Of all of the sections in the sales contract this section has the potential to cause the most damage from the underwriting perspective. Although the verbiage in this field includes 'no contributory value', the reality is, everything has value and the secondary market knows this. As such, anything entered in this field can potentially be considered an inducement to purchase and is hence not allowed. To compensate for this, if there's any personal property listed here the underwriter has the authority to assign a value to it and then lower the buyer's loan amount by and equal dollar figure. This causes the buyer to now have to bring that amount extra to the closing table. Here's a perfect example which happened to a friend of mine not too long ago:
A contract was received and sent to underwriting with 'hard wood flooring stored in garage' listed in the Personal Property section. As it turned out it was very expensive hard wood and there was quite a bit of it. A value was assigned to it in the amount of $5000. The buyer did not have the extra $5000 to bring to closing so an extension was needed to completely change the loan program, delaying the closing by almost 30 days.
Once an underwriter sees a document it cannot be taken away so writing an addendum to remove the personal property after the fact doesn't fix the issue this section can cause. To ensure no issues in underwriting concerning Personal Property it's best to leave this section blank. Think of it this way, the contract is for the conveyance of real estate, not personal property, so best practice is to leave this section blank and handle personal property separate on its own addendum.
Prior to a loan going in for underwriting the loan file has to be processed and prepared forreview. Anyone that's worked with us for a while can confirm that we more often than not get clears to close on the first loan submission, its very rare that we require an extension and loan denials are even rarer. This is because we follow a process on each loan file to ensure the cleanest and quickest underwriting result possible. The Loan Commitment section of the contract can cause issues with not only proper loan processing but underwriting approval as well.
We're all very familiar with home inspections in that they take quite a few hours and are therefore quite expensive. The cost is however well justified as a thorough home inspection is paramount to ensure your client's new home has integrity and your client will be safe and secure. In keeping with that would you feel comfortable allowing your buyer to purchase a home when the home inspector has only been allowed 10 minutes to inspect it? The answer is of course not, definitely not!
We often see contracts written where the requirement for Loan Commitment is 5, 10 or 15 days from the Effective Date. We realize that Sellers request this so they can feel good about the buyer so they can move forward with their plans. That makes sense and it's understandable but to follow the previous example above, is any party to a transaction really going to be comfortable with a Loan Commitment that has a ton of prior to closing conditions listed because the file was rushed and was not fully underwritten? Again definitely not! The honest truth is everything is electronic now so any lender can get a Loan Commitment from any investor in just a few days. But until a really long list of documents AND all the 3rd party verifications that go along with it are reviewed by an underwriter, a loan commitment doesn't have the integrity everyone is truly looking for.
The loan process is just like the home inspection process..., in order to do it right and for the loan commitment to have integrity there is a process that must be followed. Requiring any lender to rush that process is of zero benefit to any party to the transaction. For the benefit of all parties to the transaction best practice is to leave this field blank so the default of 30 days will apply.
Is there a topic, program or guideline you'd like to know more about? We strive to make these monthly emails as informative as possible, so if there's anything you'd like to know more about please just let us know! Simply email us your question and we'll put the information together for you and include it in a future newsletter!
As always, feel free to contact us at any time for personalized loan scenarios for you and your clients! Please Call (321) 757-5009.