The Arizona REALTORS® Residential Resale Purchase Contract: The Financing Section

This is Part 3(a) of a series of articles discussing the major provisions in each of the sections of the Arizona REALTORS^® Residential Resale Real Estate Purchase Contract (10/22) (“Contract”). The Financing Section is addressed in two sub-parts because there are so many issues to address. The previous articles in this series can be located at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com). 

Financing is often the cornerstone of a real estate transaction and obtaining a loan can be a complicated process. A lender generally has no contractual agreement, agency relationship or fiduciary duty to the buyer. Therefore, it is essential for the brokers in the transaction to be active in the buyer’s loan process and to follow up with both the buyer and the lender to ensure that the loan approval process is completed by the close of escrow.

The financing section of the Contract obligates the buyer to take specific steps to obtain a loan and sets forth the financing contingency. If the transaction is an all-cash sale, the terms of the Financing Section do not apply to the transaction. 

PRE-QUALIFICATION (2a)

The buyer is required to attach an Arizona Association of REALTORS^® (“AAR”) Pre-Qualification Form to the Contract offer, which is incorporated into the Contract. The listing agent should review the Pre-Qualification Form very carefully with the seller because it sets forth the terms of the loan contingency if the buyer has consulted with a lender and completed the form.

• If the Pre-Qualification Form is not fully completed or the buyer changes the financing terms in the Loan Status Update (“LSU”) delivered ten days after Contract acceptance, the LSU will set forth the terms of the loan contingency. This issue will be discussed in the next financing article.

In reviewing the Pre-Qualification Form:

If the buyer has not yet consulted with a lender, the buyer should indicate on line three of the Pre-Qualification Form that “Buyer HAS NOT consulted with a lender.” The buyer should then print their name on line four and sign and date on line five. If the box on line three is marked, the buyer does not complete lines six through 42 of the Pre-Qualification Form.

• Obviously, if the buyer has not consulted with a lender before submitting an offer, the risks and implications should be discussed with the seller before the seller decides whether to accept the buyer’s offer.

If the Buyer has consulted with a lender, the buyer should complete the remainder of the form, and indicate the following information. 

• Marital status – if a married buyer is purchasing the property without their spouse, there will be specific title requirements that may impact the buyer’s ability to close a transaction.
  • Discuss these risks with the seller and consider addressing the risks in a counteroffer, for example, requiring an executed disclaimer deed within a certain time frame. See the Additional Clause Addendum.
• Whether the buyer is relying on the sale or lease of a property to qualify for the loan.
  • If so, consider whether the Buyer Contingency Addendum should be executed or what additional information the seller should be given before accepting the offer.
• Whether the buyer is relying on seller concessions or down payment assistance to qualify for the loan.
  • If so, determine whether the seller concessions are addressed in the offer or what additional information the seller should be given before accepting the offer.
• The type of loan – Conventional, FHA, VA, USDA or other type of loan.
  • The type of loan will affect the lender’s requirements and underwriting.
• Whether this will be a Primary, Secondary, or Non-Owner Occupied property loan.
  • The intended use of the property will affect the interest rates available, and the requirements needed for the buyer to qualify for a loan. Primary residence loans can be easier to qualify for and generally offer the lowest interest rates.
• Where the buyer is in the loan process – whether the lender has provided the buyer with the required HUD form for FHA loans, discussed income, assets and debts with the buyer and obtained a Tri-Merged Residential Credit Report.
  • Obviously, if the lender has not discussed the buyer’s financial status or obtained a credit report, the lender’s pre-qualification is subject to a great deal of information.
• Based upon the information provided, the amount the buyer can pre-qualify for, assuming a specified total monthly payment.
  • The loan amount that a buyer can qualify for is based not only on a monthly principal-and-interest loan payment but on a total monthly housing payment, which includes property taxes, homeowner’s insurance, HOA fees, and flood insurance costs.
• The maximum interest rate and whether it is fixed, adjustable, or has a Pre-Payment Penalty.
  • The interest rate “not to exceed” should be reasonable given current market conditions. If the buyer cannot obtain a loan at or below the stated interest rate the buyer’s loan contingency would be unfulfilled (unless waived by the buyer) resulting in a cancelled Contract.
  • If the “not to exceed” interest rate was available and buyer failed to lock the rate during the Inspection Period, the buyer is obligated to close escrow at the higher rate assuming the buyer can otherwise qualify for the loan. The failure to obtain loan approval due to the failure to lock the interest rate and points during the Inspection Period is not an unfulfilled loan contingency.
• The documentation that the lender has received from the buyer.
  • Again, the more documentation that the lender has received from the buyer, the more reliable the pre-qualification.
• An instruction for the lender to provide loan status updates to the seller and broker(s) within ten days of Contract acceptance and upon request thereafter.
• The name, license, and NMLS (“National Mortgage Licensing System”) number of the lender. The lender’s license number will indicate whether the entity is a banker or a broker.
  • A mortgage banker is a lending institution that offers a variety of loans, funded with the bank’s assets or by use of a credit line issued in the bank’s name.
  • A mortgage broker generally is an intermediary who brings borrowers and lenders together but does not use its own money to fund the loan.

