We will now cover the financing portion on page 1 of the RPA-CA.
2. Financing
Obtaining financing is a contingency of the agreement, unless it's an "all cash" offer or the buyer states that obtaining financing is not a contingency. The buyer must make a good faith effort to obtain financing. If the buyer is unable to obtain financing, the buyer is NOT required to perform, nor is the buyer held liable for breach of contract.
Obtaining a deposit, down payment and closing costs are not contingencies. If the buyer does not have or cannot get money for the foregoing, the seller may be able to retain the buyer's deposit or canceling the sale.
The buyer makes a promise that the funds will be good when deposited in escrow, which is a "promise", not a contingency. If there are not sufficient funds in an account to cover a check given in escrow, the buyer could be in breach of contract, and the seller may cancel the contract.
A. Initial Deposit:
The deposit is given to the buyer's agent, who will then submit the offer (If not dual agency). If the deposit is given to anyone else, it needs to be specified in the blank line. The check is usually payable to the listing agent, title or escrow company.
Funds received from a principal must not be commingled with a broker's own funds. The broker may be disciplined by the real estate commissioner for such actions. Additionally, the deposits must be logged whether they are placed into the broker's trust account or in an escrow account.
The C.A.R. contract authorizes holding the check uncashed until the third business day after acceptance of the offer, unless the parties contractually agree to an alternative.
If using a post dated check, be sure to disclose it to the seller. Make sure to indicate where the deposit money will be placed (escrow account, escrow, etc.) The deposit is to be made by personal check unless a different form of deposit is specified in the blank line.
The amount should be written out in numbers in the column to the right.
If the deposit is not made in a timely manner, the seller may cancel the contract.
B. Increased Deposit:
For the increased deposit to be included in the amount of liquidated damages, there must be a separate receipt for the increased deposit at the time it is paid, in which the buyer initials or signs the liquidated damages provision.
Fill in the number of days indicating when the increased deposit will be made or specify a particular condition such as "upon removal of the appraisal contingency."
If the increased deposit is not made on time, the seller may cancel the agreement.
C. First Loan in the Amount Of:
This paragraph applies to first loans, which can be FHA, VA and Conventional.
The first sub-paragraph only refers to conventional loans. Seller financing requires an addendum and should be referenced in the "additional financing terms" (2D) paragraph. Secondary financing and assumptions require an addendum (Form PAA) and the appropriate box check in paragraph 2D.
The terms should always be specific and set forth. Do not leave them for future interpretation. Do not use "best available terms". Allow for market fluctuations!
If both the fixed rate and the adjustable rate information are filled in, then the buyer is obligated to complete the transaction with whichever option the lender has available. If the buyer does not want an adjustable rate loan, the do NOT complete the line.
Points to be inserted in paragraph 2C (1) are those to be paid by the buyer. If the seller is paying points, be sure to indicate in paragraph 2D-"Additional Financing Terms."
The second sub-paragraph is to be used only for FHA/VA transactions. Although buyers are allowed to pay points on these loans, there are certain fees that buyers are not allowed to pay. This paragraph obligates the seller to pay these fees. If the seller has agreed to pay up to a certain amount, the box should be checked and the pre-agreed limit should be written into the blank line. The buyer is responsible for all other fees.
Repairs, such as wood destroying pests, are contingencies of the FHA/VA loan approval. This portion of the paragraph obligates the seller to pay for lender required repairs.
If the Mortgage Insurance Premium (MIP) on an FHA loan, or the origination fee on a VA loan is included in the loan amount, it can be specified in the "Additional Financing Terms" in paragraph 2D.
D. Additional Financing Terms:
This paragraph is only for terms that relate to financing. Paragraph 25 is for terms and conditions other than financing.
Anything filled out in this section will be added to the total purchase price if it's for seller financing, secondary financing or an assumption. If it's MIP or origination fees, DO NOT put it in the column if the total will not add up to the purchase price.
If there will be seller financing, secondary financing, or an assumption, be sure to check the box and attach C.A.R. form PAA to the RPA.
E. Balance of Purchase Price:
The balance of the purchase price will be deposited with the escrow holder before close (checks that are not drawn on a California bank have a time delay to "clear").
F. Total Purchase Price:
Be sure the columns add up!
G. Loan Applications:
Loans require timely application by the buyer.
If the buyer does not provide a letter from a lender showing the buyer is pre-qualified or pre-approved, the seller may cancel the agreement. Different lenders use different terminology in these letters. These letters are not guarantees that the buyer will be given the loan that was applied for; however, it does state that the buyer has begun the loan process and the letter should be based off their loan application and credit report.
Verification of Down Payment and Closing Costs
The buyer or buyer's lender needs to verify that the buyer has sufficient finds for a down payment and closing costs. This can be done by means of a bank statement.
I. Loan Contingency Removal:
There are two choices for the length of time the financing contingency is effective:
- The default choice is for the loan contingency to be removed within a specified time (usually 17 days). Under this choice, the buyer must remove the contingency of obtaining the loan or cancel the agreement. Once the contingency is removed, the buyer has created a covenant to complete the transaction even if the lender does not fund the loan. Even if the buyer may not have the ability to complete the purchase without the loan, the buyer will be in breach of contract and the seller will have legal remedies. Monetary damages may be limited to the liquidated damages clause if initialed by all parties.
- The optional choice is for the contingency to remain in effect until the loan is actually funded. If the buyer cannot obtain financing, there is no breach of contract and the deposit must be returned.
J. Appraisal Contingency and Removal:
Even if the lender is willing to lend the amount specified in paragraph 2C, the buyer is not obligated to purchase the property if it appraises at less than the purchase price in paragraph 2F. By default, the appraisal contingency must be removed when the loan contingency is removed. Accordingly, the buyer should be sure the property has been appraised before removing the loan contingency. Buyer's can also check the box and opt out of this contingency. Cash buyers are advised to get an independent appraiser.
K. No Loan Contingency:
This is an optional paragraph. If checked, it is the same as the loan contingency being removed. See 2I Above.
L. All Cash Offer:
This paragraph must be checked to apply.
For a cash sale, the buyer must give written verification of funds necessary to close, within seven (7) days, or days specified. If the buyer does not provide the verification in time, or the seller disapproves the verification, then the seller may cancel. If a buyer does not have the cash to purchase the property and requires a loan to acquire the property, but does not want to make a contingent offer, then the loan amount line should be filled in paragraph 2C and the No Loan Contingency paragraph 2K should be checked.
