Loan and Appraisal Contingencies

BROKER RISK MANAGEMENT

 

WEEKLY PRACTICE TIP

 

Loan and Appraisal Contingencies

 

Q:  I am a buyers’ agent and concerned about my buyers removing their loan and appraisal contingencies at a time when many lenders have secondary appraisals, or even a full underwriting review, late in the escrow after my buyers have removed their contingencies.  I have heard of buyers not being able to close after the lender lowers the loan amount based on a second appraisal, or even cancels the loan commitment based on an underwriting review.  How can I protect my buyers if they remove loan and appraisal contingencies and then later the lender changes the deal?

 

A:  In a market where there is uncertainty about lenders changing the terms of a loan or withdrawing the loan commitment altogether, buyers can face the risk that, if they remove the financing contingency and the lender fails to fund that loan on time and/or on the terms of the commitment, those buyers will be alleged to be in breach of the contract and suffer damages to seller. 

 

If, on the other hand, the financing contingency is not removed on time, the seller may cancel the contract.  What to do?

 

PRACTICE TIPS

 

1.  Try to negotiate up-front on behalf of your buyer that the loan contingency will remain open until the loan is funded. (See, e.g., CAR Purchase Agreement paragraph 2.I.)

 

2.  If seller is not amenable to such an open contingency, perhaps the seller will allow the buyers to remove the contingency, but not be liable only in the event the lender fails to fund the loan timely and on the terms of the original commitment.  The following language can be inserted into the Purchase Agreement to accomplish this result: 

 

“Seller and Buyer agree that, after the removal of Buyer’s loan and/or appraisal contingency, if a loan commitment or approval is not timely honored, or the appraisal is lowered, by Buyer’s lender without fault of Buyer, Buyer may terminate this Agreement and shall be entitled to the return of Buyer’s deposit.”

 

3.  If buyers are currently in escrow without such a clause, and the time for the removal of the loan contingency is approaching, and buyers are concerned about their loan funding on time and per the terms of the loan commitment, then try to get seller and buyers to agree to the following:

 

“Buyer hereby removes the loan contingency subject to the following:  Seller and Buyer agree that, after the removal of Buyer’s loan and/or appraisal contingency, if a loan commitment or approval is not timely honored, or the

 

 

 

 

appraisal is lowered, by Buyer’s lender without fault of Buyer, Buyer may terminate this Agreement and shall be entitled to the return of Buyer’s deposit.”

 

 

This, of course, would require the signatures of both seller and buyer to be effective.  If the seller does not agree to the above, then the contingency is not removed by the above language and the seller could act to cancel the purchase agreement.

 

4.  Listing Agents:  Sellers may be willing to consider the above terms, or risk losing an otherwise qualified buyer who is unwilling to go forward in an uncertain lending environment subject to factors beyond their control that could cause them to be unable to close the transaction.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.