing their inventory increasing, however; in Las Vegas our inventory is decreasing.

    Project City Center has had some issues but is still on pace to be completed at the end of the year. The unemployment rate is pretty high but most of the increase can be attributed to the loss of jobs in the construction industry. In the last 8 years, we saw an influx of people moving here for construction work because of all the projects coming online. Many have left the state but are still collecting unemployment.

    One of the biggest problems Las Vegas faces is diversifying its economy. We rely so much on gaming and tourism revenue and this is the first time since maybe the early 80s that we have seen a drop in revenue from gaming and tourism. Not sure what the answer is but I am sure we will find a solution in the near future.

    Tony Sena’s last blog post: Las Vegas Loan Modification Frequently Asked Questions

  3. Richard Warren on


    I live in Las Vegas as well. I paint a bleak picture because that is the case, though I am bullish on Las Vegas long-term. We have met and you come across as an intelligent and sincere guy but as the owner of a real estate business you are going to have a natural bias.

    ? Houses are being sold because prices have dropped to 2003 levels. This also means that many of those who purchased after 2003 are now upside down which only exacerbates the problem.
    ? REO inventory is decreasing. However, the foreclosure moratorium has been lifted and we will be seeing an increase in REO inventory nationwide as the pace of foreclosures picks up again.
    ? Unemployment is officially at 10.1%, however this only includes people who are receiving benefits. The real number is much higher and the competition for job openings is fierce.
    ? Population in Clark County has decreased for the first time in 23 years. Fewer people equals lower demand for housing.
    ? To say City Center has “some issues” is a gross understatement. Major defects cause the size of the Harmon hotel to be drastically reduced. A report last week outlined many unresolved problems. From the Review Journal: Felix Martin, a forensic structural engineer based in Southern California, makes his living analyzing data for and testifying in construction defect lawsuits. Based on his experience, he believes City Center’s unresolved rate should be no higher than about 10 percent. “I’m concerned about the sheer magnitude” of unresolved discrepancies and missing approvals at the City Center project, Martin said after he reviewed the spreadsheets in which the Review-Journal dissected the City Center logs.
    ? Gaming companies are massively over-leveraged with many on the brink of insolvency. There have been many layoffs in the industry and it will get worse before it gets better.
    ? Many people have touted how Las Vegas would always survive because of convention and tourism business and the influx of foreign visitors. Many businesses have scaled back conventions or cancelled them altogether. Tourism is down and those who do come are spending less. Foreigners are feeling the effect of the recession and cutting back as well. One room service manager that I know who works at a major hotel says that his room service business is 40% of what it was a year ago. That is a huge drop
    ? People in the real estate industry have been crying “bottom” for over two years now. The truth is that nobody knows where the bottom really is and we won’t until it has passed.
    ? We also have a state legislature that spends money like a bunch of drunken sailors in good times and then cries the blues when they have to cut back spending.

    I don’t pretend to know what the answer is. However jobs are the key to any recovery. We have already lost Echelon Place, we can’t really afford to lose any more. There is already a fear that these new resorts are not going to create any new dollars, just take existing revenue from other properties.

    Do I paint a bleak picture? Unfortunately yes, I wish it wasn’t so but playing the spin game doesn’t change things.

  4. What are the qualification changes that are causing these folks to be pre approved one minute and have the loan turned down the next? What a pain for both the buyer and seller. Also how is it legal that the lenders can just decide to pull the plug on a project (like the las vegas one) just as it is almost finished? The funds were spent, builing 80 percent up and they are now left with a shell of a project.

    • Richard Warren on

      If by lucky you mean being forced into bankruptcy and losing $2.3 billion. These were not people looking to make a purchase. These were the developers of the project who had already sunk $2.3 billion into it and needed the lenders to fund the $800 million they had already promised in order to complete the project. Instead of an operating hotel casino there is now an empty tower on the Las Vegas strip. There were no winners here and the developers could hardly be called lucky because they didn’t get funded.

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