There is an expiration date on the Pre-Qualification Form because a pre-qualification generally expires when the credit report expires – typically within 60 days.

TYPE OF FINANCING (2h)

The type of financing is indicated in this Section: Conventional, FHA, VA, Assumption or Seller Carryback.

Conventional Loans: A conventional loan is not guaranteed or insured by any government agency. Conventional loans are usually more difficult to qualify for due to requirements such as down payment, credit score and income. Conventional loans can be conforming or non-conforming.

• Conforming loans comply with guidelines set forth by Fannie Mae or Freddie Mac.
• Non-conforming loans, usually provided by portfolio lenders, have guidelines that are set by the lender underwriting the loan. (Portfolio lenders are financial entities that originate the loan and keep the loan in their own portfolio rather than selling it on the secondary market).

FHA Loans: An FHA loan is insured by the Federal Housing Administration.

• With an FHA loan, borrowers pay for mortgage insurance which protects the lender from a loss if the borrower defaults on the loan.
• FHA loans may be an option for buyers with lower credit scores or not much money for a down payment. And closing costs may be rolled into the loan.
• FHA buyers cannot be required to waive the appraisal contingency and FHA appraisers follow HUD guidelines for minimum property standards.

VA Loans: A VA loan may be an option for active military, veterans, or surviving spouses. The Department of Veteran Affairs (VA) guarantees loans made by qualified lenders. 

• These loans have lower credit score requirements, do not require a down payment, have lower interest rates, and do not require private mortgage insurance (PMI).
• There are some costs the VA buyer may not be allowed to pay with a VA loan, therefore consider requesting that the seller cover some of those costs when submitting a Contract offer.
• VA buyers cannot be required to waive the appraisal contingency and VA appraisers follow the VA’s minimum property requirements.

USDA Loans: The U.S. Department of Agriculture (USDA) Guaranteed Loan Program assists approved lenders in providing loans to low- and moderate-income buyers in eligible rural areas.

• Applicants must meet income eligibility (not to exceed 115% of median household income); occupy the property as their primary residence; and be a U.S. citizen, non-citizen national or Qualified Alien.
• These loans may have a lower interest rate, do not require a down payment, and may have a lower PMI, which may be rolled into the loan amount.
• The USDA has specific site and appraisal requirements.

Loan Assumption: A loan assumption is when the buyer takes over the seller’s loan and continues to make payments on it. Most conventional loans cannot be assumed because lenders do not allow it with a due on sale clause. However, FHA, VA, and USDA loans may be assumable. 

• Generally, to assume a loan, the buyer will need to qualify for the loan and will probably incur loan transfer and assumption fees. 
• Additionally, the buyer will most likely have to pay cash (or execute a seller carryback) to the seller for seller’s equity in the property.
• In agreeing to a loan assumption, the seller should ensure they are released from any future liability on the loan. 
• The Arizona REALTORS^® provides a Loan-Assumption-Addendum that addresses these and other issues.

Seller Carryback Financing: Seller carryback financing occurs when all or a portion of the purchase price is financed by the seller.

• The Arizona REALTORS^® provides Dodd Frank Seller Financing Addendums which should be used in a transaction with seller carryback financing.
• Generally, the buyer will execute a promissory note and deed of trust in favor of the seller, which will be recorded, at close of escrow.

LOAN APPLICATION (2f)

Unless previously completed, within three days after Contract acceptance, Buyer is obligated to:

• provide lender with Buyer’s name, income, social security number, premises address, estimate of value of the premises (typically the purchase price) and mortgage loan amount sought; and
• grant lender permission to access buyer’s Trimerged Residential Credit Report.

LOAN PROCESSING DURING ESCROW (2g)

The buyer agrees within 10 days after receipt of the Loan Estimate to:

• provide lender with notice of intent to proceed with the loan transaction in a manner satisfactory to lender, and
• provide lender with all signed disclosures and documentation listed in the LSU at lines 32-35.

The buyer agrees to diligently work to obtain the loan and promptly provide the lender with all additional documentation required.

LOAN COSTS (2i)

All costs of obtaining the loan shall be paid by the Buyer, unless otherwise provided for in the Contract. 

SELLER CONCESSIONS (if any) (2j)

In addition to the other costs the seller has agreed to pay in the Contract, the seller agrees to pay up to a specified percentage of the purchase price or a specified dollar amount for any buyer fee, cost, charge, or expenditure to the extent allowed by buyer’s lender. 

• In some instances, the lender may require that certain expenses be prepaid as a condition of the loan, such as interest or insurance premiums and these “pre-paids” may also be paid from the seller concessions. 

CONCLUSION

By staying active in the buyer’s loan approval process and communicating with the lender, the agents should have a good idea prior to the close of escrow date whether the buyer will obtain loan approval and be able to close escrow as agreed. A good lender will communicate to the buyer and the agents, facilitate the loan approval process, and with the help of all parties, be able to fund the loan by the close of escrow date.

Next Article – Financing Section Contingencies

Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS^®. She is also the author of the book – Arizona Real Estate: A Professional’s Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel. 2/27/23