Under what circumstances can a bank change the terms of a loan after pre-approval goes through?

I was pre-approved for a certain loan. After finding a home that I wanted and signing the documents from the bank (saying how much I would pay, what the bank was loaning me and at what rate), my bank point of contact told me that the underwriter would not write the loan after finding out that I didn’t have 4 valid sources of open credit. My credit score was good, 755. I told my POC my credit situation, namely that I have a credit card but I never use it because I don’t buy things I can’t pay for. Also, just coming out of college I never really needed to incur credit. She then still said everything was fine and I could go ahead into escrow for the purchase of the house. It was only after this that I was hit with the news and that I would be forced to bring on a co-signer or the loan would fall through. Do I have any other recourse with this particular institution or was there any malpractice of some sort on their part that I should be aware of as a customer? I feel that they didn’t meet their fiduciary and business responsibilities/duties to me as a client to inform me of this sort of thing upfront.

Asked on May 8, 2016 under Real Estate Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

While what you describe is unfair, it is also common and legal. A "pre-approval" is nothing more than a statement that based on what you have provided, you *should* or likely would qualify for a loan--but it is not a loan committment. Until there is a firm committment (e.g. the loan has gone through underwriting), the bank is not locked into providing it, and is not liable if they fail to provide it.
While there is technically a legal theory you could try based on the POC telling you to go ahead into escrow (which she should not have done; most will not say this), called "promissory estoppel," which can in some circumstances enforce a promise even without a final contract (or, as here, a loan committment), you would be unlikely to prevail on it: among other things, it requires that your reliance on the promises be "reasonable" and if there was no actual loan committment issued it, a court could easily find that it was *not* reasonable to rely on this statement--especially if there was anything in any of the lender's marketing materials, the application forms, or on the bank's website stating that there is no obligation to provide a loan until after underwriting and a final committment is issued (since if there was such language or statement anywhere, that make any reliance on a statement to the contrary completely unreasonable). Plus a legal action based on this would typically take months, which is likely far too long a time frame for this. You may need to do what it takes to satisfy the lender (e.g. co-signor).
I definitely sympatheize: my wife and I recently bought a house and the lender initially told us we could do so at a 15% cash/85% mortgage level; but after getting deep into the process, they suddenly decided that because I am a self-employed solo practioner, they needed 20% cash from us, forcing us to scramble to find another 5% deposit while also footing all the expenses of sale and moving expenses. Lenders do this frequently.

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