There is a phrase that is used quite often and it is profoundly appropriate in this real estate process…”Don’t start anything you can’t finish!”
For buyers, especially first-time buyers, there can be a sense of euphoria after finding that perfect home. The “honeymoon” stage, as I like to call it, starts with great plans. “We can paint the rooms and buy new carpet for the baby’s room. Can you picture us having coffee in the mornings out on that gorgeous screened in porch? I’ll love gardening in that backyard….I can almost see my roses now.”
Once the contingencies are removed and the homeowner documents have been reviewed and accepted is when I remind my clients again, “You are under an obligation to see this to the end. Do NOT do anything stupid!”
Paragraph 26 of the Northern Virginia Regional Sales Contract specifically states the following:
DEFAULT – Purchaser will be in Default even if the Financing Contingency has not been removed if Settlement does not occur on the Settlement Date for any reason other than Default by Seller, including without limitation the following:
A. Failure to lock-in the interest rate(s) and the rate(s) increase so that the Purchaser does not qualify for such Financing; OR
B. Failure to comply with the lender’s reasonable requirements in a timely and diligent manner; OR
C. Application is made with an alternative lender (one other than the one who provided Lender’s Letter) and the alternative lender fails to meet the Settlement Date; OR
D. Does not have the down payment, closing fees, or any other required funds, including without limitation, any additional funds required to be tendered by the Purchaser if the Appraisal is lower than the Sales Price; OR
E. Make any deliberate misrepresentations, material omissions, or inaccuracies in financial information that results in the Purchaser’s inability to secure financing; OR
F. Failure to make application for property insurance, if required, by lender within 7 Days of Ratification; OR
G. Does or fails to do any act following the Date of Ratification that prevents Purchaser from completing settlement.
Now, mind you, none of my clients are stupid. But the point is to get their attention and remind them of some key things they may not have been aware of that will cause them to go into default on a contract. These are all worth noting and repeating.
A. When you are ratified, the clock starts ticking on a contract. It is your “START” point. Most contracts allow you a certain amount of time, usually within a 7 day window, to make written loan application. You do NOT have the right, based on this contract, to say you didn’t qualify for the Specified Financing because your rate went up. It’s your responsibility to lock-in at the rate or rate(s) specified on the contract offer.
B. Have all you paperwork (W-2, 1099’s, bank statements, pay stubs, credit card invoices, rental history information, etc) ready BEFORE you start shopping for a home. Ideally, you’d want to be pre-approved for a loan program, as well. Keep a file folder with all you pertinent information and realize that an underwriter may require you to submit an updated bank statement or resend a W-2 two days before settlement. This is typical and your responsibility to do so. Keeping your folder with you and accessible will allow you to easily find documents your lender will require at the last minute….and they will!
C. When you submit an offer, you are making a representation to the seller that you have sought a program through a Specified Lender and intend to submit a loan application with that lender. However, circumstances sometimes require you shop with another lender to get a better rate, program or terms. Keep in mind, unless written notification and acceptance by the seller has been established otherwise, you are not entitled to delay settlement because you opted to use a different lender and they cannot meet your predetermined time-line.
D. This is why a pre-approval is imperative. You MUST have a good idea based on a GFE (Good Faith Estimate) from your lender as to your anticipated expenses of the particular program and this is required by law. Save your funds and make sure you have enough to close. The Appraisal portion of this paragraph applies if you have not made your purchase contingent on an Appraisal. ALWAYS make your purchase contingent on an Appraisal…especially in today’s market. That contingency will allow you to renegotiate your sales price offer with the seller or void the contract and receive a full refund of your Earnest Money Deposit.
E. DO NOT LIE!! Simple…do not imply you have 20% of the sales price to contribute to the down payment unless you can verify you have the funds to do so. It is your option to change your financing after the fact as long as it does not delay settlement or cost the seller any money. But do NOT misrepresent yourself to make your contract appear more attractive to the seller. This is fraud.
F. Some areas have very high property insurance premiums, specifically areas that may have seen significant damage from natural disasters. Application for property insurance must be made immediately after ratification. This is something that is usually put off until the last minute – DON’T do it! You have 7 days from the date of ratification. Get on it!
G. This one is tricky and where I see SO many go down the wrong path. If you were fired from your job through no fault of your own, you would most likely not be considered to be in Default. However, if you quit your job halfway through the loan application process to start an at-home business where you would be self-employed you are definitely going to compromise your creditworthiness and this would normally constitute Default.
H. Another dangerous path is when Purchasers get overzealous and buy a houseful of furniture on their new department store credit card or maybe go on a vacation using their savings. Within several days of settlement, the underwriter typically pulls a last minute credit check and realizes your new debt has put your ratios out of line with your program and you now no longer qualify…this is Default!
When in doubt, seek legal counsel to any specific real estate questions and the consequences to Default. I am not an attorney and this is not to be construed as legal advice.