You are a buyer or seller in today's market. The home is in escrow and it seems to be proceeding nicely. Suddenly, the transaction comes to a screeching halt. The lender has dropped the ball in processing the loan. You can save yourself severe stress by anticipating this issue.

With interest rates at historic lows, buyers are taking advantage of their opportunity to lock in extremely attractive fixed loans, in some cases under five percent. More significant, however, is the refinancing activity by existing homeowners. Approximately three of every four residential loans today is a refinance.

This torrent of “refis” has been clogging up the system. In particular, lenders with the best rates are being besieged with applications. Unfortunately, the most popular banks do not have sufficient staff to handle the onslaught.

To make matters more complicated, the lowest rates appear to be alternating every week or two between the large lenders. As a bank's rates decrease, its activity increases and proper customer service is forgotten.

If you already own a home and are refinancing, the expeditious processing of your loan is less of a concern. On the other hand, as a buyer or seller, you could be harmed by unexpected delays.

A pre-approval letter is a requirement for an offer to be seriously considered. In most cases, this document is prepared by a mortgage broker who works with a variety of lenders. It indicates that the buyer's credit, funds and employment have been verified and are satisfactory.

There is a computer-based system that can determine whether the buyer meets general underwriting guidelines. If that has been completed as part of the pre-approval process, it makes the letter even stronger.

Nonetheless, a pre-approval letter, unless issued by the same lender that will grant the loan, is not an absolute guarantee that the buyer will qualify. Making binding plans based on a pre-approval letter could turn out to be a mistake.

In our still-competitive market, some aggressive agents take risks with their clients' welfare, whose implications may not be understood until it is too late. With a pre-approval letter in hand, agents who write contracts without a loan contingency (unless the buyer has all the cash necessary to close the sale without a loan) are putting their buyer, and the seller, in a possibly vulnerable position.

If there is no loan contingency (even though the buyer needs a loan), and the escrow closes late, or worse, not at all, the buyer could be responsible for damages to the seller. For example, if the seller commits to closing on another property by a certain date, and then incurs large costs because your loan delays caused it to close late, the seller may look to collect from you, the buyer, and your agent.

I just closed an escrow that aged me unnecessarily. The buyers were extraordinarily well qualified; the home they were purchasing was lovely and had no red flags that would slow down a loan; and the escrow was a longer-than-usual, 50-plus days. As they say in the lending business, this should have been a “slam-dunk.” It was not.

Although my buyer had a pre-approval letter, it was not from a particular lender, but from a mortgage broker. Today, lenders can barely handle actual loan applications. As a rule, there are scant resources for pre-approving borrowers who may, or may not, ever apply for a loan.

The first clue of a problem with the lender was its failure to approve the loan in a reasonable period, three weeks in this case. This was despite the fact that all paperwork and documentation had been provided early. After almost a month, loan approval was finally granted, the financing contingency was removed and the escrow proceeded.

About 10 days before the scheduled close date, the mortgage broker requested that the lender prepare loan documents and send them to escrow. Understanding that there is a turnaround time for lender review after the buyer signs the loan “docs,” I knew we needed to have the forms in escrow by Friday for a close the following Thursday. We were assured by the bank representative this would happen. It did not.

I called and told the listing agent there was a good chance the escrow would close late. His sellers were in contract on another house, and he was unhappy to hear the news. It was the prototypical “domino” effect.

Calls were made to the lender and papers were promised for Monday. None were sent. Every ensuing day the number of calls by the mortgage broker to the bank increased, until they reached one per hour, each day. Almost all of these inquires went unanswered. The few times the bank's managers did respond, we were again promised that the docs would be e-mailed to escrow that day.

Each day arrived, more calls were made, promises were broken and loan docs were not delivered. Finally, on the Thursday scheduled for closing, with still no papers in escrow, I suggested that the buyer go personally to the bank's regional office to confront the underwriter. I knew they would not talk with me; it was worth the long shot that they would speak with my buyer.

When he arrived, he was told they could not locate his file. After almost an hour, they realized that the person who was supposed to be working on the case had called in sick. It was sitting on her desk, one of about 200, mainly unattended, loans being processed by that office.

My buyer remained in the underwriter's office for five hours until he saw her e-mail the loan docs to escrow and I confirmed they had been received. I signed the buyers in escrow the next day and the husband hand-carried the signed papers to the underwriter. The loan was funded on Monday, and closed on Tuesday, three business days, but seemingly years of heartache, later.

If there was any good fortune in this situation, it was that the lender had a local processing office and I had a buyer who was willing to stand up for his rights. In almost 24 years in real estate, I have never experienced anything like this and hope to never have to again.

Interestingly, several days later, I heard from a veteran, local broker that he had had an even worse experience with the same lender and had closed three weeks late.

Until interest rates rise and loan demands slackens, buyers, sellers and their agents have to be aware of lender delays. As a seller, it does not serve your best interests to allow your agent to insist on an impossibly short loan contingency. On the buyer's end, writing an unrealistic contract regarding financing could cause upset and, possibly, expensive penalties if you do not perform.

Ask who the lender is and its time frame for processing. Most importantly, buyers must be circumspect about making offers without loan contingencies; sellers should insist on proof of cash to close if a buyer does this.

Remember that, in today's out-of-control loan market, only lenders with uncompetitive rates can keep up with the volume. Plan accordingly.

Related Article: Unwritten Contingencies