Loan Officer Training 09/19/2024 - How to Review a Real Estate Purchase Contract

Welcome to Loan Officer Training! In this episode, we’re delving into the crucial skill of reviewing a real estate purchase contract. Whether you're new to the industry or looking to sharpen your skills, understanding the intricacies of a purchase contract is essential for facilitating smooth and successful real estate transactions.

We’ll guide you through the key components of a real estate purchase contract, including important terms, conditions, and contingencies. Learn how to identify and interpret critical clauses that impact financing, deadlines, and obligations. Our expert hosts will provide practical tips for ensuring that all terms align with your client’s needs and protect their interests.

Discover how to spot potential issues, handle common contract pitfalls, and collaborate effectively with real estate agents and clients. By the end of this episode, you’ll have the knowledge and confidence to review purchase contracts thoroughly and address any concerns proactively.

Tune in to Loan Officer Training and enhance your expertise in reviewing real estate purchase contracts, ensuring that every transaction is as seamless and successful as possible.

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Sep 19, 2024 • 04:02:50 PM: 0:13

Good morning, everybody. Thank you for joining us on today's very important training on how to review a real estate purchase contract. Uh, it's not only important for the real estate agent to be aware of the terms and conditions and uh, due dates on a contract, but also for the, uh, mortgage loan originator who is responsible for providing a loan commitment before a set date and for being able to ensure that the transaction closes also by a set date or else, uh, the contract, uh, could, the buyer could be in default. He's the realtors buyer. He's our borrower, right? Could be in default risk losing their deposit, uh, or the seller just canceling the deal and not wanting to extend the purchase contract. So let's go ahead and review. I'm sure there's going to be some important information there that you may not have considered. So, uh, what exactly are we referring to with this? With the real estate purchase contract, it is a legally binding document that identifies the parties to the transaction and outlines the terms and conditions of the sale of a property. Now there's a very important, uh, components. Uh, to the contract items, uh, to consider I've highlighted the ones, uh, very important to the mortgage loan originator, but they're all important to the transaction to verify their accuracy, be aware of the terms, due dates, all those sorts of items. So we would be talking about buyer and seller information, right? Obviously want to make sure that the buyer listed on the contract is our borrower. Uh, on our loan application, uh, one of it, you want to verify that the seller of the property on the contract is the actual seller of record, uh, property address and legal description, right? Verify the information you have again to public records. Purchase price, all of these items or items need requiring verification. Closing date, be aware of that, right? Put a big old, uh, asterisk on the closing date. Earnest money deposit. Financing details, tax proration, closing costs, breakdown, uh, in other words, who pays, right, are there any clauses in there in the contract that may be changing, uh, the normal terms for that area, maybe the buyer is paying the transfer taxes on the deed or they're normally paid by the seller. Uh, financing contingency, right? There's going to be a financing contingency clause in the contract. Uh, if it is a deal subject to financing and not a cash transaction with the borrowers, obtain financing, be aware of. A, what type of financing are they listing on the financing contingency? Did it say FHA and now the borrower is applying for convention or did it say conventional and now they're applying for FHA? What is the due date on the financing contingency? Normally it's going to be either a set date or a set number of days from the effective date of the contract. Those are, that's the time period that you as a mortgage loan originator have. to provide either a loan approval for the transaction. It could be a conditional loan approval, but you need to provide either your loan approval or the statement of denial, uh, within the financing contingency period to ensure that your borrower's, uh, earnest money deposit On the transaction is not put at risk and possibly defaulted to the seller. There's one, uh, one, uh, common mistake made a lot of times is that the, um, you will communicate to the real estate agent that you need an extension. Right? Uh, to the transaction, but normally what is asked for by the MLO or maybe provided by the realtor or both is just an extension to the closing date. But please be aware that you also have to ask and receive an extension to the financing contingency period, loan approval period, whatever they call it in that contract, but if you need an extension to that time frame, please extend the financing contingency period as well as the closing date to ensure Thank you very much. Um, that your borrower is, uh, in compliance of the terms of the contract and not in default and risk losing their deposit. That's probably one of the most important points I can make here. The appraisal contingency is the transaction subject to appraisal. What does it say in the appraisal contingency in the contract? Just be