Part Two in our dissection of the new Multi-Board Residential Real Estate Contract (4.0)
Part Two in our dissection of the new Multi-Board Residential Real Estate Contract (4.0) involves changes to the ever important mortgage financing contingency.
We are confronted with an industry now where attorneys are constantly seeking to extend financing contingencies in contracts. Why? Are lenders simply not getting their job done quickly enough? Is it that difficult to check a person’s credit and order an appraisal for the property in question? Or is it attorneys who are being overly technical in their reading of commitment letters, and doing everything possible to try and protect their buyer clients?
A key change in Form 4.0 is the fact that a “firm” written commitment is now required as opposed to an “unconditional” mortgage commitment as was required under Form 3.0. The hope in this language change is that it will eliminate numerous requests for extensions of the financing contingency because of some minor clerical condition or because of some ambiguous or over-broad language in the mortgage commitment letter.
Both forms indicate that exceptions as to title and survey and matters totally within the buyer’s control do not constitute conditions that would allow a buyer to request an extension of the financing contingency. However, it is very common to see mortgage commitment letters that just don’t want to commit. Although the letter sets forth the basic terms of the loan (loan amount, interest rate, amortization period, etc.), there are general catch-all conditions such as “subject to further review and final underwriting approval.” This doesn’t really tell anyone anything as far as what is needed to satisfy the condition. Further, if there needs to be final underwriting approval, is the loan even approved at all?
The cautious buyer’s attorney would ask for an extension of the financing contingency after receiving a commitment letter with a condition as noted above. The frustrated seller’s attorney would then explain to his client that the buyer needs an extension of the financing contingency but no one is really sure why, other than the contract is subject to the buyer obtaining an “unconditional” commitment. The ambitious seller’s attorney might try calling the buyer’s lender only to be told that this is how all their commitments read and there is nothing that can be done.
Although the request to extend the financing contingency seems somewhat commonplace in our industry, the fact is it involves a significant amount of time and effort on the part of both attorneys, and increases the stress and frustration of both the buyer and seller. As the contingency date arrives with no commitment letter in sight, or one as noted above, buyer’s counsel now must call the lender and the buyer to see if the commitment is unconditional. When it is determined that it is not unconditional, buyer’s counsel needs to prepare and send a letter to seller’s counsel asking to extend the financing contingency; seller’s counsel must in turn review with the seller for approval and oftentimes will require additional phone calls to see exactly what is the hold up. Add to this mix the seller client that always wants to have the upper hand, and who will only agree to extend the contingency until August 7, even though the buyer requested August 9 and the lender has indicated the appraisal will not be complete until August 8............you get the picture!
Alas, Form 4.0 only requires a “firm” commitment. The above scenario where the buyer has a commitment letter setting forth the loan terms with the general catch all language should be viewed as a “firm” commitment which will eliminate the need to request extensions, or at the very least, if an extension is requested, it will probably garner a response from the seller’s attorney that he or she deems the condition satisfied.
Of course, attorneys being the argumentative bunch that they are may still quibble about the meaning of “firm commitment.” If a commitment letter is still subject to appraisal is it firm? Probably not. If it is subject to a general catch all such as “subject to final underwriting review?” A better argument could be made that this is a firm commitment, however, the cautious buyer’s attorney may still seek an extension so as not to be the one blamed when the lender later cancels the commitment due to some underwriting condition that the buyer cannot satisfy. Obviously, with a term like “firm” being used in a contract, the above is only this author’s opinion, as a firm commitment to one attorney might appear to be no commitment at all to another attorney.
One final note regarding Form 4.0, the financing contingency still retains the language of Form 3.0 regarding a condition in a mortgage commitment that the buyer must sell their existing residence. The contract does NOT allow buyers to back out of the deal if they receive such a commitment unless the parties have specifically agreed that the contract is contingent on the buyer selling their existing residence. In some form contracts, buyers have the ability to make an offer which is not contingent on selling their existing residence (attractive to the seller), only to be able to “back door” the seller when they cannot satisfy the financing contingency because of a condition in the mortgage commitment that the buyer must first sell their existing home. If a buyer tried this with Form 4.0 (or 3.0 for that matter), they would find that it would be a miserable failure with the probable loss of earnest money and possible additional damages.
As always, we invite your comments and questions and thank you for your participation in the FAL&R Blog.
Robert H. Rappe, Jr © 2006. Senior Partner
Freedman, Anselmo, Lindberg & Rappe, LLC.
Thomas Anselmo, Real Estate Practice Partner