Understanding Financing Contingencies in Real Estate Contracts
When purchasing property, buyers often choose to finance their acquisition. If you’re a real estate agent working with financed buyers, it’s crucial to grasp the ins and outs of financing contingencies as outlined in Section 8(b) of the AS IS and Standard Contracts. This section encompasses key elements that protect buyers during the transaction process.
What Is Section 8(b)?
Section 8(b) defines the buyer’s financing contingency, detailing when and how loan approval must be secured. It specifies appraisal requirements and loan particulars. Completing all sections within 8(b) is paramount, as any missing information can diminish buyer protections, potentially jeopardizing the transaction.
Key Components of Financing Contingencies
1. Specify the Loan Amount
“Financing: Express as a dollar amount or percentage (‘Loan Amount’) ___”
It is vital to fill out the loan amount in Line 39 of the Contract. Buyers can express this as a specific dollar figure (e.g., $400,000) or a percentage (e.g., 80%). Leaving it incomplete could weaken the buyer’s leverage regarding the Loan Approval contingency, risking approval status.
2. Loan Approval Period: Set a Realistic Timeline
“This Contract is contingent upon, within ____ (if left blank, then 30) days after Effective Date (‘Loan Approval Period’).”
Should this section be left blank, the contract will revert to a standard 30-day Loan Approval Period. For transactions with a closing date of 60 days from the effective date, it’s advisable to specify a Loan Approval Period of 45-50 days. Lenders generally process approvals as the closing date nears, making a 30-day window insufficient in many cases.
3. Type of Loan: Be Specific
(1) Buyer obtaining approval of a conventional, FHA, VA, or other _____ mortgage loan for the purchase of the Property for a (CHECK ONE) fixed, adjustable, fixed or adjustable rate in the Loan Amount.
Identify the type of loan for which the buyer has pre-approval directly in the contract. If the buyer is securing an FHA or VA loan, be sure to attach the corresponding Rider to the Contract for completeness.
4. Interest Rate Cap: Don’t Skip This
“at an initial interest rate not to exceed ___% (if left blank, then prevailing rate based upon Buyer’s creditworthiness), and for a term of ____ (if left blank, then 30) years.”
One often overlooked part of the Contract relates to the interest rate cap. It’s critical to specify the maximum interest rate that the buyer is comfortable with. For example, if a buyer anticipates a 6.5% rate during negotiations and the rate ends up at 7%, having a cap of 6.5% allows the buyer to exit the contract under the Loan Approval contingency. If this is left blank, the borrower misses the chance to terminate the contract despite their discomfort with the prevailing rate.
5. Appraisal Requirement: Understand the Timing
“and (2) Buyer’s mortgage broker or lender having received an appraisal or alternative valuation of the Property satisfactory to lender, if either is required by lender, which is sufficient to meet the terms required for lender to provide Financing for Buyer and proceed to Closing (‘Appraisal’).”
If loan approval is conditional based on appraisal results, note that Loan Approval has not been finalized until a satisfactory appraisal is received by the lender. This requirement must be clear in the Contract to fulfill the Loan Approval contingency effectively.
Conclusion: Every Blank Matters
While navigating the Financing Section of the Contract may seem simple, it encompasses significant implications that directly affect buyers’ protections. Properly completing all sections is essential to safeguarding interests during the real estate transaction process.
For further insights on financing contingencies, consult a trusted real estate attorney to clarify any complex areas.
By paying attention to these pivotal details in financing contingencies, agents can ensure a smoother transaction experience for their clients. Always review the contract thoroughly, as strategic details can have profound implications on the outcome of the deal.