Caveat emptor, Latin for "buyer beware," are two words every buyer should take to heart when embarking on their first or even subsequent real estate purchase. Since gone are the days when buyers were lining up for overpriced property, when loans were freely given and open houses heavily attended, it's important now more than ever to make sure that the proper mortgage or financing contingency is included in the initial offer and carried through to the Purchase & Sale Agreement.
As an attorney that represents real estate buyers, I can't tell you how many times I'm stuck in the unglorified position of trying to fix a mortgage contingency gone astray in an offer. Often it's a lack of planning and homework that causes the problems like when a buyer hasn't been preaproved and, therefore, doesn't know what they're even qualified to borrow. Other times, a realtor has assisted with the drafting of the offer and instead of specifying that the buyer is going to get a mortgage with 3% down, they do the reverse and specify that the buyer is putting 97% down. It often takes some negotiating on my part to convince the seller or their attorney that there's no way the buyer intended to get a loan for 3% of the purchase price!
Another common error I see buyers make is the failure to include specifics about the type of mortgage they will be seeking. For instance, a buyer trying to get an FHA mortgage should specify that as a possible type of financing they will be seeking and should also require the seller's cooperation with any FHA required paperwork. Since FHA borrowers pretty much always finance mortgage insurance, this boosts the loan amount up. The offer should also include this fact. It's key to include the core terms of the deal in the offer not only because they carry over into the Purchase and Sale Agreement, but also because an accepted offer, depending on its terms, can become a binding contract.
Financing contingies are important to all of the parties. For buyers, they function as an escape valve out of the deal if financing can't be obtained. For sellers, they provide assurance that the buyer is going to be taking the necessary steps within certain timelines to get financing to buy their house. If a buyer fails to takes those steps, they can say "bye, bye" to their good faith deposit. In this economy, I can't imagine anyone wanting to part with what may be tens of thousands of dollars of hard earned money.
The moral - take some time to get the financing contingecy just right when you make your offer. Be sure to communicate with your proposed lender so that you know how much you can borrow and how long it will take to process your application and when a mortgage commitment will be provided. And, don't forget to put the important dates in your calender. You don't want to miss a beat.
*This blog is the first in a series of posts geared toward real estate buyers, applies Massachusetts law, and is for informational purposes only. Always consult legal counsel for guidance.
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