The financing section of the contract is one of the most difficult sections of the contract for agents to understand and clearly explain to their clients.
In brief, the financing section obligates the buyer to take very specific steps to obtain a loan. It also clarifies the buyer finance contingencies that govern the agreement between the buyer and the seller.
2.a Line 59 And Section 2.b Lines 70-75
Section 2a requires the Pre-Qualification Form to be submitted in conjunction with the Contract at the time of the offer.
Section 2b provides Buyer’s obligation to complete this sale is contingent upon Buyer obtaining loan approval without Prior to Document (“PTD”) conditions no later than three (3) days prior to the COE Date for the loan described in the AAR Loan Status Update (“LSU”) form or the AAR Pre-Qualification Form, whichever is delivered later. No later than three (3) days prior to the COE Date, Buyer shall either: (i) sign all loan documents; or (ii) deliver to Seller or Escrow Company notice of loan approval without PTD conditions AND date(s) of receipt of Closing Disclosure(s) from Lender; or (iii) deliver to Seller or Escrow Company notice of inability to obtain loan approval without PTD conditions.
Section 2.c Lines 76-82 Section
The buyer’s obligation to complete the sale is contingent upon the buyer obtaining loan approval for the loan described in the AAR Loan Status Report (LSU) without Prior to Document (PTD) conditions no later than three (3) days prior to the close of escrow.
If after a good faith effort the buyer cannot obtain loan approval without PTD conditions by COE the loan contingency is unfulfilled.
When must the loan contingency be filled?
In order to establish unfulfilled loan contingency and cancel the contract a buyer must:
Deliver an Unfulfilled Loan Contingency (AAR) to the seller and title and also send to title a demand for earnest money signed by the buyer. Sample verbiage:
“Attached is a Notice of Unfulfilled Loan Contingency. Pursuant to section 2c lines 76-82 of the purchase contract I am entitled to a return of my earnest money. Please immediately cancel this escrow and return my earnest money.”
What should the seller do if the buyer fails to sign all loan docs three (3) days prior to COE?
If the buyer does not deliver a notice of the inability to obtain loan approval or sign loan documents three (3) days prior to COE the seller should:
Deliver a cure period notice to the buyer specifying that the buyer has not complied with the contract by signing the loan documents or delivering a notice of the inability to obtain loan approval to the seller or the escrow company. Thereafter:
- If the buyer signs the loan documents within three days and is prepared to close escrow on the COE Date, the seller must close.
- If the buyer delivers notice of the inability to obtain loan approval without PTD conditions within three days, the contract is unenforceable against the buyer and the buyer is entitled to a return of the earnest money, assuming that the buyer made a diligent and good faith effort to obtain the loan.
If the buyer does neither, the buyer is in breach of contract, and the remedy for the breach depends on the specific noncompliance, as set forth in Section 7b:
- If the buyer failed to obtain loan approval without PTD conditions and failed to deliver the notice, the buyer is in breach for the failure to deliver the notice, and the seller is entitled to the earnest money.
- If the buyer obtained loan approval without PTD conditions or failed to make a diligent and good faith effort to obtain loan approval, the buyer is in breach, and the seller may accept the earnest money as the seller’s sole right to damages or pursue the buyer for the actual damages or specific performance.
Three (3) days before close of escrow, the buyer receives a notice of disapproval from lender #1. Buyer is now attempting to qualify for financing with lender #2. The seller has a better “back up” offer from another buyer and wants to accept this better “back up” offer now. Is the buyer entitled until close of escrow to attempt to qualify for financing with lender #2?
Additional verbiage has been added to Section 2c, titled Unfulfilled Loan Contingency. Has anything changed?
Section 2.d Lines 83-86
Buyer acknowledges that the inability to obtain loan approval due to the failure to lock the interest rate and “points” by separate written agreement with the lender during the inspection period –or—the failure to have down payment or other funds due from the buyer is not grounds for an unfulfilled loan contingency.