Lenders and funding 

What can real estate agents do to ensure that there will be funds at closing? 

A continuing problem in Wisconsin real estate transactions is the failure of buyers to have mortgage funds available at closing. Preventive measures that can be taken include:

• Alert the buyer and seller that these problems may occur and make certain that they understand the possible consequences of no purchase money at closing.
• Collect the names of lenders who have a track record of funding at closing and make this list available to buyers.
• Contact the closing office to ask if they are aware of funding issues with the lender in the specific transaction and schedule the closing accordingly. Scheduling closings early or late in the day may increase the chance of funding delays.
• Consider including additional language in the offer to purchase — for example, “Buyer is obligated to have the total purchase price, including mortgage loan proceeds, available at the time of closing. Buyer agrees to determine when Buyer’s loan proceeds will be funded to ensure that the funds will be available at the time of closing.”
• The parties could agree in the offer to purchase to a liquidated damages provision – a dollar amount per hour/partial day/day that the buyer will pay if the mortgage funds are not available within ___ hours of the completion and execution of the closing documents.
  Recognize that back-to-back closings should only be scheduled if the lender in the first closing has guaranteed that funds will be available at the scheduled time for closing.

Other suggestions may be found in the article “Are No funds ‘Good Funds?’” in the October 2006 edition of the Wisconsin Real Estate Magazine online at www.wra.org/WREM/Oct06/Funds.

No funds at closing 

The broker has a transaction set to close today. The lender is saying they cannot fund the loan even though the buyer had a pre-approval and a loan commitment. If the transaction does not close today, is the offer null and void? The buyer submitted an amendment to extend the closing but the seller may not agree. 

The offer to purchase does not automatically become null and void simply because the closing date passes. The broker should present the buyer’s amendment for the seller’s consideration. If the parties do not perform as stated in the offer, the parties have a variety of options. Whether the seller elects to terminate the offer, amend the offer per the buyer’s request or offer a different amendment is the seller’s decision. If the parties reach a compromise, the broker may draft an amendment to implement the new agreement.

If the parties cannot reach an agreement, the broker may suggest that they review the default provisions in the offer to purchase and confer with private legal counsel.

As is explained at lines 281-300 of the WB-11 Residential Offer to Purchase (2010), the parties have a variety of remedies if one party defaults. If the buyer defaults, the seller may:

1. sue for specific performance and request the earnest money as partial payment of the purchase price; or
2. terminate the offer and have the option to: a) request the earnest money as liquidated damages; or b) sue for actual damages.

If the seller defaults, the buyer may:

1. sue for specific performance; or
2. terminate the offer and request the return of the earnest money, sue for actual damages, or both. 

In addition, the parties may seek any other remedies available in law or equity.

HUD-1 review 

How soon before closing does a buyer need to receive their closing statement? 

The HUD-1 Settlement Statement lists all the charges and credits to the borrower and seller in the transaction. The borrower may ask to see the HUD-1 one day before closing. The HUD-1 should clearly compare the buyer’s estimated and final costs. If there are discrepancies, they should be addressed before the closing. “Shopping for your Home Loan, HUD’s Settlement Cost Booklet” contains step-by-step guidance for buyers in the home buying process and reviews the Good Faith Estimate and the HUD-1 in some detail. The booklet is a good resource for agents as well, and is available online at www.hud.gov/offices/hsg/ramh/res/Settlement-Booklet-January-6-REVISED.pdf.

Closing costs 

The offer provides the seller will pay up to $1,800 of the buyer’s prepaids and closing costs. What can the buyer use these funds for?  

One frequent area of disagreement is whether prepaids and closing costs include a buyer’s loan points. Prudent brokers who draft contract provisions referring to “closing costs” should also define “closing costs” in the offer. This definition may be inclusive or exclusive. An inclusive definition lists permissible closing costs; an exclusive definition includes all fees and costs paid at closing except for those listed. If an amount is given for a closing cost allowance or credit, specify clearly if the amount is a maximum (closing costs not to exceed a certain amount or closing cost up to a certain amount) and what will happen to the balance if actual costs do not reach the maximum credit or allowance. It is also wise to check with the lender in advance to make sure the provision will not violate the lender’s underwriting standards.

Walk-through 

The selling agent has an out-of-town buyer. The buyer wants the selling agent to do the final walk-through before closing. Is this the proper thing to do or does it expose the agent to possible pre-closing or post-closing issues? Alternately, the buyer wants his home inspector to conduct another inspection. 

In the new WB-11 Residential Offer to Purchase, instead of being referred to as the “Pre-Closing Inspection,” this section was renamed the “Buyer’s Pre-Closing Walk-Through.” This change was designed to eliminate buyer misconceptions about having the home inspector accompany them during that final “inspection.” This section does not give buyers the authority to conduct a new home inspection or a follow-up inspection. Rather, the buyer may simply walk through the property to make sure that there have been no major changes in the condition of the property and that the seller has repaired the property in the manner agreed in the contract, most often in connection with the Inspection Contingency.

It would be preferable for the buyer or someone acting on the buyer’s behalf to conduct the pre-closing walk-through. Should the agent miss a problem in the walk-through, the buyer may sue the broker. It is best to have the buyer or another representative of the buyer do the walk-through to avoid broker liability.

Buyer incentives disclosed to secured lender 

Is there any reason why a broker could not offer to pay closing costs for a buyer as an incentive to purchase? 

Brokers may offer incentives to buyers, however the broker should consider the implications of giving cash or another incentive to a buyer with regard to the buyer’s ability to qualify for and obtain financing. Any incentive should be documented in advance of closing and included on the HUD-1 to avoid any accusations of fraud. The broker must make sure the incentive is disclosed to the buyer’s lender. Brokers offering incentives may find it prudent to instruct the buyer to fully disclose the incentive when applying for a loan so the lender can avoid placing the buyer in a loan program where the incentive payment would pose an obstacle. More information about incentives is available in the October 2006 Broker Supervision Newsletter at www.wra.org/bsnoct06.

Broker incentive for repairs 

After the home inspection, the buyer wanted some items fixed and the seller said no. No one wants the transaction to fail, so the co-broke and listing offices have agreed to split the costs. How should the paperwork be handled to keep the deal together?  

If the buyers are willing to proceed with the transaction, so long as the brokers pay for the repairs, this can be documented in a buyer incentive agreement. Incentives may be offered to sellers or buyers to induce them to sell or purchase real estate. Such party incentives should be clearly documented in advance — prior to closing — to establish the payment is not a fee-splitting arrangement with a non-licensee. The brokers could draft an agreement between themselves and the parties and incorporate it into the offer to purchase via an amendment. Although the offer to purchase is a contract between the buyer and the seller, such an amendment would ensure the parties’ consent and memorialize the incentives so that the buyer’s lender is aware and the title company properly reflects these payments on the closing statements.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.