Why Do Lenders Require a Real Estate Contract?

By
Mortgage and Lending with NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 IL Lic 031.0006220/WI

 

Why Do Lenders Require a Real Estate Contract?



http://www.genemundt.com     One of the Loan Officers in my office had a Seller's Attorney recently ask him ... 

     "Why does a Lender need a copy of the Real Estate Contract?"

     Admittedly, I was somewhat taken-aback by this basic question, but I believe my LO handled it pretty well.  He responded to the attorney with 2 questions of his own:  

  • How else would a Lender be able to confirm the actual terms of a real estate sale?
  • What Appraiser would accept an Appraisal Order without receiving a copy of the Contract in a Purchase Transaction?

 
     Below is what Fannie Mae has to say regarding this issue:

     Fannie Mae's policy is intended to help ensure that the appraiser is aware of all relevant aspects of the transaction.  The sales contract provides important sales and financing data, including whether there are any concessions as part of the transaction.  

     If the contract is amended, the Lender must provide the updated contract to the appraiser to ensure that the appraiser has been given the opportunity to consider any changes and their effect on value.  If the appraiser determines that there is no impact to value, then no additional commentary is required from the appraiser. 


      This fact may be unknown to clients and others within a transaction:  But when a Mortgage Lender prepares a Loan Application and/or Good Faith Estimate for a Purchase Transaction, they MUST correctly disclose the effect of Real Estate Transfer Taxes, as dictated by the terms of the Contract.

https://1609956119.secure-loancenter.com/FreeConsult.aspx

     Participants within a transaction must be aware that:  Every transaction is uniquely agreed to by the parties involved ... and every community, county, and state is different in this regard. 

     Facts are:

  1.  Not all municipalities or jurisdictions charge such fees.  Some charge the Buyer.  Others charge the Seller. 
  2.  Entities such as Fannie Mae, Freddie Mac, FHA, VA, and others simply are exempt from paying Transfer Taxes.  


     Lenders and Appraisers need to know:

  • Are there any Closing Cost Credits?
  • Are there any Concessions being offered by the Seller?
  • If Concessions are involved, do they impact PRICE?
  • Is the transaction an "Arms-length Deal"?   

    

     and very importantly, they also need to know:

  • Contingency dates for financing
  • Closing Dates
  • Real Estate Tax Proration Agreements
  • Names of the participants in the transaction, including but not limited to the obvious ones 

     
     The Lender's ultimate task is to Close the transaction and provide the funding.  But in order to do that ALL the relevant data must be made available ... and/or be tracked down. 

     It's important to be aware and understand why this information is needed.  It's more important to comply.  The financing process will meet challenges and delays if the information is missing ... 

http://www.genemundt.com/ContactUs.aspx


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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Lynn B. Friedman 12/31/2014 09:16 PM
Topic:
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Groups:
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Rainmaker
1,234,213
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

Peggy Yee ... And your actions facilitate the process greatly ... believe me.  Those working with you during transactions are lucky ...

@Paul Rodriguez:  The contents and stipulations found within the Contract can be reflected in the value found by the Appraiser ...

Gene

Jan 01, 2015 05:05 AM #27
Rainmaker
1,234,213
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

Jenna Dixon ... In a perfect world, you are right.  The Appraiser's role is to estimate the value of the real property and excludes any personal property and any other contract-related concessions that could impact an agreed price, but should NOT impact the value estimate.  I will offer that if the comps used included concessions, etc. .. and impacted price of the comp, an Appraiser must "back-out" those concessions as adjustments when comparing them to the Subject Property.  I will be amending my post to read "price" VS value when speaking of concessions, Jenna ... good catch on that error.  Thank you ..

Gene   

Jan 01, 2015 05:15 AM #28
Rainmaker
1,234,213
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

Janis Borgueta ... Agreed.  For the reasons you state and those made above ..

Nicole Doty - Gilbert Real Estate Expert ... I was more surprised that the attorney didn't know .. or understand .. the process any better than that.

Gene

Jan 01, 2015 05:21 AM #29
Rainmaker
335,661
Jenna Dixon
DRA Homes | Cobb County Real Estate - Marietta, GA
Empowers You With a Better Real Estate Experience

Gene Mundt, Chicago-area Mortgage Lender - www.genemundt.com LOL I wasn't attempting to point out any errors.  I just think appraisers are, to some degree, back under the thumb of the lenders (read investor bank) and certainly they feel the pressure to "find" or not "find" the value based on factors unrelated to the sale.  Such as who the seller is, for instance, Fannie, Freddie, HUD, etc. vs a private seller.  Even homes with well supported value being marketed by a private seller typically take a hit on the value assessment.  All just conspiracy theory and conjecture on my part, my opinions are limitless.

Jan 01, 2015 05:21 AM #30
Rainmaker
1,234,213
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

Thanks, Mike Cooper ... appreciate that!

You mention the coming changes in 2015 .. and you're absolutely right, Rob Spinosa.  There will be no avoiding the delays and issues that subsequently arise from them soon.  Personally, I don't think enough emphasis is being given to these changes ... and the impact they will have.  It's not going to be pretty ...

The process is definitely a "team" process, Ranee Bray ... now more than ever ...

Gene

Jan 01, 2015 05:28 AM #31
Rainmaker
1,234,213
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

True, Carla Muss-Jacobs, Principal Broker/Owner ... and yes, the thought that an attorney would ask that question somewhat startled me some ...

I'd include that agents and other professionals within the process needs to know and understand this too, Nina Hollander ... the question by the Attorney proves that point!

Gene

Jan 01, 2015 05:31 AM #32
Rainmaker
1,234,213
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

Richard Iarossi ... ahhhhhh yes.  In that perfect world so often mentioned ...

