Massachusetts homebuyers need to thoroughly understand the importance of the loan commitment date when purchasing a home and how failing to do so may result in the loss of their deposits.
The failure of a home buyer to receive a clean loan commitment letter, extend the loan commitment deadline or to terminate the contract with the seller before the loan commitment deadline passes puts him or her in jeopardy of losing deposits made at the time the offer to purchase and purchase and sale agreement were signed. For many home buyers, these deposits total 5 percent of the purchase price of the home they intend to purchase.
What is the loan commitment date or deadline?
The loan commitment date is the day in the purchase and sale agreement that a home buyer's lender (bank, credit union or mortgage company) must provide a written commitment to the borrower that it will provide the financing for a specific property. The date is usually between 21 days and 35 days after the parties have signed an offer to purchase contract. It is part of the mortgage contingency clause that is typically in an offer to purchase real estate and is carried over and made part of purchase and sale agreement. The mortgage contingency also will have a loan application deadline, which is specific language that states the buyer has to formally apply for a mortgage loan within a certain amount of time from the date of the accepted offer.
If a lender cannot provide a borrower with a commitment letter by the loan commitment deadline specified in the purchase and sale agreement, the home buyer has two options: (1) ask for and obtain a written and signed extension to the loan commitment deadline, or (2) terminate the contract with the seller in order to protect his or her deposits (sometimes referred to as earnest money deposits). If a home buyer fails to obtain an extension or terminate the contract by the loan commitment deadline, he or she runs the risk of losing both deposits if the lender subsequently does not provide financing in time for the closing date, thus preventing the home buyer from buying the home.
It is important to stay in close contact with your lender and your attorney in the days leading up to the loan commitment date. An extension should be obtained as soon as possible, if it appears your lender will need more time to provide a commitment letter. Many real estate lawyers will include language in their request for an extension that indicates the home buyer is terminating the contract in the event the seller doesn't agree to and sign the extension to the loan commitment date.
In the event that the lender determines the borrow does not qualify for the necessary home loan, the home buyer must terminate the agreement before the loan commitment deadline. The seller may request a copy of the denial from the lender; however, the language in the purchase and sale may or may not require that the buyer provide the seller with such documentation.
Why is it important to have a 'clean' loan commitment?
It is important that a home buyer not only receive a loan commitment letter by the loan commitment date, but that commitment letter should be what is referred to as "clean." The home buyer should review the commitment letter's conditions with his or her attorney to make sure that any remaining conditions can be easily met. Some conditions are standard, such as reviewing a borrowers credit score before closing and verifying employment.
Loan conditions that are out of the borrowers control, such as a condo questionnaire or an appraisal, require that the home buyer obtain an extension to the loan commitment date until those documents are received by the lender. For example, a condo questionnaire that contains information about litigation against the homeowners association or an appraisal that provides a value for the property below the contract price may result in the lender refusing to finance the transaction. If the loan commitment date has passed when the lender declines to finance the purchase, the home buyer's deposit(s) may be lost.
Contrary to what some inexperienced mortgage professionals believe, the fact that something outstanding is a condition in a loan commitment letter does not protect a home buyer who fails to obtain financing because he or she does not meet said condition after the commitment date has passed.
How do Massachusetts home buyers protect their deposits?
There are a number of standard contingencies in an offer and additional contingencies that a buyer agent may add to the offer to protect a home buyer's interests. An experienced real estate lawyer likely will add an addendum, or what is sometimes referred to as a "rider," to the purchase and sale agreement that will include additional contingencies and language to protect the home buyer's deposits and interests.
If a home buyer puts together a strong home-buying team made up of an exclusive buyer agent, a competent mortgage professional and an experienced real estate attorney, his or her interests, as well as deposits, likely will be protected.