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You may just have to eat that mortgage rate!? Make it a tasty one.

The multi-board contract (v5.0) that we use here in Northern Illinois, has a mortgage contingency.

As we all know, a large part of the purpose of the mortgage contingency protects the buyer, in case they cannot obtain a mortgage. And we fill in the specifics of the mortgage we are trying to obtain.

However what many people (Realtors included) do not understand is that we don't have to fill in precisely the mortgage that we're planning on getting... because that's not really the entire purpose of filling in those details.

We are also spelling out the terms and rate that the seller can use if/when providing us with a mortgage.

WHAT?, you ask? But we're not obtaining a mortgage from the seller! We didn't sign up for that!?

Didn't you? If you read lines 126 and on, you'll note that it states that if the buyer can't get the loan, the seller (at the seller's expense) may provide one for you. But the loan they obtain must live by the rules you've spelled out above.

For example, if you've specified a 30-year fixed, with a 4.75% rate, and no points, no origination fee... then the seller can only provide the terms of that loan (or better) in order to hold you to the deal. I'll admit, it's rare that any seller takes advantage of that clause... but you should know about it... you should tell your clients about it... and they should be aware, that under the oddest of circumstances... if their lender can't provide a loan, the seller is allowed to provide one for them. So fill out those specifications carefully... don't just adjust the rate to 6%, simply because the seller's agent requested it... you may end up eating that rate!

And don't just assume that all the Realtors know about this. I just spend a good amount of time this morning, explaining that to an agent who's been in the business longer than I have. And he had no idea.

ALAN MAY, Realtor®
Specializing in Evanston Real Estate and North Shore Real Estate
Coldwell Banker Residential Real Estate, 2929 Central Street, Evanston, IL 60201
847.425.3779 Cell: 847.924.3313 Email: Almay@aol.com
Evanston Real Estate & North Shore Real Estate • Licensed in Illinois

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Posted by Alan May, Coldwell Banker Realtor® Evanston, Illinois Homes for Sale on 02/04/2010 04:31 PM

Comments (42)

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42 Comments on You may just have to eat that mortgage rate!? Make it a tasty one.

FEB

2010

Great information.

This is one of the most neglected paragraphs in the contract, rarely enforced by sellers, often to their deteriment.

Wow Alan! I do believe that very few realtors (including me) know anything about that. But then, I also remember when the entire contract was 4-pages, as opposed to the 11 it is now (not that that's an excuse not to read it all . . .)

Am I glad we don't have this in the Oklahoma contract. We do have contiongency. but once we are done with the appraisals and inspections, we have a form that both parties sign that removes the contingencies from the contract.

We don't have that in Texas and if I understand you the seller is required to finance the deal? And anyway if they still owe another bank there is that pesky "due on sale" clause. Of course since this is not in Texas contracts I may have misunderstood this altogether and could be having an Emily Litella in which caes "never mind"...

Lenn - rarely enforced, but available, should they choose to.

Margaret - I remember when it was just two legal pages, front and back... c'mon, join me in the wayback machine.

Joe - I figured it wasn't all over the country.

Russell - no.. the seller isn't REQUIRED to finance the deal... they have the OPTION... of getting a loan for the buyer, if the buyer is unable. Of course, if they wanted to... they could offer the financing themselves (at the rate and terms specified).. but they are NOT required to, by any means.

I'm sure there are sellers who would consider paying down the loan rate (with upfront points) in order to meet the financing condition of the buyer...if it was explained to some desperate sellers. Hold that buyer in with a last minute seller contribution (of acceptable terms).

As a lender, I will chime in here because I view the buyer as my client. Here in Ohio the standard contract does not have verbage like used in the contract you posted. Here in Ohio, I believe the contracts have great bias to the sellers. Consider if a home were sold for !00,000 with the buyer putting 20% down to avoid mortgage Insurance. When the home is appraised, it appraises for 95,000, because none of the financing contingency details are made as part of the contract, a contract dispute could occur because the borrower could still be approved for the loan, WITH PMI. I do like the most of the verbage in your contract and would believe buyers would appreciate it. The problem is changes in contracts are generally not well recieved.