Jenna Dixon ... I have absolutely no problem with someone pointing out an error of mine.  You were absolutely 100% correct!  The info I provide needs to be clear and correct.  Thanks to you, it now is.  

And situations, such as those you provide, no doubt exist.  There are always those that will game it.  I will say that, certainly on my company's part ... and most of those Lenders I speak with, there is a zealous attempt to follow the rules regarding contact with Appraisers.  There is too large a penalty to pay on a personal .. and company level ... not to.  Unfortunately, there are always those rotten apples that muddy the system ...

Appreciate the dialogue!  Exactly what AR should be an outlet for ...

Gene

Jan 01, 2015 05:40 AM #33
Rainmaker
442,952
Rain Silverhawk
Keller Williams Sandpoint rain@lakeandhomes.com - Sandpoint, ID
208-610-0011 Sandpoint Idaho Real Estate Realtor

I understand why the lender needs to see the contract but I highly disagree that an appraiser needs it or should have it.  Call me old fashioned but when I started in real estate an agent would face reprimands  if they disclosed the purchase price to an appraiser and it was viewed an influencing values.  An appraisers is being paid to determine the value of a property based on facts.  They are not in a guessing game where they get the answer first.  

Jan 01, 2015 10:28 AM #34
Rainmaker
641,507
Mike McCann - Nebraska Farm Land Broker
Mike McCann - Broker, Mach1 Realty Farmland Broker-Auctioneer Serving Rural Nebraska - Kearney, NE
Farm Land For Sale 308-627-3700 or 800-241-3940

Interesting reading the comments.  In Nebraska...one of the 4 comps is the home under contract. I do not see how an appraiser can accurately appraise a home if he does not know all conditions of the contract.

Jan 01, 2015 11:12 AM #35
Rainmaker
1,317,551
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

I think an argument could be made that the appraiser should not see the contract. 

Jan 01, 2015 11:58 AM #36
Rainmaker
83,748
Ernest Villafranca
Better Homes and Gardens Real Estate - Oakland, CA
3923 Grand Ave. Oakland CA, 510-418-9443

I'd give it to the home inspector if it would help close the deal.

Jan 01, 2015 12:57 PM #37
Ambassador
4,300,542
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Frankly, Gene Mundt, Chicago-area Mortgage Lender - www.genemundt.com I always wondered why do they need this - and you have a great explanation! Now I may not question that.

Jan 01, 2015 02:42 PM #38
Rainmaker
739,862
Pete Xavier
Investments to Luxury - Pacific Palisades, CA
Outstanding Agent Referrals-Nationwide

Love it, playing the attorneys own game right back at them...by answering the question with a question times two.

Jan 01, 2015 06:14 PM #39
Rainer
206,026
Richard Robibero, e-Pro, ABR, SRS
Panorama R.E. Limited - Toronto, ON
Selling Your Home as if it were My Own!

Thanks for highlighting the need Gene Mundt, Chicago-area Mortgage Lender - www.genemundt.com ... I've never had an issue with the bank's appraiser after a sale and I'm not sure if he sees the contract before heading out. It would be interesting to find out.

Jan 01, 2015 10:45 PM #40
Rainmaker
303,164
Kate McQueen
CB&A Realtors - Cypress, TX
Tailored service for your real estate needs!

Good information for buyers.  Many buyers (particulary first time) don't understand the difference between pre-qualification and full loan approval.  Unfortunately, too often a lender doesn't fully explain this.

Jan 02, 2015 12:31 AM #41
Rainmaker
1,234,213
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

Rain Silverhawk ... I too have seen many changes in the practice of lending and real estate in the nearly 40 years I've been in it.  Business is definitely NOT conducted as it was when I started in 1977.  I'd love for Appraisers to be left unfettered and left to find a true value of a property on their own .. as I formerly was a licensed Appraiser as well.  But in this current market, there are pieces of info on a Contract that can prove relevant to an Appraiser.  As I wrote in a previous comment there are so many inclusions, disclusions, etc. that would possibly have ramifications ... and an Appraiser wants to make sure they are comparing apples to apples ... or make adjustments where and when needed on comparables.  JMO ...

Gene

 

Jan 02, 2015 01:41 AM #42
Rainmaker
1,234,213
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

Mike McCann - Nebraska Land Broker ... In this day and age and in the current transactional atmosphere, I would agree for the most part.

Agreed, Joan Whitebook ... many have written and commented on that perfect world.  Unfortunately that is not what we are currently living in ...

Gene

 

Jan 02, 2015 01:43 AM #43
Rainmaker
1,234,213
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

Ernest Villafranca ... I understand your feelings!

Thank you, Praful Thakkar ... so glad you found the post and info helpful.  The comments left by many were great too ...

Gene

Jan 02, 2015 01:45 AM #44
Rainmaker
1,234,213
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

Pete X with X Group Real Estate Advocates, Huntington Beach, CA 714.459.2017 OCLister.com ... I have to admit the attorney's question was a little unsettling, as it showed an incomplete grasp of the process ...

I've found, via the comments here, Richard Robibero, ABR, SRS  ... that each state or location can have its own "twists" on the process.  My guess is that in the majority of locations and times, the Appraiser does have access to a contract ...

Gene

Jan 02, 2015 01:49 AM #45
Rainmaker
1,234,213
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

Kate McQueen, SRS ... I can only speak to my comfort level at providing information with true value and weight to my clients.  In order for me to do that, I need to ask questions and gain a fairly complete bank of information from potential Borrowers.  I don't feel comfortable doing less ... and I really don't see any value in providing anything less to my clients either.   Often clients want a simple, quick answer regarding their qualifications to buy or refinance.  It's just not that simple anymore ...

Gene

Jan 02, 2015 01:54 AM #46
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