Line 69 of the Residential Resale Real Estate Purchase Contract now requires that an AAR Pre-Qualification Form be attached to the Contract. What should the buyer do if they have not yet obtained a Pre-Qualification form, but nonetheless wish to submit a purchase offer?
Under these circumstances, the buyer should indicate on line three of the Pre-Qualification Form that “Buyer HAS NOT consulted with a lender.” The buyer should then print their name on line four and sign and date on line five. If the box on line three is marked, the buyer does not complete lines six through 42 of the Pre-Qualification Form.
When must the loan contingency be fulfilled?
Answer: The Contract provides that 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 Update (“LSU”) form without Prior to Document (“PTD”) conditions no later than three days prior to the close of escrow (“COE”) date. (See “Contract”, Section 2b.) If the loan contingency is not fulfilled, the buyer has no obligation to close escrow. Therefore, the Contract can be considered cancelled or terminated because it is unenforceable against the buyer. Even though the Contract is no longer enforceable, the parties should execute written mutual cancellation instructions to avoid any confusion. Further, if the seller agrees to allow the buyer additional time to obtain the loan, the parties should execute an amendment to the Contract extending the close of escrow date.
Why does the loan contingency expire three days prior to COE rather than at COE?
Answer: The loan contingency was moved to expire three days prior to COE rather than on the actual COE Date to increase the probability that the seller will be informed prior to the COE Date whether or not the buyer will be able to qualify for the loan and close escrow. Thus, the Contract requires the buyer to sign loan documents or deliver a notice of the inability to obtain loan approval no later than three days prior to the COE Date. (An Unfulfilled Loan Contingency Notice is available for this purpose.)
When must the buyer first deliver to seller a completed Loan Status Update?
As evidenced by Section 2e of the Residential Resale Real Estate Purchase Contract, an initial Loan Status Update must be delivered to the seller “within ten days after Contract acceptance.” This is a change from the prior Residential Resale Real Estate Purchase Contract, which required initial delivery of the Loan Status Update within five days after Contract acceptance.
What should a buyer do if their lender refuses to complete a Loan Status Update?
As is currently the case, the buyer should complete, at a minimum, lines 1-40 of the Loan Status Update. The failure of the buyer’s lender to complete the Loan Status Update is not a potential breach and, therefore, not subject to a cure period notice because the lender is not a party to the Contract.
Line 39 of the Loan Status Update states “Buyer commits to work with the above referenced Lender on the terms described herein.” Is the term “commits to work with” synonymous with the term “intends to proceed” as used in 12 CFR §1026.19?
No. Intends to proceed is a defined term of art by which a borrower communicates to the lender that they choose to proceed with the loan transaction after having received the Loan Estimate. A buyer can therefore commit to work with a lender via the Loan Status Update and not yet have given formal notice of intent to proceed. If that is the case, the buyer would sign on line 40 of the Loan Status Update, but the box on line 45 would be marked “NO” as that line asks if the “Buyer indicated to Lender an intent to proceed with the transaction after having received the Loan Estimate.”
Section 2f of the Residential Resale Real Estate Purchase Contract now requires the buyer, “within three days after Contract acceptance,” to provide the lender with “Buyer’s name, income, social security number, Premises address, estimate of value of the Premises, and mortgage loan amount sought.” Why was this requirement inserted?
The CFPB has defined a loan application as the borrower’s submission to the lender of the above-referenced six pieces of information. Submission of the loan application triggers the lender’s delivery of the Loan Estimate to the borrower, thereby beginning the timeline that will be followed through close of escrow. To ensure a timely closing, it is important that the timeline commence as early as possible, and for that reason, the borrower is now required to submit these six pieces of information to the lender within three days after Contract acceptance.
If the buyer fails to close escrow on the COE date, what should the seller do?
Answer: The seller should deliver a cure notice to the buyer specifying that the buyer has not complied with the Contract by failing to close escrow. If the buyer closes escrow within three days, there is no breach. (Note: To avoid any issue regarding the buyer’s ability to obtain loan approval, the cure notice should be delivered as set forth above.)
Is the buyer obligated to lock the interest rate during the Inspection Period?
Answer: No, the Contract does not require the buyer to lock the interest rate during the Inspection Period. However, if the buyer does not lock the interest rate during the Inspection Period, for example, at 5 percent, but at COE can get the other loan terms described in the LSU at, for example, 6 percent, the buyer will be obligated to close escrow or will be in breach of contract (after the expiration of the cure period). However, if the buyer does not lock but cannot obtain loan approval for some other reason, the loan contingency is unfulfilled, and the buyer is entitled to a return of the earnest money.
As part of their Loan Application, the borrower is required to provide the lender with an “estimate of value of the Premises,” in addition to five other pieces of information. What does “estimate of value of the Premises” mean?
The estimate of value of the Premises will typically be the contract price.
Why were Seller Concessions included in the Contract?
Answer: In today’s marketplace, Seller Concessions are a prevalent loan condition. Instead of requiring buyers to write concessions in the Contract with various verbiage, the concession, if any, is specifically defined as the maximum amount that the seller agrees to pay for buyer’s loan costs, including pre-paids, impounds and buyer’s title/escrow closing costs. Of note, Private Mortgage Insurance (PMI) is a loan cost which would be included in the seller concession amount. PMI is extra insurance that lenders require from most buyers with less than a 20 percent down payment.
What fees are not included in Seller Concessions?
Answer: Fees that are not attributable to the buyer’s loan costs or the buyer’s title/escrow closing costs are not included in the Seller Concessions. For example, inspection fees, home warranty plan fees, HOA transfer fees and any other fees unrelated to the buyer’s loan or the buyer’s title/escrow closing costs are not included in Seller Concessions. Appraisal fees may or may not be included in the Seller Concessions, as indicated on the Contract at line 90.
What VA loan costs are not permitted to be paid by the Buyer?
Answer: The VA loan costs that are not permitted to be paid by the buyer include the escrow fee, any processing fee, tax service and notary. (See VA Pamphlet 26-7, revised November 8, 2010, for complete list.) Notably, the VA does not obligate the seller to pay these loan costs and the seller is not required to pay these costs unless the seller agrees to do so in the Contract. If the buyer does not indicate in the Pre-Qualification form that the type of loan is a VA loan, zero or N/A should be indicated on line 79. Of note, the VA periodically changes the costs that VA buyers are not permitted to pay, and at present, these costs could be as much as $1500.
What action must the buyer take three days prior to close of escrow?
Three days prior to close of escrow the Buyer must 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. See Section 2b of the Residential Resale Real Estate Purchase Contract.
Why is it important for the seller to know the date(s) on which the buyer received the Closing Disclosure(s) from their lender?
This information is important to the seller because it will help the seller understand when the transaction may close escrow. More specifically, the loan cannot be consummated (i.e. – execution of the promissory note and deed of trust) less than three business days after the Closing Disclosure is received by the buyer.