Mortgage Contingency FAQs
Thursday, January 27, 2022
When financing a purchase transaction, the mortgage contingency date is the single most important pre-closing event after the Purchase and Sale Agreement (P&S) is signed. The mortgage contingency date typically occurrs three to four weeks afer the P&S execution. The lender needs to issue a "clean" mortgage commitment letter on or before the mortgage contingency date, or the buyer's attorney likely will seek an extension.
What Is The Purpose Of A Mortgage Commitment?
When financing a loan, a lender undertakes a lengthy review of the borrower and subject property prior to approving financing. The borrower and the property must meet detailed federal lending guidelines. Thus, a mortgage contingency date allows a Purchase and Sale Agreement to be signed before a borrower is approved.
What If A Borrower Is Not Approved?
If a borrower's financing is not approved, then the lender must issue a "denial" letter and the buyer's attorney must submit a termination letter to the seller. Provided the request is timely, the borrower will receive a full refund of the P&S deposit (typically 5% of the purchase price in Massachusetts). However, a skilled loan officer should be able to make an early determination that a borrower is qualified for a loan. Moreover, the overall process creates incentives to ensure that the borrower is qualified: the seller, lender, agents and the closing attorney all will have invested resources into a transaction and thus want to avoid a scenario where the deal is terminated several weeks in.
What Does A Lender's Underwriter Review?
A lender's underwriter engages in a thorough review of the borrower's ability to repay a loan, including reviewing credit, employment, and assets. (Note, if a borrower has commission or bonus based income, it may take longer to analyze).
The lender also reviews the appraisal to ensure the property appraises at or above the purchase price. Finally, if the borrower is purchasing a condominium unit, the lender conducts a detailed condominium project review. The review including ensuring the condominium questionnaire, the condominium documents and financials meet federal lending guidelines.
What If The Lender Does Not Have A (Clean) Commitment Ready On The Mortgage Contingency Date?
On occasion, a commitment can be delayed due to an issue beyond a lender's control such as problems with the appraisal process. The appraisl is conducted by an independent third party, and the lender does not have direct control over the scheduling or timeline. There also are occasionally issues with obtaining and reviewing financials (e.g., bank statements, brokerage accounts, tax returns). In either scenario, the buyer's attorney will request an extension. A seller is incentivized to grant an extension because if the seller refuses to extend, they must refund the buyer's full deposit and then put the property back on the market. Thus, the buyer typically can obtain one to two extension(s). However, many deals are on tight timelines, and if a seller is purchasing, they need the certainty of the commitment in a timely manner.
Practice Tip: Most lenders will issue a mortgage commitment in advance of the mortgage contingency date. Unless and until a commitment letter contains appraisal approval and (if a condominium unit) condominium project approval, the borrower should continue to extend the mortgage contingency date.
How Should A Borrower Read A Mortgage Commitment?
Once the lender issues the mortgage commitment, it is important for the borrower to thoroughly review the letter with their loan officer and/or attorney. The commitment will contain a few outstanding conditions. Most are boilerplate that apply to all loans and are easily satisfied in the days prior to closing. They include verification of employment, a final credit check, a final inspection (if new construction), or final review of bank statements.
Conditions that should be "red-flagged" as requiring an additional extension of the mortgage contingency date in order to satisfy underwriting guidelines include when a loan is "subject to" an outstanding appraisal condition, a loss of employment, or condominium project approval.
Should A Borrower Show The Commitment to the Listing Agent?
The lender sends the mortgage commitment directly to the borrower. A borrower is not required to disclose their mortgage commitment to any party in the transaction. Often, the commitment contains personal and private information, such as bank accounts, financials and employment. A borrower simply can let the mortgage commitment date pass when proceeding forward. Often, a buyer's agent will verbally notify a listing agent that the borrower has a mortgage commitment.
2019 Real Estate Market Outlook
Friday, January 11, 2019
Considering the financial markets volatility, the 2019 financial year has started off on an improved note led by the decrease in interest rates and the rebounding stock market. This paints an optimistic picture of what could be in store for the real estate market in 2019.
Although pundits are once again talking about a softening of the real estate market, there are noteworthy signs that point to a positive year when it comes to real estate, both with transactions and appreciation. According to Freddie Mac, the average 30-year fixed rate has dipped to 4.51 percent, bringing the rates back to where they were in May, 2018. During this time in 2018, inventory was at it lowest in parts of the country, according to the Massachusetts Association of Realtors. Additionally, in May, the median price of homes in the state rose over the $400,000 mark for the first time in 2018. These improvements, while not a direct correlation to interest rates, do positively influence consumer confidence and stimulate the market with refinances. The stock market has seen an 8% surge since Christmas, which will also contribute to an increased sense of consumer confidence.