aware. Is there a certain time frame for the completion of the appraisal and to raise any objections to the value to the seller? Be aware of that too. If you missed that mark, maybe that was 14 days and the financing contingency period could have been 28 days, but they wanted to make sure that the appraisal, um, contingency was eliminated early in the process. They didn't want to wait to the end of the, uh, approval period. And then all of a sudden be hit with that bomb that the borrower does not qualify because the property did not appraise, so do be aware there could be a difference there. Home inspection, contingency period. That's the time frame during which they can cancel the transaction or put forth any objections to property conditions the inspections may have brought up and also what are the included fixtures in the transaction. Um, so further highlighting I started touching base on these, uh, but what are the important terms to consider? Again, verify the property information like the address, legal description, and folio number. Make sure we have the right property. Verify that the sales price is correct. Uh, verify that you have a complete copy. of the contract, including all addendums and disclosure. Um, what is the contract effective date? Uh, is the contract, now this could be a red flag also, but is, is the contract dated after you receive the credit documents? Uh, what are the interested party contributions, right? Seller credit, realtor credit, uh, and are they exceeding the limits for the loan transaction that is being selected? Is this a non arm's length transactions? In other words, do, is there some type of a relationship between the buyer and the seller? Are they related? Is it their employer? Uh, cause that can definitely affect the maximum loan to value as well as additional, uh, items that would have to be provided, uh, when it is a non arm's length transaction where there is a relationship. What are the sales concessions? Notice this is, this is separate from interested party contributions. Sales concessions could be items like, uh, credit for, for repairs of 10, That if it's not a seller credit to closing costs, but a seller credit to, to repairs, that is a concession that's considered a non realty item added as an incentive And that may reduce the sales price dollar for dollar because they're going to assume that that concession is being built into the contract and then result in a reduction of the sales price. Uh, verify that if the seller is the owner of record and most importantly, the date that the seller purchased the property. to determine if there is any seasoning issues, right? That is a big one. Seasoning on title is what we're talking about here. Uh, because, uh, that could affect it on an FHA loan. For example, you have the 90 day rule that you can't enter into a contract until day 91 of the seller being entitled, uh, on a DSCR loan. Uh, Even if it's a purchase, if the seller has been on title less than a year, 12 months, that's considered a flip. And then depending on exactly how many months since he's been on title and the percentage of appreciation on the value from the price that the seller purchased it for to the price that's being sold now, if that exceeds a certain threshold, then that also triggers additional actions needed like possibly a second appraisal. Uh, so do be aware of that. It's a very important one and also verify the buyer on the contract is our applicant, right? If you have John Doe on the contract and then you have, uh, Jim Smith actually as the applicant, right? What's going on? Right? Is this, uh, did they get added? And maybe we do not have a current copy of the contract. Did the buyer get switched for some reason at the last minute? They sent us the wrong contract. Just do a little investigation there. Find out what is going on. Now, what are some of the red Flags. Again, I already touched base on some of these, but now I'm going to highlight these, especially as, uh, red flags. Uh, relationship. If there's any relationship between the parties. That is going to be a red flag. Obviously, we mentioned non arms transactions. That's why it raises the red flag. They know each other. So, we want to make sure that there isn't any type of collusion going on here that could be affecting the transaction like inflated sales price or some other kind of funny business going on. Um, the seller on the contract is not the seller reflected on title and public records. The buyer is not the applicant. Uh, individuals deleted from or added to the contract, no real estate agent, believe it or not, uh, that's viewed as a red flag by underwriting. Uh, I guess they feel that when there is a, uh, real. real estate agent or real estate agents involved. It, it possibly is more of a legitimate transaction rather than some collusion going on between a buyer and a seller that actually may know each other, may be planning something that is not legal. Uh, you can have a contract signed with a power of attorney. That's a little odd. So obviously that's going to trigger additional document requirements. Now, this relates a little bit more to occupancy, right? You could have, um, a significant or unrealistic commute distance for the borrower. for their job, right? Th you know, 100, 150 miles saying it's a primary res gonna have to see, is thi what actually is going on downgrading and size of the property or value of the property. Now, obviously if they're empty nesters and they don't want to sell the property, they want to keep it as an investment