Just because you know how to complete the financing contingency clause of a Purchase and Sales Agreement does not mean your Buyer’s deposit is safe from forfeiture.
The financing contingency is supposed to protect the Buyer’s deposit from risk of default to the Seller — and it is a litigation landmine. The nastiest attorney emails I receive (and send) invariably relate to a Buyer losing their deposit.
Want to keep your clients out of nasty attorney emails? Follow these financing contingency tips to safeguard your Buyer’s deposit, your deal, and your blood pressure:
1. Do not just fill-in-the blanks on the financing contingency of the P&S with the dollar amounts and dates from the Offer.
Numbers and dates can change since the Offer was accepted and these changes must be reflected in the P&S. The P&S is the governing legal agreement for the transaction. It’s binding. And once it’s signed, there are very real and often non-negotiable consequences for violating the agreement, one of which is that your client’s deposit may be compromised.
2. Speak directly with the loan officer to verify the amount of the Buyer’s mortgage.
This number sets the baseline for your Buyer to make or break their purchase obligation and fulfill the terms of the financing contingency. You need to know, for example, if the Offer was accepted at 80% financing but your Buyer is really applying for 95% financing.
Why does this matter? First, if the P&S also requires 80% financing, and the Buyer fails to secure 80% financing, their deposit is no longer protected by the financing contingency. Second, if the Buyer is rejected for 95% financing, the Seller may choose not to grant an extension to secure financing and move to keep the deposit. And finally, the Seller’s decision to accept the offer and take the property off the market was based on the Buyer’s ability to obtain financing. Not only is this scenario unfair to the Seller, it also creates reputational risk for agents on both sides of the deal.
Bottom line: Make the extra effort to uncover any discrepancies before completing the financing contingency and the P&S is signed. After the fact, your client is just making work for attorneys.
3. Connect with the loan officer well before the mortgage commitment date.
All dates in the P&S matter. Verify the exact date your Buyer needs to have a mortgage commitment from their lender and find out who you need to contact on the Seller’s side if your client needs to ask for an extension.
If your client’s lender cannot provide a written loan commitment by the date required in the financing contingency, you will need to either (a) ask the Seller for an extension; or (b) ask for your client’s deposit back and pull the plug. And you need to take this action by the date listed in the financing contingency.
4. Ask the loan officer if it is realistic for the Buyer to meet the mortgage application deadline.
The mortgage application deadline is the date by which the Buyer must submit a complete mortgage application. And yes, failure to meet this term of the financing contingency puts their deposit at risk.
Thanks to the implementation of TRID “Know Before You Owe” mortgage disclosure rules, this surprise doesn’t happen as often as it used to. Still, make it part of your playbook to speak with the loan officer sooner than later. They should be able to identify if there’s anything unusual about the Buyer’s application (or missing from it!) very early in the process.
Questions? Relax. We’ve got this. J.Blumen & Associates 781-784-2500.