While it is expected that inventory is always thin in the winter, the (relatively) mild winter weather in the Northeast (to date) and an active pool of buyers, due to the lower inventory available, makes January a great time to list a home or condominium. Historically, buyers who are out shopping in the winter have a motivation for which cold, sleet and snow will not stop them from pursuing their home search and thus, equates to more serious buyers who are ready to make decisions quickly.
Additionally, for buyers, purchasing earlier than anticipated carries the advantage of eliminating much of the competition that is prevalent in the spring market. Submitting an offer prior to the onslaught of buyer competition that materializes during the spring market carries three distinct advantages; first, it allows the buyer to take advantage of lower interest rates, second, there is a greater likelihood of getting the offer accepted, because the buyers have fewer people to bid against and, last, but not least, it affords a buyer the opportunity to include contingencies (e.g., finance and inspection) that might not be favorable to winning the bid when going up against many other bidders.
So, while the news can be confusing, all key indicators point to a strong year in real estate for 2019, which, as the year unfolds will continue to increase confidence to fuel the market even more.
Wednesday, December 12, 2018
When purchasing a house or condominium, it is a good idea to check with the municipality to determine if there are any open permits on the property. Most municipalities have an on-line database, which makes the research easier. If a permit is located, then it is reasonable to request that the Seller remedy the issue. Possible outcomes of a request include: -Seller to make any necessary repairs and the municipality signs off and closes out permits prior to closing; -Seller provides a Buyer credit; -Seller does not agree to remedy some of the prior owner permits. If the open permits issue is not resolved to a Buyer’s satisfaction, then a negotiation can ensue. Factors to consider in the negotiation are whether there are other offers, likelihood of another Buyer raising the same issue, feasibility of the municipality signing off on remaining open permits (in Boston, for example, the city often cannot close out older permits), and the cost of the work (if) needed to close out the permit(s). A skilled real estate attorney can provide additional guidance.
Improve Your Outlook
Wednesday, October 17, 2018
How Boston's Canner Law Gained Their Competitive Advantage in the Real Estate Closing Industry
Thursday, August 30, 2018
We are pleased to work with our many vendors to deliver the most cutting edge services to our clients. Our real estate software allows us to deliver numerous enhanced services.
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What Real Estate Agents Should Expect From a Real Estate Attorney
Thursday, August 9, 2018
All real estate attorneys possess the legal acumen needed to purchase and sell homes safely and efficiently. However, only the best attorneys make the purchase and sale process seamless not just for the homeowner, but also for the real estate agent, the mortgage firm, and everyone else involved in this complex process. Real estate agents can help ensure that they have the best person for them if they know what to expect from the real estate attorney, and what is needed to facilitate a smooth home buying experience for everyone involved.
Real estate attorneys are not paid through commission; they are paid solely for their expertise. Therefore, it is imperative that they conduct themselves in the utmost professional and ethical manner at all times. Attorneys should always follow the laws and regulations in their field, without bribery or deception. If you think something is suspicious, ask. And if you suspect that an attorney has a hazy ethical code, look up reviews, ask for references, and ask fellow agents – you’ll often be able to use colleagues in the industry to confirm or deny any lingering suspicions.
Buying and selling homes can be chaotic enough without a real estate attorney that does not do their job efficiently. The attorney should be readily available and offer tools that make the process easier, like communication platforms, options for sharing protected documents, and more. One example of a tool that actually consolidates all of those services is Qualia, a technology platform that allows agents, attorneys, and brokers to simplify the home purchasing/ selling process. It not only limits the number of platforms through which the involved parties need to communicate and share documents, but also adds a layer of transparency so that all parties involved can see the process move along in real time. You want your attorney to have something like this, so that your and your client’s process is easier, and more enjoyable.
Real estate agents should demand that their real estate attorneys have a good reputation in the industry. Real estate attorneys are an integral part of the real estate process and need to be able establish client and industry relationships that make all parties involved feel confident and comfortable with each step of the process. You should look for an attorney that has a solid track record of clearing titles, negotiating contracts, and working through challenging situations. Social media, review sites, and personal references all allow agents to explore an attorney’s past, and ensure that they are the right fit for you.
Though an attorney’s reputation is important, it’s almost, if not more important that an attorney has strong relationships with individuals in the local real estate industry. If they are well known among the local realtors and community, that tells you that they have done their job for long enough, and well enough, that they are recognized and remembered throughout the industry. Their connections within the community are also helpful in allowing you to complete the real estate transaction properly and quickly.
Though not comprehensive, these characteristics provide a good roadmap for what to look for when determining the best legal partner for you and, most importantly, for your client.
