Financing Contingency-Understanding the Lender Commitment Letter in MN

By
Real Estate Agent with Edina Realty

The "Written Statement" of Lender Commitment is a misunderstood, under-utilized, and yet incredibly significant component of the Minnesota Association of Realtors' (MAR) Residential Purchase Agreement. Despite the almost universal acceptance of the MAR forms in MN purchase transactions, the "Written Statement" or Lender Commitment Letter component is seldom explained to a buyer or seller.

The Financing Contingency (Conventional, FHA or DVA) which functions to describe the financing that a buyer is attempting to obtain, contains the clause referring to the Lender Commitment Letter (referred to as a "Written Statement".)  The Financing Contingency requires an option to be chosen at the time of purchase agreement. In short, those two options are:

  1. Should the buyer(s) be unable to obtain the type of financing described in the Financing Contingency and the Purchase Agreement does not close by the chosen closing date, buyers and sellers are to sign a cancellation and any earnest money deposited would be directed to the chosen recipient (almost always the buyer.)  This option looks great on paper (for the buyer), however, since it is a weak option for the seller, it reduces the buyer’s overall negotiating strength.
  2. The buyer should provide the seller (or seller's agent) with a "Written Statement" of Lender Commitment by a chosen date.  Such written statement shall confirm that the buyer is approved for the loan needed to purchase, as well as any subordinate financing.  This option includes further clarification and remedies for lack of compliance:
  • Such statement should specify that an appraisal, found satisfactory to the lender, has been completed. This statement should also list any yet unsatisfied conditions needed to close the loan.  Once the statement has been provided to a seller, the buyer accepts responsibility for all remaining conditions of the loan and if the Purchase Agreement does not close by the contract closing date, the seller has the option to declare the Purchase Agreement cancelled and retain any earnest money deposited.
  • If the "Written Statement" is not provided by the agreed upon date, at any time prior to receiving the "Written Statement" the seller has the option to cancel the contract.  If the seller exercises this option, the earnest money is directed back to the buyer.  Buyers should understand that a purchase agreement is put in jeopardy if their real estate agent and loan officer overlook this critical detail.
  • If the "Written Statement" is never provided to the seller, regardless of buyer or seller preference, the language of this provision states that the Purchase Agreement is technically cancelled as of the contract closing date and earnest money is directed back to the buyer. This provision is typically overlooked as many purchase agreements close without a "Written Statement" of lender commitment ever having been provided. (Does anyone else think that we are creating a heyday for lawyers here?)

It is a fact that Lender Commitment Letters often show up late, if at all and often lacking the required components described above.  This begs the question, "Why are these details overlooked?"

Because the fundamental core of a Purchase Agreement is an agreement, (a buyer wishes to purchase and a seller wishes to sell) adherence to the details of the Purchase Agreement often gives way to the pursuit of the mutual end goal (the successful closing).  Although the "mutual pursuit" nature of a real estate transaction should be viewed as overwhelmingly positive, the danger of the resulting institutional sloppiness can surface when the "end goal" changes for one of the parties.

For example: If a seller decides post-contract that he no longer wishes to sell, a disregard for, or even a loose adherence to the above provisions of the Financing Contingency will create an easy exit strategy.  Perhaps a seller has received a back-up offer for considerably more money than the existing offer.  In such a case, a seller may be waiting (with a cancellation in hand) for a failure to deliver the "Written Statement" by the agreed upon date.

As many lenders work in multiple states, they encounter the challenge of navigating the differing contracts of those jurisdictions.  Although the use of "Lender Commitment Letters" is typical across state borders, the language of the Financing Contingencies in the Minnesota Association of Realtors forms calls for specific requirements of the "Written Statement".  If a lender fails to include each of the specific requirements of the "Written Statement", an argument could be made that the bar was not met in delivery of an acceptable statement and remedies of cancellation may apply.

There are many considerations in choosing a Realtor or Loan officer.  Too often, however, the most important skills are not evaluated until something goes wrong. For both pre-contract negotiation and post-contract follow-through, please be sure that "knowledge of contracts" and "attention to detail" makes it into your Realtor/Loan Officer shopping cart.  This point cannot be emphasized enough.

Adam Duckwall, Edina Realty, 651-353-4650, adam@adamduckwall.com

Comments (10)

Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Fantastic post. 

The Financing Contingency is a part of the purchase agreement that is understood by few agents, fewer borrowers and ignored by far too many lenders.

I have found a general and stubborn reluctance on the part of loan officers to provide this document.

That said, I DO GET IT.

