On page 2 of the Purchase-Contract, the buyer details how he/she is going to pay for the purchase. Provision is made here for every type of loan, as well as cash. As subsequently discussed, the nature of how the buyer intends to pay can impact the acceptability of the offer to the seller, even where the offer does NOT involve any seller-financing.
The loan details are very much part of the Purchase Contract. The buyer must get written agreement from the seller to subsequently change the nature of financing, else the seller may cancel the transaction.
Most buyers need a loan to purchase a home, and they make their offer contingent on obtaining that loan. In considering whether to accept the offer, a prudent seller is going to demand full details for the loan the buyer is intending to get. The includes some loan details and refers to the Pre-Qualification Form that includes additional information as well as contact information for the buyer’s-choice lender who is generating the Pre-Qualification document.
The AAR Pre-Qualification form indicates the type of loan that you have applied for and, most important, the preliminary steps the lender has taken to determine that you are qualified to make the purchase. The boxes checked on this form could reflect a minimum investigation by the lender – if really not good – could result in an outright rejection. But even if the “Pre-qual” reflects extensive investigation, a good listing agent is going to call that lender and ask some questions to get a “feel” for the true quality and extensiveness of that work. A weak “pre-qual” almost assures a declined offer. Have your lender do the work and be prepared to give you a solid, honest report.
If real, have a huge advantage, but a good listing agent is going to require that the buyer provide evidence that he/she has the cash with what’s referred to as a “Proof of Funds” (POF). Most commonly this is a letter from an officer of the financial institution holding the funds testifying that the buyer has the cash to complete the purchase. A good listing agent is going to call the source of that POF to confirm that the cash will definitely be available by the COE date.
Loan Down Payment
First, don’t confuse “Loan Down Payment” with “Earnest Money Deposit – EMD”. EMD is the good faith deposit the buyer makes to open escrow. The loan down payment is the buyer’s cash portion of the sales price, which is usually more than the EMD and requires that the buyer pay additional cash into escrow prior to closing. The amount of the EMD is specified on the first page of the AAR contract. Sellers need to understand that this deposit, even if it’s very large, is NOT necessarily reflective of the commitment of the buyer, nor is it absolute security for performance. For nearly the entire time for a normal escrow, the basic contingencies in the contract provide the buyer with no-penalty exits if he/she determines to do that.
The Pre-Qual specifies an interest rate limit. If the rate increases above that limit, the buyer MAY be able to cancel and get full refund of the earnest deposit … except if the buyer could have “locked” his/her interest rate but didn’t, the rise in rates does NOT take him/her off the hook. Also, if the rate specified in the Pre-Qual is at the current market rate and rates have recently been increasing or variable, the seller may reject the offer.
Closing Costs and Other Incentives
A buyer may include in the offer that the seller is to contribute toward the buyer’s closing costs, or buy down the buyer’s interest rate, or absorb some other part of the buyer’s costs. The seller would make the contribution as a reduction in the net cash from the sale, so none of this “contribution” would occur until/unless the transaction closes. The offer may also include a higher price to cover all or part of the seller “contribution” to the buyer. If not, the buyer is asking the seller to provide some of the cash for the buyer to buy the seller’s property. If the offer is at a higher price, then the property may not appraise for that sale price. In which case, either party can cancel the deal or elect to go back to the negotiating table.
Obviously, demanding a seller incentive in the offer is a negative factor, and seller of a recently listed property is likely to simply reject it. However, if the property has been listed 30+ days and traffic and offers have been scarce, the seller might be receptive, especially if the buyer doesn’t have the financial capacity to make the purchase otherwise.
A buyer’s offer may also indicate that the seller is to “carry-back” a second mortgage to help facilitate the purchase. If the seller doesn’t need all the cash from the sale, this is a possibility. The buyer’s agent should inquire about this possibility before writing such an offer. The big advantage to the buyer of a carry back is to avoid paying mortgage insurance. This could make the difference in buyer qualifying for the first mortgage and being able to make the purchase.
The portion of the Dodd-Frank Act that went into effect January 1, 2014, imposed requirements for seller carry-backs that makes this form of financing even less attractive to sellers that previously, very unattractive actually.
FHA & VA Loan Issues
A VA or FHA loan can be issue to the seller because these loans impose unique obligations on the seller. Presumably this is because the buyer is putting up much less of a down payment, maybe even none, so the FHA and VA have made the appraisal requirements rather stiff. These loans definitely lower the probability of acceptance of an offer by a seller.
FHA and VA – Extra Costs to the Seller. Non-Allowable Fees – VA and FHA loan regulations prohibit buyers from paying certain fees that are commonly involved in these transactions. The charges are still involved, but they cannot be paid by the buyer. Typically, the seller pays them as a reduction in the net cash from the transaction.
These are the costs NOT allowed to be paid by the buyer with a VA loan: broker commissions (which are rarely paid by the buyer anyway), notary public fees, recording fees (if $17 or more), broker expenses, transaction coordinator costs, termite inspection fee.
The following costs ARE specifically allowed at the national level for a FHA loan: lender’s origination fee, deposit verification fees, attorney fees, appraisal fee, any inspection fee, cost of title insurance and title examination, document preparation (by a third party), property survey, credit reports (actual costs), recording fees, and home inspection fees up to $200. However, each local FHA office can further restrict what a buyer may pay to what that office deems “reasonable and customary” for the area. Costs not listed above are generally NOT allowed to be paid by the buyer with an FHA loan.
Obviously, a seller is going to be less inclined to negotiable on price knowing these fees are going to further reduce his/her net cash from the transaction.
FHA and VA – Appraisals. FHA and VA property appraisals are quite different from those for conventional loans, and generally more expensive. First, FHA and VA appraisers usually seem excessively “picky”. Second, the appraiser is required to perform a sort of “inspection” of the property and formally include any repair or maintenance issues as part of the market valuation. Please note, the appraiser’s report is no substitute for a professional inspection. Third, these “fixes” commonly must be completed before the loan is to be funded. Some buyer agents advise buyers to include a limit to any such repair costs within the offer, but this would actually have no effect if the repair costs were higher – the repairs must be made before COE, so the seller must pay to have the repairs done, or cancel in which case all of the marketing time while the property was tied up in escrow would have been wasted. The buyer could repay the repair cost over the limit, but this would happen only if/when the transaction closes, and is a possibility only if the buyer the cash available – usually not the case.
FHA and VA appraisal issues may be even more of a negative factor than the non-allowed fees, which can possibly be offset by a higher price. There really is no way around some of the appraisal negatives.
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