Check out this great video!
Bidding War Advice from a Real Estate Attorney
Thursday, May 31, 2018
The Greater Boston real estate market is historically competitive right now, and many properties are selling for well above listing prices. In competitive markets, bidding wars are commonplace. How do you win them and, most importantly, how do you win without taking on an undue level of risk? The points below offer different ways to craft your offer, and what to consider before you commit beyond your means.
- Find a real estate agent that is communicative, punctual, and level-headed
- Your real estate agent should continually communicate with the listing agent, provide all documentation in a timely manner, and offer you advice that’s in your best interest, in every way. It’s not just the offer you put in that is important – it’s the agent’s relationships with other professionals in the market, his or her familiarity with the specific region in which you’re buying, and his or her ability to communicate effectively and frequently, which will best position you for success.
- Determine the risks that you’re willing to take
- According to a study quoted in the Wall Street Journal, all-cash offers are most impactful when it comes to winning the bid, boosting the buyer’s odds of winning by nearly double. However, all-cash offers are neither common nor typically feasible, so – what are the next best options?
Well, the second and third most effective ways to win a bid are: “waiving a financing contingency—effectively agreeing to forfeit the deposit if a buyer can’t get a mortgage,” and, interestingly-enough, penning a cover letter. The fascinating piece of this is: waiving a financing contingency increases the buyer’s odds by 57.9%, and, at the same time, puts the buyer at a good deal of risk, while penning a simple, heartfelt letter boosts it by 52.5%, and entails zero risk. Mortgage contingency waivers are now highly common. Before electing this scenario, however, you should be confident in your financial situation. Generally, if you’re planning to finance more than 80% of the purchase price, you should not waive this contingency – it’s simply too risky.
Beyond these three tactics, other methods that have been successful include: escalation clauses (in which the buyer’s bid will automatically increase if another offer comes in higher than their original), waived inspection contingency (buyer can’t cancel or renegotiate based on results of inspection), and pre-inspection (inspection scheduled before offer is made). Each tactic carries risk, and each risk should come with a certain threshold for the buyer. For example, will you be willing to waive an inspection contingency if you notice 200-year-old fireplaces? Is this your first time buying, and are you concerned about the terms of a potential mortgage? If so, waiving a financial contingency may not be in your best interest. The answers to all of these questions simply depend on where you are financially, and how much risk you are willing and able to take on.
- Take a minute to listen to your gut.
- Yes, the hardwood floors are beautiful; yes, it’s a great neighborhood. But what is any given home truly WORTH to you, specifically? Will you be okay if the roof needs repairs? What about if the financing doesn’t quite align with the bid you made? Is this home worth those additional potential costs?
Before taking a risk with the inspection or financing, consider: what is winning this home worth, and at what point does winning just become winning? In other words, are you truly, absolutely sure of the home and what you’re willing to do for it?
Try to give yourself time, and know that you can always consult a real estate attorney with any questions you have about bidding wars and risky offers.
Dana was featured in The Metrowest Daily News!
Tuesday, May 8, 2018
Five Items to Include in A Use and Occupancy Agreement
Wednesday, April 4, 2018
As everyone in the real estate field is aware, inventory is tight. As a result of the shortage, Sellers are nervous about listing because they may not be able to find a suitable home in a short period of time.
The Use and Occupancy Agreement (U&O) is a great tool to give prospective home buyers comfort that they will have more time to find a new home.
Here are the top five items to consider referencing in an Offer when proposing a “lease back” to allow a Seller to stay past the closing date:
- 59 days. If the Buyer is financing, limit the U&O term to 59 days. At closing, the borrower will have to sign an Occupancy form where they will represent that they intend to move into the property within 60 days of the closing.
- Per Diem. If the Seller stays past the closing date, the Buyer can reasonably ask for per diem carrying costs, which typically include the daily mortgage interest, taxes, insurance and condominium fee (if applicable).
- A Holdback. The Closing Attorney/ Settlement Agent should holdback funds at closing to enforce the U&O. A typical holdback is in the range of $5,000. The holdback can be released when the Seller terminates.
- Insurance. The Buyer will need a new insurance policy in place when purchasing. The Buyer should request a rent rider to cover the occupancy period. The Seller needs to check with their insurance agent to see if they can obtain a short-term rent policy or extend their current coverage.
- Utilities. Utilities should remain in the name of Seller until the termination of the U&O. Taxes should be part of the carrying costs. A final water reading should be done at closing and immediately before the Seller vacates.
There are other provisions that a skilled real estate lawyer can add to a U&O such as an indemnification, a penalty clause if the Seller stays past the termination date, and a no tenancy clause. All parties should consult with a real estate lawyer before finalizing the U&O.
