Financing is at the heart of the real estate business. Indeed, it is fair to say that without modern real estate financing, the real estate industry simply would not exist as it does today. It is the leverage financing provides that makes it possible for a significant percentage of the population to own their own homes. Accordingly, financing is a critical part of almost every residential real estate purchase.
The central and critical nature of financing is usually reflected in real estate forms. In California, for instance, the residential real estate form used by REALTORS® contains more than two pages of financing provisions. In Arizona, the REALTOR® sale form is supplemented by a standard Financing Options Addendum that covers everything from a new conventional first loan to seller financing. Whether in the form of a separate addendum or not, real estate finance provisions tend to be pretty standardized.
Finance provisions typically benefit the buyer by protecting them from being required to perform the contract if they cannot obtain the necessary financing prior to the closing date. Sellers, however, are as interested in the financing provisions as are buyers. It is for this reason financing provisions are usually written to address both the concerns of the buyer and the concerns of the seller. Buyers tend to be concerned about the details (interest rate, points, etc.) of the loan. Sellers, on the other hand, are usually more interested in the loan process than details of the loan.
To protect the buyer, financing provisions in form contracts usually specify the amount of money the buyer wants to borrow, the term of the loan, the type of loan (fixed, adjustable, conventional, VA, etc.) and the maximum interest rate and points. To protect sellers, financing provisions typically specify that the buyer must apply for the loan within a fairly short period of time following acceptance, use best efforts to obtain the necessary loan and notify the seller of conditional approval of the loan within a specified period of time. A simple way to accomplish seller notification of loan status is to require the buyer to provide the seller with a loan application status form. The Oregon Residential Loan Application Status form, developed by Oregon lenders and the Oregon Association of REALTORS®, is such a form. Click here to download a copy of the loan status form. It is the felt need to balance the interests of the buyer and the seller that makes finance contingencies both lengthy and important.
Whether representing the buyer or seller, an agent should be familiar with and able to explain to their client the finance provisions of the form contract they use. Most form contracts make the entire transaction contingent upon the buyer obtaining “the loan” they need to meet the purchase price. For that to work, the details of “the loan” must be spelled out in the financing provisions. If not, bitter fights over earnest money (when the buyer fails to close for want of financing) are inevitable.
A seller, off the market for months while waiting for word that the buyer has the money they agreed to pay as the purchase price, will usually not be very understanding when, on the day of closing, the buyer announces they couldn’t get a loan after all. It is to prevent these kind of late-in-the-day surprises that most finance provisions in form contracts spell out the exact terms of the loan sought, require early loan application, best efforts and some sort of conditional approval letter from the buyer’s lender prior to closing. Where the form contract does not spell out financing details, agents should consider a separate standard financing addendum that does.
The failure to spell out financing details in the contract may disadvantage the buyer or the seller or both. For instance, if the contract is made contingent on the buyer obtaining a loan without regard to amount, type, interest rate, points or other factors, a seller may claim the buyer’s withdrawal in bad faith because a loan could have been obtained by simply paying more. On the other hand, if the transaction is made contingent on the buyer obtaining a loan “satisfactory to buyer” or one of “buyer’s choice,” the seller may find they have been off market with no recourse if the buyer simply changes his mind. Financing provisions in form contracts are about balancing these needs.
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