Lending a Hand on Loan Approval

During these uncertain times, providing buyers with the confidence and security to move forward with a transaction is paramount. A well-drafted offer can lead to a smooth closing process while protecting the buyer’s interest in the event of unforeseen issues. Section 8 of the Residential Contract for Sale and Purchase (the “Standard Contract”) and the “AS-IS” Residential Contract for Sale and Purchase (the “As-Is Contract”) identifies whether a buyer will pay cash or obtain financing for their purchase. When preparing an offer, Section 8 is usually straightforward; is the Buyer paying cash or applying for a mortgage? Not-so-fast my friend!

For many buyers, the COVID-19 pandemic has thrown a wrench into the Loan Approval process. Many lenders are requiring additional verification of employment on the Closing Date. Some lenders are even requiring that they speak with the Buyer’s employer on the Closing Date. If the lender cannot get in touch with the employer, the lender will refuse to release the loan package to the closing agent or, even worse, fund the transaction. In this scenario, a buyer’s escrow deposit could be at risk simply because their employer hasn’t returned the lender’s call!

A buyer should exercise extreme diligence when shopping the lending market during the pandemic. It is important to remind a buyer that they may apply for a mortgage with multiple lenders during the Loan Approval process. While interest rates are currently low, many lenders are quickly changing their lending practices as they are increasingly unwilling to lend to potentially “risky” borrowers. As such, a buyer should carefully research each lender to make sure they do not have any plans to alter their lending practices.

With all of this in mind, how can an agent draft an offer to better protect their buyer? The first step is a simple step. The offer should have an extended Loan Approval Period. While an extended Loan Approval Period is ideal, there is not a one-size-fits-all to the length of the Loan Approval Period. Every lender will have slightly different processes in place to address the pandemic and the timeframe for Loan Approval will vary. However, the longer the Loan Approval Period, the better, for a buyer! With so many buyers currently requesting an extension to their Loan Approval Period, it is certainly best practice to have an extended Loan Approval Period from the get-go.

Next, a well-drafted offer should address the continual verification of employment and income. The following language can be added to an offer, “If Buyer has obtained Loan Approval and Buyer’s lender refuses to fund the loan due to Buyer’s employer’s failure to provide the lender with verification of employment and/or income (the “Verification”), then the Closing Date shall extend until the lender obtains Verification. Closing shall occur within ten (10) days of Verification. If the lender does not obtain Verification within five (5) days after the Closing Date, then this Contract shall terminate and Buyer shall be refunded the Escrow Deposit, thereby releasing Buyer and Seller from the Contract.”
For those of you wondering how to protect a seller, the following language can be added to a counteroffer, “Buyer shall keep Seller fully informed about any changes to Buyer’s employment status. If Buyer becomes unemployed at any time prior to the Closing Date, Seller may terminate this Contract, by written notice, and Buyer shall be refunded the Escrow Deposit, thereby releasing Buyer and Seller from the Contract.” This language enables your seller to quickly re-list the property on the market without any undue delay.

While a solid starting point, the above language should be tailored to fit the specific needs of each client. As always, if you have any questions about how the COVID-19 pandemic may impact your client’s Loan Approval process, we encourage you to Contact your local real estate attorney.

Sincerely,

Robert R. Garcia, Esq., rgarcia@berlinpatten.com
Berlin Patten Ebling, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

berlinpatten.com