I will be interested in seeing the comments by others.

Your title made me laugh out loud- thank you! What you posted is typical, but often overlooked- thank you for the reminder. I hope that seller choice is filet mignon for my buyer.

Steve - I have seen that happen.

Tim - This clause was created because some buyers were "using" the mortgage contingency, as an escape clause. They might qualify well for the loan, but have colluded with a lender who's a friend, to deny them the loan, and thereby back out of the deal, with their earnest money in tact.
This clause allows, if the seller believes this has occured, for the seller to have them vetted by a lender of the seller's choice... and if they are approvable (as their pre-approval likely stated), then they can be held to the contract.
This isn't "changing the contract"... this is how our contract is written.

Laurie - that was my goal. That's precisely why it's so important that the buyer's agent be very selective about the rate and terms they put in the clause. Filet Mignon, or Sauerkraut... it's your choice.

As Tim said, this is not common practice here but it sure does make a lot of sense.

Hi Alan-

This is a fine example of the power over possibilities that is yours (and your Buyer's or Seller's), when the Agent knows the contract!

There are fascinating clauses in every state and it is our duty to be aware of them, so that we may best advise our clients!

--Sara in San Antonio

Alan, I believe my prior comment do support the protection to the buyer and option to the seller where a win-win situation can occur. I believe that is the way things should be. I did mention what I do believe is a bias in contracts towards sellers. By example, lines 120 - 122 contains

"If Notice of inability to obtain such loan commitment is not served within the time specified, Buyer shall be deemed to have waived this contingency and this Contract shall remain in full force and effect"

This appears to be bias to the seller and what is the liability or responsibility of the Buyers agent to insure that the proper notice is delivered to the seller?

Alan - We don't have such a clause in our contracts either but it would make for an interesting debate on how it would be received in our state.

Very interesting! I've never had this pulled on me, and will be following up and learning more! EVERY line of the offer to purchase is important. Thanks for sharing.

Interesting. I'll have to take another look at the GAR form to see if it is similar.

Reading a contract carefully can sure be an eye-opener. I'd never thought about this possibility and don't believe our contract has that in it. BUT I'd better go and re-read.

Barb - it surely does.

Sara - very important that your buyer's agent (as well as the listing agent) knows the contract back to front, front to back and inside out.

Tim - there's a separate section of the contract that addresses the "notification"...and my post didn't address, nor am I now addressing, whether the contract is pro-buyer, or pro-seller. Just pointing out an interesting and important clause in our contracts.

Donna - I'm sure it made for interesting debates when it was adopted into our contract, too.

Joseph - you're right... every single line is important, and it's our job to know what we're asking our clients to sign.

Lane - I'll be curious to hear you report back.

Barbara - clearly not every state has this... I'll be curious to hear if yours does.

Alan - As Russell mentioned above, we don't have that particular clause/option in our Texas contracts. Interesting to see this.

Jason - I've always thought it's kinda bizarre that each state has it's own laws... and I'm not just talking about real estate.

We have a finance addendum in Texas, but nothing what you've mentioned.

In your area, I think it's pretty darn smart of the listing agents to counter back with a higher rate if the buyer has the option to terminate because the seller doesn't want to seller finance. They would not be looking out for their seller's best interest if they left a 4.75% in the contract.

I was contemplating sending an email to Lynn Madison today over the issue of qualifying PMI in the 5.0 contract, so this is a timely post. An offer presented to my seller stated that the loan would be FHA. The agent included the MoRE version of the FHA amendatory clause, which seems to claim that FHA t's and c's supercede any other contract language. Most agents automatically write 0% for "loan origination fee". But wouldn't the PMI origination fee count here? Not the monthly PMI, but the 1 3/4% origination fee that gets amortized over the life of the loan?

I quickly looked at the NC offer to purchase contract, and do not see this clause. I am going to read and reread it again to make sure it is not in the NC form. Thanks for the heads up.

