Five Things I Don’t Want to See in a Purchase Contract
By Doug Goelz, Mortgage Services
Generally, realtors in The Bay Area use standardized real estate contracts when writing a purchase contract. The contracts have boilerplate language that has been reviewed by countless attorneys and probably tested in court. Realtors add the few variables specific to each transaction (address, price, financing terms, etc.) and have the latitude to include any additional language and terms desired by the seller and buyer.Occasionally, I get a purchase contract that has terms I know will be a problem with a lender. Here are a few “red flag” items I never want to see in a purchase contract because they will be an issue with the lender:
- Specific inspections. The standard real estate contracts have language that allows a buyer to do all inspections the buyer wants to as part of his or her due diligence. The problem occurs when specificinspections are added to the standard language of the contract (e.g., “Buyer to conduct pest inspection within 10 days.”). If the contract mentions a specific inspection, the lender will ask to see the inspection report. And if the inspection report mentions needed repairs, the lender can require that the repairs be completed before close of escrow. In our market, getting necessary permits and contractors to complete repairs on a property can take months. It is not feasible to have significant repairs done on a property and close within our tight escrow deadlines.
Standard contracts allow buyers to get the inspections they need without having to provide lenders with the inspection reports. Note: Pest and contractor’s reports are part of the terms of VA and FHA financing and are always required with VA and FHA loans. In general, any required pest work or health and safety issues must be completed before close of escrow with FHA and VA loans.
- Credit for repairs. Asking for a credit for a repair draws attention to work that needs to be done on a property. A lender will require that needed repairs mentioned in the contract be completed before close of escrow, and they will ask for a certificate of completion from a licensed contractor.Again, the relatively short escrows required in our market usually don’t allow enough time for repairs to be completed before close of escrow.
- Rent-back for more than 60 days. Occasionally sellers are willing to sell their property, but want to remain in the property for a while after close of escrow. The purchase contract may allow a “rent-back” period during which the sellers can remain in the property. Sometimes the sellers pays rent during the period; sometimes they don’t. The uniform deed of trust in California on an owner-occupied property states that the borrower will occupy the property within 60 days of close of escrow. If you finance the purchase of a home with a loan that has terms for an owner-occupied property, you are stating in the deed of trust you will live there within 60 days. Logically, then, you can’t have your contract saying someone else (the sellers) will be living in the home for more than 60 days after you buy. If you do, the lender will treat the property as a rental (even if you aren’t collecting rent), and the terms of your financing could change.
- Large credits from sellers. Seller credits allowed by Fannie Mae (which often is the standard lenders use) vary with the percentage of the down payment. The larger the down payment, the larger the allowable credit: anywhere from 3% – 9% of the purchase price.The credits must be applied to an expense that is paid through escrow. If there is a repair that can be completed before close of escrow, the seller credit can be used to pay for it. Most often seller credits are applied to non-recurring closing costs (“NRCCs”), making it possible for a buyer to get a credit from the seller that can be used to pay for all closing costs, including significant points the buyer pays to obtain a lower interest rate. Sometimes, though, the seller credit is so large that there are not enough expenses paid through escrow to use up all the credit. In these cases, the buyer loses the unused credit. Under no circumstances will a lender allow a seller credit that results in the buyer getting cash out of the purchase transaction.
- Expensive items other than fixtures and fittings included in the purchase. When you finance a property, the financing is intended to pay for the land, the building, its fixtures and fittings (i.e., anything attached to the structure), typical appliances, and landscaping. Your home loan is not intended to pay for removable furniture, art, statuary, vehicles that come with the home, or other significant items that could be added to the standard language in the contract. Lenders will not approve loans when the contract specifies the purchase price includes items that are not part of the real estate. Purchase of items outside of standard fixtures and fittings should he handled in separate transactions between the buyer and seller.
The standard contracts used in our market are thought to protect buyers and allow flexibility is the terms of the purchase. Your realtor should be able to guide you on the best way to structure the purchase agreement so that any non-standard terms are clear and you get what you want. After speaking with your realtor, if you have concerns about the protections offered you by your purchase contract, be sure to consult with an attorney.
Questions? Feel free to get in touch with me at 415-730-4665 or firstname.lastname@example.org