and now they're buying the condo in Florida and they're leaving the house somewhere in some cold state in the U. S., then that, that would make sense. But again, downgrading in size or value is going to be a red flag and underwriting is going to ask you for additional documentation. Now we have a sales contract subject to an existing lease. That could be another, uh, point to, uh, consider that is going to affect, can you actually close on that loan? Because most primary residence loans are going to require the borrower to occupy the property within a certain number of days. And if you have a lease, Uh, contract subject to a lease that, uh, uh, expires four or five months after the closing date, you're going to have an issue trying to close that property as a primary residence. Another big one here is if there is a second mortgage indicated on the contract. But not included in the application that could be a silent second the way that they're trying to put additional assets Into the closing so that the borrower possibly doesn't have to come up with a down payment or actually get some cash back at closing That is illegal So we do have a second on the contract, but not included in the, in the application, we have to find out what's going on. And are there excessive contributions or concessions on the contract? Something that just doesn't make sense. Uh, you know, could be a red flag that there is, uh, some type of collusion going on between the seller and the buyer. So, what are the important dates to consider here, right? Super important. Um, so, I mean, we touched base on generally, but now breaking it down, the appraisal contingency date. period determines the time period for completion of the appraisal and raising any objections about valuation or conditions. The financing contingency period, uh, determines a time period for providing the loan commitment or denial without risking the borrower's deposit. And like I mentioned already, common mistake to extend the closing date, but not the financing contingency period. What MLOs need to be aware of, and also buyers need to be aware of, that the transaction becomes a cash deal after the expiration of the financing contingency or the loan approval period. That means, If you don't close, if they decide to let the transaction continue, and if the borrower obviously decides to let the transaction continue without getting an extension to the financing contingency period, and the transaction converts to a cash deal, and then there is no way to cancel it at that point for not qualifying. And, um, uh, Get your deposit back and the date that the buyer can take possession of the property. I touched, you know, touched on this topic and if it's subject to a lease, so you have to be aware when are they going to take possession because that determines the date they can take possession after closing and it may invalidate the transaction if beyond the maximum allowable. Hi, so I hope this gives you some clarification here on the important points to consider for mortgage loan originators and buyers, uh, using financing to consider when they are reviewing, uh, the purchase contract for the buyers when they're getting into the contract. And so we were. always recommended that t also with an attorney. If transactions to ensure tha they should be when the c drawn and then work close agent and with your loan the transaction to make s is clear on all these stat I don't see any questions, so we'll go ahead and, uh, wrap it up here. But definitely there. I got one. Hold on. Go ahead. Uh so Jose, you mentioned it for a second but can you touch on the furniture and fixtures and how that can affect absolutely uh the deal because that has killed more deals and a lot of some of these other terms that we didn't go into depth on. Yeah, I guess that would be similar to the concessions. These underwriters are going to view that similar to the concessions. If, if, uh, you know, we put, uh, what would be considered personal property. So, for example, fixtures, that's, you know, light fixtures, uh, built in appliances are going to be considered part of what is being offered with the actual property, but personal property like furniture, uh, and other items that are not considered fixtures, if they are added. to the contract. Uh, in Florida, for example, it's on page one. If they're added to the contract and they're, uh, the underwriter is going to ask, uh, for additional documentation because they're going to see a value that is, uh, that those, that that personal property has, and it could result in the appraised value being reduced by the value of the personal property. So it's always best for any personal property considerations of a transaction to be handled by the seller and the buyer slash borrower separate from the real estate purchase contract for financing, because that's simply personal property. You know, you could, they could do their own bill of sale and buy it from each other. And that's it. That has nothing to do with the real estate purchase transaction. All right. Great, great question. Definitely very common problem there. All right. I don't see any other questions coming in. We'll go ahead and wrap it up. Remember that we do this on Tuesdays, Wednesdays, and Thursdays at 12 p. m. Eastern, where we have a new loan officer training topic. So we'll be back next week with some new topics. We will see you all on Tuesday at 12 p. m. Eastern for the next episode of the Loan Officer Training Series with the Mortgage Calculator. Have a great day.