Monday, March 19, 2018
When considering whether to convert a multi-family property to condominiums, you should weigh the pros and cons. While the cost of a condo conversion is substantial, the potential benefit of owning or selling multiple units on the open market may greatly outweigh that expense.
Even if you have been using your property as an income-producing, rental property, you may be surprised at the potential financial advantage to selling two or more distinct condo units, rather than a single multifamily home.
When you are converting a property, below is a list of fees which you can expect to pay for the process:
-legal fees Consult with your attorney – legal fee depends on how many Units will be created; this fee includes the creation of the condominium documents, including the Master Deed of the Condominium, the Declaration of Trust and By-laws of the Condominium, and the proposed Condo Budget.
-architect/surveyor $1,500+ to create floor plans and site plans which will be recorded at the appropriate Registry of Deeds.
-recording fees approximately $400
You will want to speak to your attorney about the costs which may be specific to your property (how many units exist, whether the title is registered, and in which city or town the property is located). After determining the total cost to you of converting to condominiums, you should speak to a real estate agent regarding the potential sales points for each option. Only then can you make a fully-informed decision as to your best course moving forward.
Leveraging Technology to Ensure a Unified Real Estate Experience
Friday, January 5, 2018
One of our preferred vendors, Nate Baker, recently wrote in a Housing Wire article that closing attorneys “must explore taking the lead on implementing technology that drives the real estate industry forward.”
At Canner Law, one of our goals has been to implement technology to improve the closing experience by connecting all parties in the transaction with secure document exchange, messaging, information requests, and real-time automated updates on closing milestones. Towards this end, all of our referral partners and their clients can now:
- Order closings with one click
- Get real-time updates on the closing process
- Send messages and share documents securely
- Use our software’s mobile app while on the go
To learn more, please contact us at email@example.com
Breaking Down the Tax Plan: 5 Points to Consider
Wednesday, January 3, 2018
With the passage of the tax bill and its immediate implementation, there has been a lot of confusion. To help clear up that haze, below is six quick summaries of points that directly affect housing. While these points are based on the facts of the tax plan itself, the interpretation of how this will help – or hurt – is entirely up to you.
- Capital gain exclusion is left unchanged. This was one of the larger debates of the tax plan, and many are happy to see it left unchanged. Why? Well, the capital gain is the difference between the price you paid for a house and the price at which you sold it. This gain is typically treated as taxable income.
That said, depending on how long you owned the house, you may be able to exclude up to $500,000 (or $250,000 if married and filing separately) of that. Therefore, you could avoid paying federal income tax on up to $500,000 of that profit. This provision has remained, and homeowners are just required to have used it as a primary residence for two of the five years before the date of sale.
- Mortgage interest deduction now capped at $750,000 instead of $1 million. This means that if you buy or have bought a home after December 15, 2017, and if the interest you pay on that mortgage is at or below $750,000, you can deduct that on your taxes. For those buying a home in which they’ll have to pay $850,000 or $1 million of interest on their mortgage, they will no longer be able to deduct all $1 million of that.
- SALT – State and Local Tax – Property tax deduction is limited to $10,000. Again, this is limiting the amount that homeowners – particularly those paying heavy taxes – can deduct. While the current tax bill allows individuals to deduct the total amount of property taxes, the current bill will only allow homeowners to deduct up to $10,000 in property taxes. In states where property taxes are higher, like Massachusetts, this will have a larger impact on homeowners, as they will not be able to deduct as much as they used to.
- Home equity deduction is eliminated. Currently, you are able to deduct interest on up to $100,000 of home equity debt. Under the new tax plan, effective come 2018, you will not be able to deduct any interest on home equity debt. This eliminated deduction will have a large impact on individuals who need to borrow money for tuition or other reasons besides buying, building or improving a home beyond what’s necessary. This makes borrowing from a home equity line of credit less appealing, as the interest paid on it will no longer be tax-deductible.
- Moving expenses deduction is removed. Typically, when filing your taxes, you are asked if you moved in the past year, and, if so, what your expenses were. Even if you did not itemize and track those costs, you had the opportunity to deduct some moving expenses from your taxes. This is not the case anymore. Only active duty members of the armed forces are able to deduct such expenses.
Of course, the exact impact that these different points will have on you as an individual will vary depending on so many factors, from your marital status, to the deductions you take advantage of, to your income and employment type (small business owner vs. student vs. employee). For most, the exact effects of this bill will not truly be felt until 2018 tax returns are filed. But in the meantime, continue to read up; considering how this bill can hurt or help you can help you plan ahead of your filing in the spring of 2019.