The Number Six mistake buyers make when buying a home is not understanding the legal implications of loan and inspection contingencies, as well as other contractual provisions. When applying for a loan the process can be complicated. All contingencies need to be removed before escrow closing and need to be in place to PROTECT the buyer from losing the earnest money deposit in the event that a contingency cannot be met.
In the case of loan approval... We need to remember it is a three step process: Step #1 - Borrower approval Step #2 Property approval. Step #3 The meeting of all conditional loan approval items.
In step one of the process the borrower is qualified based on credit, income, assets and ability to repay the loan.
In step two, the property is appraised and the conditions will determine if it is suitable for the loan that is in question.
Step three, the conditional approval will spell out lender requirements for borrower and/or property prior to funding the loan to close the purchase. If the loan condition has been removed without careful consideration of any of these items... the borrower could be in jeopardy of losing deposit monies IF the lender says "no". Conditional approval items could require additional proof of funds or "paper-trailing" deposited funds, previous employment verifications, documents from a bankruptcy court trustee, repairs to the property to name a few...
One of your provisions would be Appraisal- This important! If the value of the property and the contract amount do not agree, you would be in a renegotiation status with the Seller. The Seller is not required to sell at the lower price... If that were the case and you still wanted to continue with the purchase, the lender would require you as buyer to make up the difference between the appraised value and sales price... in addition to the originally agreed upon down payment. Or, assuming you were putting 20% down and the short fall was 5% of the price, you could ask the lender to change the terms of the loan to an 85% loan to value and pay mortgage insurance for a few years... IF the contingency is still in place... you can play "hard ball" and "walk away" form the transaction. There are many ways to compromise when an appraisal falls short. But, without the contingency in place... you as the buyer have less negotiation power.
Inspections: It is key to get your inspections ordered and down quickly. It is amazing how quickly the typical 21 day time frame slips away. It is important for your agent to stay on top of the calendared days to be sure none of you contingency time frames expire... Sometimes, one inspection leads to another... Say the septic inspection produces a report that questions the validity of the leech line field... then a follow up inspection is required to determine possible costs to repair. The same holds true for older sewer lines... the home inspector may call this out. It is beneficial to determine costs for all inspection items prior to the removal or expiration of the contingency period. Most Realtors are proficient in coordinating these items, but it is wise for Buyers to know the timeframes and to be responsive. Note ALL these items can circle back as part of step #3 - Conditional loan approval since the lender typically receives copies of the inspections. I've only listed some of the most common inspections... your Realtor will advise of inspections most used in the area where you are buying, however you as the Buyer should take it upon yourself to know what is important to you and advise your Realtor.
A federal disclosure such as Lead-Based Paint is required for all transactions if the home was built before 1978. The disclosure also gives the buyer 10-days to conduct inspections for lead-based paint, unless that time period contingency is waived in writing. It's considered good practice, however, to give every buyer, regardless of where she lives and regardless of the type of property she is under contract to purchase, the disclosure regarding lead-based paint. Additionally, California has strict laws regarding lead paint abatement.
Bottom line: I advise my Buyers to leave the loan contingency in place until the conditional approval has been reviewed and it has been determined that the remaining conditions can be met, even if it means requesting an extension of the timeframe.
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