Today’s post is a cautionary tale to all those involved in real estate transactions that utilize NWMLS forms that include financing contingencies. I’m writing this specific post not with the intent of being the definitive source on the subject, WA State law doesn’t allow for that; I’m not an attorney and I don’t play one on TV :); if you want more concrete answers you can pay for your own attorney to review the forms and provide appropriate language for your situation. What I can do is to provide a couple of client scenarios as well as a little bit of background on the forms and why they are set up the way that they are today.
For anyone that hasn’t bought or sold a home in the past few years you may not be aware of some of the changes that have occurred in the financing contingencies of NWMLS forms so if you’re going to comment in this forum please be sure we’re talking about the usage of the same forms before doing so.
Scenario 1:
Client/Seller is selling a property that has had intense buyer interest. Buyer #1 has tied the property up in contract but has been reluctant throughout the sale to give updates on financing. Time period for the letter of loan commitment passes (noted as 15 days in the addendum) and no sign of an appraiser accessing the property shows up on the showing reports for the listing agent, so the Seller submits a request for Buyer to waive financing or cancel the contract over concern that Buyer #1 is not pursuing financing as anticipated/required. Buyer #1 does not know that a back-up buyer #2 is waiting in the wings with an offer for more money and in cash (verified). Buyer #1 only sends over letter of loan commitment and is stumped and angry when seller terminates contract and moves to Buyer #2 contract.
Lesson: Language in the NWMLS forms allows for a seller to request the buyer in a contract to waive financing or the contract will terminate automatically in 3 business days from the notice period. The NWMLS changed the forms in June 2006 to reflect stronger rights in the financing addendums for sellers.
Scenario 2:
Buyer has put a home under contract with Seller at $10,000 less than list price and a $2,500 credit for closing costs. The buyer is focused on a specific loan package with their lender of choice. In the contract between the buyer and seller, however, there is a box checked that the buyer is going to obtain financing with a 10% down payment and a single conventional loan. Toward the end of the contract period the lender finds a different loan program that provides for a better rate and payment for the buyer, this time they only need to put down 5% and they have a first and a second conventional loan, so buyer chooses to go that direction with the lending. No updates are made to the contract.
The end of the contract period arrives and the lender is suddenly having trouble with getting the loan documents out to escrow and states that they need more time to complete the transaction. The seller has, in the meantime, been contacted by buyer #2 who is willing to pay full price for the property and with no credits. The buyer’s agent for buyer #1 asks for an extension to allow for the loan documents to come in for closing. The seller instead ignores the request, lets the closing date pass, provides instructions to escrow that they are due the earnest money as damages from the buyer due to buyer’s failure to close on time, and takes the offer from Buyer #2.
Lesson: Buyer #1 should have protected themselves better by having the contract modified to show the new loan terms that they were using for the purchase of the property reflect more accurately. By not modifying the terms and getting the seller’s permission, and seeking alternate financing resources, the buyer put him/herself in a breach position. Other options might include noting the various loan options that a buyer is pursuing as part of a purchase if a specific loan program has not yet been chosen but a pre-approval has been supplied based on a variety of loan programs that the buyer qualifies for at the lending institution or brokerage.
Scenario 3:
Buyer has a home under contract with Seller stating financing terms of 5% down and a first and second conventional mortgage. The contract gets to the end of the closing period and the buyer has learned that the rates quoted for the original loan package have changed significantly and the rates have gone up and they no longer qualify for this particular loan. The buyer attempts to cancel the contract using the financing addendum as reason for cancellation although they did not seek out any alternatives. The Seller makes claim to the earnest money putting it into dispute and escrow must now begin the process of interpleading the earnest money. Seller’s argument is that Buyer could have qualified for a different loan package available and the Buyer did not seek alternate financing options.
Lesson: As a buyer, you’ll want to be in clear communication with your lender about your financing options and what will happen if the original loan program you want becomes unattractive or unavailable to you. Some cases have come through in the courts where it is deemed that a buyer cannot use only one lender’s loan program to show inability to complete financing. It may be that there is a different lender that can offer a loan option that meets the terms noted in the financing addendum. The contracts state that the buyer must put in a “good faith effort” and that may include finding alternate lending resources if an initial loan officer cannot meet the terms.
Scenario 4:
A buyer has a contract for a home with seller and the buyer has noted that he’ll be providing a 5% down payment at closing. The time period for closing comes and the anticipated $12,000 gift money from the buyer’s father has not shown up and now looks to be going away as an option. The buyer attempts to cancel the contract utilizing the financing addendum stating that they cannot complete their obligation because the gift funds will not be received – however – because documentation must be provided showing that a buyer must prove they do not qualify for a loan it is noted in the buyer’s loan application that the buyer does have other financial resources available to provide the down payment amount.
Lesson – the financing addendum does not dictate where the funds for down payment come from, so, if a buyer is anticipating funds to come from an outside source this should be reflected in the contract. In this case, it might have been prudent for the buyer to have an addendum that stated the purchase was “subject to” the receipt of the gift funds to provide additional protection for himself.
Again, these are just some thoughts about ways to handle these situations. I regularly speak with my clients about these issues and we also utilize the addendum writing skills of my attorney to help draft language when it is appropriate and we need to go outside the NWMLS forms.
My recommendation is that you, as a consumer, not just assume that just because there is “boilerplate language” about a topic like financing that it inherently protects you as the buyer writing up the contract with your agent. Get to know the forms you’re signing and how the terms and language impact you, or at least ask questions as you go through them with your agent to get clarity.
