Release of loan contingency requires more time
SANTA CRUZ (December 11, 2010) - Realtors use a standard California Residential Purchase Agreement that has been prepared by the California Association of Realtors when making an offer on behalf of their home buying clients. It is an 8 page contract that provides the framework for all of the details that go into making an offer on a home. The purchase agreement specifies the address, the offered price, the loan amount and terms and identifies the buyers along with many other details.
Offers are typically contingent upon several and important factors such as obtaining financing and passing one or more physical inspections. In other words, the homebuyer will usually have a professional inspector check out the physical condition of the property and if it is determined to not meet the standards of the homebuyer, the homebuyer could reject the property and back out of the contract. Likewise for financing; a homebuyer who cannot pay cash for the property must rely on obtaining a loan and if the loan is not approved, the homebuyer is not obligated to follow through with the purchase.
While the buyer is provided a legal right to get out of the contract through these contingencies, the seller expects the buyer to make the decision in a timely manner. These timeframes are also provided for in the contract. Releasing the physical condition of the property is relatively straight forward when compared with releasing the financing contingency, which is really a moving target.
On the surface, obtaining a loan approval to buy a home seems simple enough. Given the sales price, loan amount and interest rate, our underwriters review the borrowers’ tax returns, W-2s, paystubs, bank statements and credit report in order to grant a loan pre-approval. A full approval cannot be provided until the appraisal, purchase contract and preliminary title report have all been carefully reviewed.
Here are the steps lenders must go through before a final loan approval can be granted. Assuming that the borrower has provided all of the information and documents requested, the lender must review the purchase contract before a GFE (Good Faith Estimate) can be issued. The GFE must be acknowledged by the borrower and the "Intent to Proceed" must be returned to the lender before the borrower can be charged for an appraisal. Once ordered, the appraisal can take one to two weeks before it is completed and back on the desk of the underwriter. In the meantime, the preliminary title report must also be reviewed and added to the file. Not only will the underwriter review all of the documents provided by the borrower but the underwriter will also want to review the borrower’s Verification of Employment and Verification of Deposit forms that are sent out to the borrower’s employer(s) and bank(s). Additionally, we must verify the borrowers’ tax returns by obtaining the appropriate files from the Internal Revenue Service.
It is not until this point that the underwriter has the entire file and is able to determine whether or not the borrower’s loan request meets all of the standards that are mandated by Fannie Mae, Freddie Mac or FHA. Needless to say, this entire process can easily take three or more weeks. The problem then becomes how to deal with the default clause that occurs in the Realtors’ Purchase Agreement that states the homebuyer has 17 days to release the loan contingency! Sure, there is a box on the contract that the borrower can check stating that he or she will need more days but anxious sellers want to know sooner rather than later whether or not the homebuyer can get the financing.
Add to the dilemma the fact that a lender will insist on a detailed Quality Control check just before escrow closes. This check includes another credit report (any new debt or any new late payments?) and a call to the borrower’s employer to make sure he or she still has a job. A borrower who no longer has a job or who has incurred more debt will no longer have an approved loan and, consequently will not be able to buy. A loan contingency cannot in conscience be released until the day of funding!
This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 or email him at Peter@SantaCruzHomeFinance.com.