Bank Financing - Some Important Considerations
This is part of the Real Estate Contract Fundamentals Series. I’m not giving you legal advice - you’ve got to get that for yourself from a qualified attorney. To get a free copy of the Real Estate Purchase and Sale Agreement upon which this series is based, visit the Monster Purchase And Sale Agreement Download Page.
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Probably the most common way to finance the purchase of real estate is through the acquisition of new bank financing. The availability of mortgage loans varies based on economic circumstances, but this much is sure: It’s critically important for your purchase and sale agreement to stipulate the parameters of how you’ll work with bank financing as the buyer.
Here are some points to consider:
- What happens if you are unable to secure a mortgage loan?
- What happens if you are offered a loan but the terms, conditions or rates are unacceptable to you?
- What, if any, is the penalty you’ll face if you are unable to obtain suitable financing?
- Are you required to provide evidence to the seller that you have applied for mortgage financing?
- Are you required to use a particular lender and/or closing attorney/title company?
- What requirements will be made of the seller concerning compliance with the mortgage application process? (For example, how will appraisals and on-site property inspections be handled?)
- Can your contract be extended if your mortgage application is still in process at the time closing was originally scheduled?
- Who will pay the closing costs?
In general, my preference is to make all bank financing-oriented transactions in which I’m involved subject to my acquisition of financing that is acceptable according to my sole discretion. In other words, I want to have the right to terminate the transaction without penalty if the financing I’m offered isn’t consistent with my preferences, including interest rate, points, down payment, and other significant terms.
In short, be certain to eliminate any perceived or implied requirement for you to accept any financing you don’t like.
Bank financing is sometimes difficult to get and sometimes easy to get. But one way or the other, be sure to set up your contracts to protect you in the event that your financing doesn’t happen as you expect.
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On one of our deals, we had exact financing terms spelled out in the purchase contract. We got a firm loan commitment for those exact terms. Very near the closing date, our mortgage broker tried to alter the terms by slipping in a higher interest rate and a prepayment penalty (so he could get a higher fee from the lender). We told him that the financing terms cannot be changed because it’s in the contract. We must get our terms or we void the purchase contract. He backed down and we got the terms we wanted. We haven’t used his services since then.
On another deal, I specified the financing terms, including zero points. We got the loan commitment for the exact terms. Near the closing date, the mortgage broker (different from the above broker) tried to slip in a couple of points (each point is 1% of the loan amount). I explained that I cannot accept paying the extra fee, because my contract states “zero points”. My real estate broker ended up paying the points out of her commission to avoid losing the deal.
Jeffrey, I use the clause that Bryan uses because it also covers your situation.
What your solution doesn’t cover is any condition that doesn’t *directly* involve the loan.
Lets say you are using a buy and hold strategy and you specify loan terms that will insure a reasonable monthly net income. What happens if, during the time it takes to close, you find out that a new condo complex is going in a block away and it’ll drive down rents? If you use your loan clause, you are stuck if you got the loan that you asked for in your contract.
In Bryan’s case, he can say that the loan payments are not acceptable (since it would result in a negative cash flow). The main difference here is that by putting your loan conditions in the contract, you allow someone else to decide if the loan is acceptable. By putting in “by your sole discretion,” you are reserving all rights to make that decision yourself.
Are points money and are they necessary? If they are money, who gets the points, the realtor, the lender or the buyer? What are they for anyway?
A “point” is equivalent to 1% of the loan amount. Yes, it is real money. Generally speaking, the lender and/or mortgage broker receive points. They’re not legally required, though most lenders/brokers will charge them in one way or another. Sometimes they’re very clearly apparent because they are a part of the up-front closing costs that must be paid. And sometimes they’re hidden in the form of “back-end” fees that the broker receives from the lender in exchange for the broker causing the borrower to accept a less attractive loan. — Bryan Ellis