There is a very critical element to the California Residential Purchase Agreement (RPA) that every buyer must understand when initiating the purchase of a home in Orange County. The act of removing ‘contingencies’ exposes your deposit to risk if you are unable, or unwilling to move forward with your purchase of a home.
There are specific contingencies outlined in the RPA – loan, appraisal, inspection, to name just a few. The default in the contract is 17 days for all of the contingencies. In years past, it has been possible to meet that time period with a strong lender. Today, the environment has changed dramatically and there are some things you must be aware when you remove that loan and appraisal contingency.
The appraisal can general be completed during that 17 day period. There are some exceptions with conventional loans that are out of your lender/broker’s control. The appraisals are now ordered through third party companies which can create a delay. However, let’s say the appraisal comes in at the contract price and within the time frame of the contingency. Do you remove your contingency? What are the risks?
The challenge in today’s environment is that the underwriter has the right to order an appraisal review during their review process that takes place prior to final loan approval and the drawing of loan documents. This is generally late in the game, and certainly after your contingency period. If the appraisal review brings in a lower value and you have already removed your appraisal contingency, what are the choices?
- Cancel the escrow – in which case you may lose the deposit
- Come up with the difference in sales price versus contract price (be aware, this may impact qualifying if the lender is watching your cash reserves closely)
- Negotiate with the seller (who may be less amenable if they see you have removed you appraisal contingency)
This is particularly challenging in today’s environment. Given the June 1st implementation of the Loan Quality Initiative, Fannie Mae is now requiring that a buyer’s credit is pulled just prior to close of escrow – regardless of the previous approval status. This makes removal of your loan contingency even more crucial.
Underwriter reviews, large amounts of buyer documentation, and late credit review can make the loan approval status fall into areas of less certainty than we have had before. If you remove your loan contingency and find that late in the game you no longer qualify for the loan, you are likely to lose your deposit, so be cautious and thoughtful when you remove your loan contingency.
Ways to ensure your loan approval will remain secure:
- Do not make any purchases on credit
- Do not deplete your cash reserves
- Do not move money around without a conversation with your lender
- Do not do anything that might have an adverse impact on your credit score
- Do not pay off credit cards without direction from your lender
- Do not change jobs
- Provide the documents that your lender requests of you in a timely fashion
- Be aware, requests for new documentation come in throughout the buying process so be prepared to respond quickly
- Communicate with your lender
- Interview lenders and find someone that you trust!
Do I Have To Remove My Loan or Appraisal Contingency?
No. But there are risks.
So what happens? First, be aware of the time frames in your contract. Sometimes the loan contingency may run until the loan is funded if the offer is written this way. But, if you are required contractually to remove it in 17 days, for example, the Seller has the right to issue the Buyer a Notice to Perform.
The Notice to Perform may require that in a specified period per the RPA, the Seller will have the right to cancel if the Buyer does not remove the contingency. The Buyer should be entitled still to their deposit – but you risk loosing the property.
The real estate agents should be in communication however, and in some cases a listing agent and seller may feel that the buyer, the contract, and the escrow are worth moving forward with leaving the contingency in place. Just be aware – they do have the right to cancel – depending on the structure of the RPA.Please see you legal adviser, real estate professional, and lending professional for more information these guidelines. Contingencies and time lines can vary.