Donna - I think so too, but many agents don't pay any attention to the rate.

Leslie - I'm not qualified to answer that question.. it might be a good one to email to Lynn (one of our Board Continuing Education trainers, for those who don't know), or a good question for a real estate attorney (we use those in 99% of our transactions, in our area)..

Tom - it may not be there

We don't have that clause in our contracts in the DC metro area but it certainly raises interesting opportunities for a seller to salvage a deal without having to spend a whole lot of money - just buying down points in many instances. We should all be specifying an interest rate in our contracts though just to protect our buyers.

Great infor and a reminder how important it is to give due deference to the loan clause in the contract. I hope all buyers who have found their dreamhome and are having a problem getting a loan meet with the generosity that your sellers offered to close the deal.

I'm glad that you pointed this out. Although I'm a lender, it is important to understand every aspect of the sales contract.

We don't have that in Michigan either thank goodness. We have a contingency just to get a mortgage no guarantees on rate

Alan, Intriquing to say the least! But have you ever seen the seller perform this part of the contract? Who pays the application fee and appraisal?

This just goes to show that it's important to know the contracts we help our clients to use.

FEB

2010

We don't have that in our contracts. Interesting.

Hi Alan,

As Russell, Jason and Donna said we do not have this clause in our Texas contracts. As a listing agent I do watch the interest rate inserted into the Financing addendum and will counter to a higher rate to protect the seller.

Alan:

We do not have that provision here. And, you are so right about how amazing it is that the laws and customs vary so much from state to state. In many ways, we are 50 separate entities living under one roof.

Alan--running right now to see what the PA contract states! I never thought about that angle.

Hi Alan,

I have been in real estate since 1983. I believe I remember that provision being in there when I first took my classes to enter this wonderful world of real estate at that time. I think our contract was only 3 or 4 pages (including front and back) then, not like the 12 pages they are now. It's amazing to see how many Realtors do not read the contract, they are having their clients sign, from beginning to end. Kind of scary!!

Lise - yep, we should.

Mary - yes, we shouldn't just glance over those paragraphs... they're important.

RJ - I would think so... especially since the lenders always want to see the contract... they should understand them.

Russ - why "thank goodness"... it's great protection for the buyer and the seller!

Mark - I have never, in my lengthy career, seen it enforced... and that's probably why a lot of agents don't know about it, or treat it lackadasically.

Christine - very important.

Carla - interestingly enough... each and every line in our contract is there because someone needed it at one point.

Dorie - always looking to protect our clients.

Claudette - i know... isn't that silly?

Erica - report back to us, won't you?

Kimberly - very scary!

Alan - MA does not currently have this much detail in their standard contract under the mortgage clause. However, even though this is not standard, it does not mean that it isn't added into one of those corporate addendum's that are always attached to foreclosed properties. Many of them come from out of state lenders. Buyers need to be aware of the risk and pay attention to those clauses.

Judy - buyers (and their agents) need to be plenty aware of the clauses that they sign, and their full potential impact.

FEB

2010

Alan - I must say that I had wondered about this but never fully realized the meaning until you pointed it out here. It makes much more sense now. It will be interesting to hear what Erica finds out, but I do believe that Pa Contracts are similar, just worded differently.

FEB

2010

Alan, I once had a really good attorney mis read our financing clause. After reading this, I think I'll go back and re-read it!

Jason - I'll be interested to hear.

Patricia - it is a much misunderstood paragraph.

As agents, we really should READ the contract we are using before asking our clients to sign it. LOL!

Jenna - ain't it the trooth, ain't it the trooth... we should at least (the very least) be able to explain to our clients what the impact is of the form we're asking them to sign.

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Alan May, Coldwell Banker Realtor® Evanston, Illinois Homes for Sale

Evanston, IL

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Evanston Condos & Evanston Single Family Homes

Address: Attn: Alan May, Realtor®, 2929 Central Street, Evanston, IL, 60201

Office Phone: (847) 425-3779

Cell Phone: (847) 924-3313

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