Agreement of Sale

NEW Mortgage Contingency Clause

The revised residential Agreement of Sale will be released in September, but it’s never too early to start getting a handle on the changes that are going to be made in the new form. (See the related article on this page for information on additional educational opportunities.) Over the next several months The Pennsylvania REALTOR® will carry articles highlighting some of the major changes to the form.  This month’s article focuses on revisions to the mortgage contingency paragraph.

There are two primary changes to this contingency, both of which are designed to help a seller make a more informed decision about the viability of a buyer’s offer.

The most obvious change to this contingency is the addition of space to insert information about both a first and second mortgage. More and more buyers are relying on financing that involves a second mortgage or a home equity loan, and the revised form reflects the growing use of this practice.

When filling out the Agreement, the buyer is agreeing to make application for financing according to the terms stated in the paragraph. It is important, therefore, that when a buyer knows he will be applying for multiple loans that this information be disclosed to present a true picture of the offer and to avoid a potential default situation.

For example, if a seller has two offers for the same purchase price, and both state that the buyer will be applying for 80% financing, a logical conclusion might be that both will be paying cash for the remaining 20% of the purchase price. But if one offer is really for 20% cash and the other is only 5% cash with a 15% second mortgage, the seller would want to know that when evaluating the offers. Further, if the second buyer is turned down for financing based on the need for an undisclosed second mortgage, that buyer might be in default of the Agreement for failing to apply for a loan as stated in the Agreement.

The other major addition to the mortgage contingency is a new line where a Buyer has the opportunity to identify a mortgage lender to which she will apply. In many cases, a buyer will obtain a pre-qualification or a pre-approval letter from a reputable local lender, but will then end up making a financing application to another company after an offer has been accepted. As buyers are increasingly doing mortgage research on their own, more of these decisions are being made strictly based on advertised rates without the buyer asking (or knowing to ask) other important questions about the lenders’ capabilities and reputations.

How does identifying a mortgage lender help the seller to make a more informed decision about an offer? Let’s say a seller has two offers that are identical in all terms except that Buyer A says he’ll be applying to “Rock Solid Mortgage Co.,” while Buyer B says he will be using “Bob’s House O’ Mortgages.com” for his financing.

As a broker you’ve been involved with three transactions involving Bob’s – an online mortgage lender from Nevada that just started doing business in Pennsylvania. In each of those three transactions the closing date has been delayed by several days because the lender didn’t have the funds available for the original closing date. Even worse, buyers have complained about not getting timely responses to their questions. In dozens of transactions involving Rock Solid – a well-known lender in the marketplace – there has never been a problem with the lender.

When counseling your seller as they’re reviewing offers, if you know of the track records of these lenders, which of the offers is stronger? If both buyers presented pre-approval letters from Rock Solid but didn’t identify where they were actually planning to apply for financing, would you feel misled if your seller accepted an offer from the buyer who ended up applying to a disreputable lender?

Using this provision also can help buyers strengthen their offers. For starters, it should prompt buyer’s agents to start the “what are you doing about financing” conversation with their buyers much earlier in the transaction. Rather than waiting until an offer is accepted to start researching lenders, buyers can put themselves in a stronger position if they are encouraged to begin that process as early as possible. Not only might they improve the perception of their offer in the eyes of a seller, but they’ll also be more likely to pick a reputable mortgage lender if they take the extra time to do the more in-depth research that can’t be done at the last minute.

Note that use of this provision is not mandatory. Language in the Agreement states that application will be made to the identified mortgage lender “if any,” or otherwise to a lender of the buyer’s choice. Further, there is no obligation that the buyer actually use the lender identified in the Agreement – only that application be made to that lender. This preserves the buyer’s right to apply to additional lenders if that is desired. As with certain other provisions of the Agreement, it is expected that use of this provision will develop differently in different markets.

A sample copy of the revised Agreement of Sale will be posted in the Standard Forms section of the PAR Web site by mid-July, along with a copy of the Guidelines for Preparation and Use. Brokers and agents are strongly encouraged to download a copy of the Agreement when it is available, and to start their training over the next few months.