Tuesday, December 14, 2010

Financing Section of Purchase Contract

The Financing section was revised to obligate the buyer to take specific steps to obtain a loan and to clarify the financing contingency.
The Contract is contingent upon the buyer obtaining loan approval for the loan described in the AAR Loan Status Report without conditions no later than the COE Date. If the loan contingency is unfulfilled, the Contract is terminated. The buyer is obligated to deliver a notice of the inability to obtain loan approval to the seller or the escrow company no later than the COE Date. If the buyer fails to deliver this notice by the COE Date, the seller must give the buyer cure notice and a three-day opportunity to deliver the notice of the unfulfilled contingency. If the buyer fails to deliver the notice, the buyer is in breach for failure to deliver the notice, and the seller agrees to accept the earnest money as damages.

The Contract is cancelled for an unfulfilled contingency if, after diligent and good faith effort, the buyer is unable to obtain loan approval without conditions by the COE Date. The inability to obtain loan approval by the COE Date is not a breach of contract; therefore, the Cure Period does not apply to extend COE.

The contract is contingent upon an appraisal of the Premises for at least the sales price. If the Premises fail to appraise for the sales price, buyer has five days after notice of the appraised value to cancel the Contract or the appraisal contingency is waived. If the buyer is unable to obtain the loan and close escrow after waiving the appraisal contingency, the seller should deliver the cure notice to the buyer. If the buyer fails to close within the Cure Period, the buyer has breached the Contract and the seller agrees to accept the earnest money as damages.

The AAR Loan Status Report (“LSR”) must be attached to every offer and must have, at a minimum, the Buyer’s Loan Information section completed, describing the current status of the buyer’s proposed loan. The requirement that the LSR be attached to every offer does not necessitate that the buyer obtain pre-qualification from a lender prior to submitting an offer; the buyer can simply indicate on the LSR that the buyer has not yet had the opportunity to visit a lender.

Unless the buyer has previously completed the loan application and related actions, the buyer is obligated to complete a loan application, grant the lender permission to access buyer’s credit report, and pay all loan application fees within five days after Contract acceptance.

The buyer is required to sign all loan documents three days prior to the COE Date to allow the funds to be ordered and escrow to close as agreed. If documents are not available for signature by the COE Date because the buyer has not obtained loan approval, the loan contingency is unfulfilled and the Contract is cancelled. If the buyer has obtained loan approval but does not sign the loan documents within three days after receiving the cure notice, the buyer is in breach of contract and the seller may pursue the remedies for breach.

K. Michelle Lind, Esq.
K. Michelle Lind is General Counsel/Assistant CEO to the Arizona Association of REALTORS® (AAR). She serves as the primary legal advisor to the association. Michelle oversees AAR’s Risk Management Committee, which includes professional standards administration for twenty of the state’s local REALTOR® associations, and the development of standard real estate forms. She is the author of Arizona Real Estate: A Professional’s Guide to Law & Practice and a regular contributor to the Arizona REALTOR® and the Arizona Journal of Real Estate & Business. Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel

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