This post is Part 2 of my Contingency Removal lesson and research I'm doing for my upcoming one hour webinar Understanding Contingency Removals
I actually went through the California Association of Realtor's purchase agreement contract and could not find anything specific other than the buyer has "obtained a loan." But what does this mean? When has the buyer actually obtained a loan?
First let's try and define a loan contingency removal. Most buyers and sellers agree that when the buyer has loan approval from a bank with acceptable terms, the buyer then removes the loan contingency. In essence, the buyer is making a commitment to move forward with the transaction.
There is a clause in the CAR contract that allows a buyer to remove the loan contingency when the loan has FUNDED. Funding usually occurs on the day of or one business day prior to recording/closing. Most sellers prefer to see the loan contingency sooner than this. They don't want the deal to be strung out for days on end waiting for loan approval only to find out the buyer could not qualify and selling time was wasted.
So when does the buyer have loan approval? I've have many a loan officer tell me the loan is approved only to find out the approval was CONDITIONAL. Below are typical types of approval and risk factors;
Pre-Approval-You will usually see this in a pre-approval letter for a borrower prior to a contract, home selected, appraisal report, etc. I'm going to be brutally honest here. In my opinion, sometimes a pre-approval from a loan officer is about as valuable as the paper it's written on. But that's another post I'll get to later.....
THIS IS NOT LOAN APPROVAL!
Buyer's chances of obtaining loan approval-Apx. 50/50
Conditional Approval-Now we have a contract and house selected, perhaps an appraisal report has been completed and the bank has reviewed the loan application and supporting documentation and given conditional approval. THIS IS NOT LOAN APPROVAL!
Buyer's chances of obtaining loan approval-Apx. 70/30
Approval with prior to doc conditions-Similar to conditional approval. The bank has approved the loan with conditions that must be met/approved prior to preparing the loan documents. These conditions could be minor such as a missing initial on a purchase agreement, OR they may be major such as 10 years of the buyer's tax returns meeting a certain annual gross salary figure. THIS IS NOT LOAN APPROVAL!
Buyer's chances of obtaining loan approval-Apx. 70/30
Approval with funding conditions-Similar to conditional approval. The loan is approved with all prior to doc conditions met and a letter of commitment from the BANK who is giving the loan is prepared.
The loan docs are then prepared and delivered to title. The bank will submit prior to funding conditions that must be met prior to the bank wiring the loan money into the escrow account. They should be minor such as a clear termite certification, evidence of fire insurance, etc. THIS MAY BE LOAN APPROVAL
Buyer's chance of closing escrow-Apx. 95/5 depending on what the funding conditions are.
Approved-The loan is approved with all prior to doc and funding conditions met Now we are getting closer. THIS IS LOAN APPROVAL!
Buyer's chances of loan docs going to title 98/2
Use the buyer's deposit (especially if it's incorporated as liquidated damages) and the above formulas to determine buyer's risk. If you remove the loan contingency too soon (approval with prior to doc conditions) there is an approximate 30% risk the buyer may not obtain loan approval and as a result may lose their deposit.
The least risky time to remove the loan contingency is when the loan has funded. HOWEVER, most sellers will not accept this. So as a compromise, the best time for the buyers to remove the loan contingency is when all prior to doc conditions have been removed.
HINT- SOMETIMES, a mortgage officer will MOVE a prior to doc condition to a prior to funding condition (very difficult to do, and requires a lot of begging and pleading from the mortgage officer to make this happen!).Before your buyer removes the loan contingency, ask the loan officer if he moved any of the prior to doc conditions to prior to funding conditions. Find out what the conditions are and DIALOGE with the lender and the buyer to determine risk.
Tell me, when do YOU submit a loan contingency removal-Hmmmm?
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