The following questions and answers have been asked about the financing contingency, appraisal contingency, the offer not contingent on financing and funding condominium transactions.
Delivery of loan commitment
Are loan commitments legitimate if they are not signed by the buyer?
Lines 238 to 241 of the revised 2011 WB-11 Residential Offer to Purchase state in part: “Buyer and Seller agree that delivery of a copy of any written loan commitment to Seller (even if subject to conditions) shall satisfy Buyer’s financing contingency if, after review of the loan commitment, Buyer has directed, in writing, delivery of the loan commitment. Buyer’s written direction shall accompany the loan commitment.”
If the buyer does not deliver the written authorization along with the loan commitment, the buyer has breached the agreement that the parties made when they signed the offer. The parties have agreed that the buyer’s written direction is required, so the delivery of a loan commitment alone does not satisfy what the contract says and does not fulfill this requirement. This provision has been included in the offer to ensure that the buyer really saw the loan commitment and really directed that it be delivered to satisfy the contingency and bind the buyer to the contract. Note that these provisions apply to all the 2011 updated offers. For further discussion of the financing contingency provisions, see the February Legal Update, “2011 WB-11 Residential Offer to Purchase” at www.wra.org/LU1102.
Proof of funds and cash offers
The broker wrote an offer for a buyer that was nearly full-price and had no contingencies. Broker considered this a “cash offer.” The buyer has no problem getting the money for the closing, however, the seller terminated the offer saying buyer didn’t give proof of funds.
In the updated WB offers, if the buyer writes an offer that is not contingent on financing, the verification of funds obligation is automatically included. The provision is designed to provide safeguards for the seller in cases where there is no financing contingency; the seller may, but is not required to, terminate the offer if the buyer does not provide the required evidence. In the 2011 offers, the third-party providing evidence of funds is asked to provide “reasonable written verification” that the buyer presently has sufficient funds to close. As the remaining offers are updated, the intention is to have continuity across the forms.
“IF THIS OFFER IS NOT CONTINGENT ON FINANCING: Within 7 days of acceptance, a financial institution or third party in control of Buyer’s funds shall provide Seller with reasonable written verification that Buyer has, at the time of verification, sufficient funds to close. If such written verification is not provided, Seller has the right to terminate this Offer by delivering written notice to Buyer. Buyer may or may not obtain mortgage financing but does not need the protection of a financing contingency. Seller agrees to allow Buyer’s appraiser access to the Property for purposes of an appraisal. Buyer understands and agrees that this Offer is not subject to the appraisal meeting any particular value, unless this Offer is subject to an appraisal contingency, nor does the right of access for an appraisal constitute a financing contingency.”
No loan commitment
If the buyer exceeds the contingency date for financing and they were denied the loan, does the seller have the right to keep the earnest money because it is past the deadline?
According to the WB-11 Residential Offer to Purchase, if the buyer does not make timely delivery of a loan commitment, the seller may terminate the offer if the seller delivers a written notice of termination to the buyer prior to the seller’s actual receipt of a copy of the buyer’s written loan commitment. The fact that the primary buyer does not deliver the loan commitment in a timely manner does not automatically terminate the offer. It is the seller’s choice to either terminate the offer or allow the buyer time to obtain a loan commitment and complete the transaction. If the buyer did not provide rejection letters in a timely manner and does not purchase the property, the seller may wish to review the default provisions of the offer. The buyer may initiate a Cancellation Agreement and Mutual Release for the seller’s consideration, but the seller may choose whether or not the seller will agree and sign the CAMR. The parties should be advised to consult with legal counsel if they have any questions regarding their legal rights.
Appraisal contingency
In the offer there is an appraisal contingency for 40 days. The appraisal came in low, and if the appraisal contingency was not satisfied, can the buyer ask for a reduction of purchase price? Also, when can the buyer terminate the offer?
The buyers have choices once they receive the appraisal. If the report indicates a value less than the purchase price, the buyer and the seller may try to renegotiate by using an amendment. If they are unable to reach an agreement, per the 2011 WB-11 offer provision, the buyer may deliver a copy of the appraisal report and a notice of termination to the seller by the deadline at line 267. This will mean that the contingency is not satisfied and that the buyer is terminating the offer.
“This Offer is contingent upon the Buyer or Buyer’s lender having the Property appraised at Buyer’s expense by a Wisconsin licensed or certified independent appraiser who issues an appraisal report dated subsequent to the date of this Offer indicating an appraised value for the Property equal to or greater than the agreed upon purchase price. This contingency shall be deemed satisfied unless Buyer, within __ days of acceptance, delivers to Seller a copy of the appraisal report which indicates that the appraised value is not equal to or greater than the agreed upon purchase price accompanied by a written notice of termination. CAUTION: An appraisal ordered by Buyer’s lender may not be received until shortly before closing. Consider whether deadlines provide adequate time for performance.”
Condo financing
The seller owns a unit in a condominium. The buyer was not able to get financing because the condo did not meet the new FHA condominium rules. The listing broker attended a meeting of the condominium association where they refused to update the condominium documents. What can be done to help the seller?
The Housing and Economic Recovery Act of 2008 allows the FHA to implement rules to insure mortgages on individual condominium units. The rules, which were implemented in December of 2009, have been recently updated and went into effect July 1, 2011. If the condominium does not meet the FHA eligibility requirements, buyers will need to find alternate sources of financing. Examples include cash transactions, finding local lenders willing to hold the mortgage, or seller financing. For more NAR information regarding this development, visit www.realtor.org/government_affairs/gapublic/fha_condo_policy.
Pre-approval
Can a seller direct the listing agent to identify the financial institutions the buyer must use for financing and not accept an offer if a different financial institution will be used? Can a seller make that a requirement in a counter-offer? Is the listing agent “steering” if the seller does that?
With respect to sellers requiring buyers to work with particular lenders, sellers may require buyers to submit pre-approval letters from particular lenders with their offer to purchase. Some lenders may exercise more due diligence than others resulting in fewer problems later in the transaction. Licensees may share their experience with various lenders with the parties. However, similar to recommending other third-party service providers, such as inspectors or contractors, the best practice to minimize potential liability for licensees would be to compile a list for the seller. The seller may then offer a list of reputable lenders to the buyer and let the buyer choose. For further discussion, review pages 10-14 of the May 2004 Legal Update, “Avoiding Liability When Signing and Making Referrals,” at www.wra.org/LU0405, and pages 7-9 of the May 2007 Legal Update, “Referrals to Service Providers,” at www.wra.org/LU0705.
Whether sellers can require buyers to finance their purchase with a specific lender is not as easily answered as the pre-approval requirement. A seller could assert such a requirement, but it is possible the buyers could make a legal argument that this requirement is unenforceable. In addition, if the buyers had good funds from a different lender at closing, they could argue that this breach (assuming for argument’s sake it is a breach) is not material. In short, it may be difficult to ultimately enforce such a requirement. If the sellers still want to include this requirement in the contract, the best practice would be to provide a list of lenders as described above.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.