Our financing contingency does NOT, however, say that the "Commitment Letter" must be without conditions.  That's the key that few agents understand.

 

Oct 16, 2012 08:53 PM
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Adam, my experience is getting a Commitment Letter is like pulling teeth. Lenders always wait until the very last minute. In a lot of cases the conditions in the letter usually causes a delay and requires an extension of the contract. I have to ask the question, why do lenders/underwriters have no regard for contractual dates specified in the contract?

Oct 16, 2012 10:22 PM
Adam Duckwall
Edina Realty - Saint Paul, MN
Twin Cities Expert

I agree that there is a significant disregard for some of these contractual elements by many lenders, however, I don't want to apply that sterotype to all.  If I had to guess why this happens, I believe that too many lenders feel that their focus should only be on satisfying loan conditions and attempting to deliever a mortgage by the contract closing date.  The realm we live in (RE contracts) becomes a wash of white noice and the significance of overlooking these details is not understood by most lenders.  In one transaction I had, when a lender (one my client insisted on using) failed to provide the "Lender Commitment Letter", I brought up the significance of this to him and he practically went postal on me-telling me that I was trying to "kill the deal".  Some just don't get it, and others aren't willing to do their homework.

This attention to detail, along with other pre and post contract services are what cause me to choose the lender I recommend to my clients.  I try to emphisize the importance of these details to clients in the beginning of the process and always make a strong recommendation for a great lender.  If these issues come up with another lender, at least my concience is clear.

 

Oct 17, 2012 12:30 AM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Adam:  You're right ... some "get it", others simply do not.  Happens in all professions.  There are levels of professionalism.  Obviously, from your well-written and detailed post, you are of the highest level of professionalism for your arm of our industry. 

I think many times the issues that arise within transactions simply boils down to each "arm" of the transaction having blinders, of sorts, regarding what is important.  It's only natural that it occurs.  But to agents, it's one thing that's most important ... to appraisers another ... and to lenders, still another.  Truth is, it's all important and central to the success of the deal.  Each professional needs to understand that.  Too often the relationship between professionals now becomes somewhat adversarial.  As hokey as it sounds, now more than ever within the current challenging market, each transaction needs a teamwork mentality ... and real communication between its' professionals.  As you so eloquently point out, when that doesn't happen ... or it's missing ...  trouble typically results.  Truth is, in this crazy age, no lender can promise a hiccup-free processing each time.  What I CAN promise as a lender, is that I will communicate and try my hardest to work in tandem with the other professionals to secure the timely success of a transaction.  Truthfully, that is the best and all we can ask of one another ...

Gene

Oct 17, 2012 01:39 AM
Shane Barker
Amerifirst Financial, INC. - Salt Lake City, UT

If a loan officer does their due diligence up front an approval letter is not hard to come by, it's the lazy ones that ruin it for everyone.

Oct 17, 2012 02:15 AM
Charles Dailey
iLoan - NMLS ID#4474 - Saint Paul, MN

Fantastic post!  

This is another great example of the English language getting in its own way.  It reminds me of how "seller paid closing costs" should be named something else like buyer priced points or something like that.  Here in MN, I've seen many see Lender Committment Letter (ignore the rest of the language) and assume that it means clear to close.  Most lenders refer to what the contract askes for as a conditional approval.  Getting a conditional approval with a satisfactory appraisal on time is relatively easy given a reasonable amount of time. Getting two parties in to understand what the meaning of "is" is however is not always as easy.

Again, great post Adam.

Oct 17, 2012 05:10 AM
Mark Montross
Catamount Realty Group - Burlington, VT
Listing and Buyer Specialist

Adam, this was a very good and well written post. It seems that so many agents don't track deadlines on their calendars and often need gentle reminders. I would like to email this to some of them!

Oct 17, 2012 06:19 AM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Adam - This is a great post though it sounds like it works different than it does here in California.

Oct 17, 2012 03:41 PM
Anonymous
anne

Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a “Purchase Agreement Form ”, I found a blank fillable form here: http://goo.gl/MKsi8M. This site PDFfiller also has some tutorials on how to fill it out and a few related real estate documents that you might find useful.

Mar 11, 2015 04:12 AM
#9
Anonymous
anonymous

Committing a lender to terms of a PA of which they are not signatories will get push back or rightfully ignored. Also, it is really not worth the paper it is written on when final findings occur at the 5 days to close point. This clause holds the buyer financially responsible for the lender's final decision. It is a strong-arm tactic that has been used to throw lenders under the bus for actions not of their own making.

May 04, 2018 11:42 AM
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