If preapproval crumbles, what can seller do?
By Dana Dratch • Bankrate.com

Your closing is just around the corner and you discover that your lender has gone bankrupt.

Or, maybe because of the chaos in the subprime market the lender has changed underwriting standards so you no longer qualify for the loan for which you had been preapproved.

What do you do now?

A lot of that will be determined by the wording in the contract. "It really depends on the circumstance," says Ron Phipps, broker with Phipps Realty in Warwick, R.I.

Every contract and set of state laws is slightly different, he says.

Crucial points
Typically, there are a couple of crucial points in the process. After you've signed a contract but before you've gotten your mortgage acceptance letter, you can probably get your deposit back and walk away, if that's what you want. If you want the house but need more time, you can ask the seller to move back the mortgage contingency deadline or closing date.

"In this market, which is in most instances a buyer's market, sellers are willing to work with you," says Phipps.

One exception: If your contract has a clause specifying that time is of the essence, says Phipps. If so, the sellers may elect to go with another offer, if they have one.

If your financing falls through after you've received the mortgage commitment letter and your next stop is the closing table, you're in a more difficult situation. In some cases, the seller could keep the deposit and attempt to require you to buy the house.

Most standard buyer/seller contracts set a ceiling on a maximum rate. If it's above that threshold, you can be released from your contract. It's another good reason to read that buyer/seller agreement carefully and make sure that maximum is compatible with your budget.

Phipps' advice: If you hit a snag after you've already received your mortgage commitment letter, consult with a buyer's agent and a real estate attorney who specializes in conciliation (rather than litigation) and try to work out an arrangement with the seller.

You may simply need to negotiate for more time to get new financing at a decent rate. Or, if you've discovered that you probably can't get the financing, you might be able to get back all or part of the deposit.

Before you sign a contract, read through the terms so you know exactly what your obligations are, says Phipps. Pay special attention to the default clauses.

An additional safeguard: Scope out the lender thoroughly, says Phipps. Especially if you're marginal on the financing, he says, "Check the lender out and be sure of the money to make sure you don't get caught in a bind."