Residential Resale Contract – Financing Section
The Financing Section obligates the buyer to take specific steps to obtain a loan and sets forth the financing contingency.
In this section the buyer is required to attach an AAR Pre-Qualification Form to the Contract.
Question: What should the buyer do if they have not yet obtained a Pre-Qualification form, but nonetheless wish to submit a purchase offer?
Answer: Under these circumstances, the buyer should indicate on line three of the Pre-Qualification Form that “Buyer HAS NOT consulted with a lender.” The buyer should then print their name on line four and sign and date on line five. If the box on line three is marked, the buyer does not complete lines six through 42 of the Pre-Qualification Form.
The buyer’s obligation to complete the sale is contingent upon the buyer obtaining loan approval without Prior to Document (PTD) conditions no later than three days prior to the COE Date for the loan described in the AAR Loan Status Update form or the AAR Pre-qualification form, whichever is delivered later.
If the buyer is unable in good faith to obtain loan approval without PTD conditions by three days prior to the COE Date, the loan contingency is unfulfilled, the contract is cancelled and the earnest money is released to the buyer. In order to give everyone involved in the transaction notice of an unfulfilled loan contingency, the buyer is obligated to deliver a notice of the inability to obtain loan approval to the seller or the escrow company no later than three days prior to the COE Date. If the buyer fails to deliver this notice by three days prior to the COE Date, the seller must give the buyer a cure notice and a three-day opportunity to deliver the notice of the unfulfilled contingency. If the buyer fails to deliver the notice, the buyer is in breach (not for the failure to qualify, but for the failure to deliver the notice) and the seller agrees to accept the earnest money as damages (as set forth in section 7b).
Question: Why does the loan contingency expire three days prior to COE rather than at COE?
Answer: The loan contingency expires three days prior to COE rather than the actual COE date to increase the probability that the seller will be informed prior to the COE date whether or not the buyer will be able to qualify for the loan and close escrow. Thus, the Contract requires the buyer to (i) sign loan documents; (ii) deliver to Seller or Escrow Company notice of loan approval without PTD conditions and date(s) of receipt of closing disclosure(s) from lender; (iii) or deliver a notice of the inability to obtain loan approval no later than three days prior to the COE date. (An Unfulfilled Loan Contingency Notice is available for this purpose.)
Question: What action must the buyer take three days prior to close of escrow?
Answer: Three days prior to close of escrow the Buyer must either: (i) sign all loan documents; or (ii) deliver to Seller or Escrow Company notice of loan approval without PTD conditions AND date(s) of receipt of Closing Disclosure(s) from Lender; or (iii) deliver to Seller or Escrow Company notice of inability to obtain loan approval without PTD conditions. See Section 2b of the AAR Resale Contract.
Question: Why is it important for the seller to know the date(s) on which the buyer received the Closing Disclosure(s) from their lender?
Answer: This information is important to the seller because it will help the seller understand when the transaction may close escrow. More specifically, the loan cannot be consummated (i.e. – execution of the promissory note and deed of trust) less than three business days after the Closing Disclosure is received by the buyer.
Question: What does the term Prior to Document (PTD) conditions mean?
Answer: PTD conditions are what lenders call all the actions/approvals necessary before the lender actually orders the closing loan documents and instructions. (See LSU Lines 41-58). PTD conditions include items that must be provided and reviewed by the underwriter before the loan documents can be requested.
Unless previously completed, within three days after contract acceptance, Buyer is obligated to (i) provide lender with Buyer’s name, income, social security number, premises address, estimate of value of the premises and mortgage loan amount sought; and (ii) grant lender permission to access buyer’s Trimerged Residential Credit Report.
Question: What should a buyer do if their lender refuses to complete an LSU?1
Answer: The buyer should complete, at a minimum, lines 1-40 of the LSU. The failure of the buyer’s lender to complete the LSU is not a potential breach and, therefore, not subject to a cure period notice because the lender is not a party to the Contract.
Question: Why must the buyer, “within three days after Contract acceptance,” provide the lender with “Buyer’s name, income, social security number, Premises address, estimate of value of the Premises, and mortgage loan amount sought?”
Answer: The CFPB has defined a loan application as the borrower’s submission to the lender of the above-referenced six pieces of information. Submission of the loan application triggers the lender’s delivery of the Loan Estimate to the borrower, thereby beginning the timeline that will be followed through close of escrow. To ensure a timely closing, it is important that the timeline commence as early as possible, and for that reason, the borrower is now required to submit these six pieces of information to the lender within three days after Contract acceptance.
Question: As part of their Loan Application, the borrower is required to provide the lender with an “estimate of value of the Premises,” in addition to five other pieces of information. What does “estimate of value of the Premises” mean?
Answer: The estimate of value of the Premises will typically be the contract price.
Seller Concessions (if any)
In addition to the other costs the Seller has agreed to pay herein, the seller agrees to pay up to a specified percentage of the purchase price or a specified dollar amount for the buyer’s loan costs to be used only for buyer’s loan costs, impounds and title/escrow closing costs, recording fees, and if applicable, VA loan costs not permitted to be paid by Buyer.
Question: Why were Seller Concessions included in the Contract?
Answer: In today’s marketplace seller concessions are a prevalent loan condition. Instead of requiring buyers to write concessions in the Contract with various verbiage, the concession, if any, is specifically defined as the maximum amount that the seller agrees to pay for buyer’s loan costs including impounds, title/escrow closing costs, recording fees, and if applicable, VA loan costs not permitted to be paid by Buyer. Of note, Private Mortgage Insurance (PMI) is a loan cost which would be included in the seller concession amount. PMI is extra insurance that lenders require from most buyers with less than a 20 percent down payment.
Question: What fees are not included in Seller Concessions?
Answer: Fees that are not attributable to the buyer’s loan costs or the buyer’s title/escrow closing costs are not included in the Seller Concessions. For example, inspection fees, home warranty plan fees, HOA transfer fees and any other fees unrelated to the buyer’s loan or the buyer’s title/escrow closing costs, are not included in Seller’s Concessions. Appraisal fees may or may not be included in the Seller Concessions, as indicated in the Contract on lines 12-113.
Question: When requesting seller concessions in the Contract, can the Buyer ask for the Seller to pay for “pre-paids”?
Answer: The Contract does not include “pre-paids” in the Seller Concession clause of the Contract. This allows each party to negotiate those terms. If the Buyer wants the Seller to pay certain fees at closing, then the Buyer should specifically list those fees in Section 8a, so that there is a meeting of the minds and all parties understand the terms of the Contract.
Note: In some instances the lender may require that certain expenses be prepaid as a condition of the loan, such as interest or insurance premiums. To the extent that these “pre-paids” are a requirement of the loan, it constitutes a “loan cost” and is a proper seller concession under Section 2j.
Lind, K. Michelle. Arizona Real Estate: A Professional’s Guide to Law and Practice: Third Edition. Xulon Press (select pages 143-150). Kindle edition (select locations 3397-3564).
1I would like to thank AZR General Counsel Scott Drucker of the use of his Q&As. Tags: loan application, loan contingency, pre-qualification, residential purchase contract, Residential Resale Contract, RPC, seller concessions