Just say no to short timelines for loan approval contingencies and earnest money deposit forfeitures.
By Jeff Lazerson | email@example.com | MortgageGrader.com | July 02, 2022
* Article originally posted in Orange County Register on June 23, 2022
House payment affordability is a daunting challenge for many more home shoppers. Fixed-rate mortgages increased more than 2 full percentage points since the beginning of the year, hitting 5.81% this week, according to Freddie Mac data.
Bidding wars are largely over. Buyers have stopped begging to be the chosen ones. More homes are lingering on the market for several weeks, instead of selling in hours, minutes, or seconds.
Broker associate Doug Ward of Regency Real Estate thought he had a deal for his Mission Viejo buyers at $1.25 million. Sellers countered at $1.265 million, trying to squeeze another $15,000 from the buyers.
“We refused,” said Ward. Several days later the sellers agreed to the $1.25 million.
“There aren’t a lot of sellers willing to pull the plug. They are afraid to go back to market with rates higher,” said Tish Arciniega, broker owner of San Jacinto-based Main Street Realty.
Full disclosure: I do business with Ward and Arciniega.
Jordan Levine, chief economist at the California Association of Realtors, sees a shifting market.
“Statewide homes are on the market twice as long at 26 days as they were last month,” he said. “We expect prices to soften. We are leaning toward a modest recession in 2023.”
And good riddance to nightmare seller demands for buyers, such as waiving their appraisal and mortgage contingencies as a condition of offer acceptance.
“Buyers have more choices. They are not having to waive the loan approval contingencies,” said Ward.
Something else. If the appraisal comes in lower than the sales price, buyers should now consider renegotiating the price. Why overpay in a softening market? There’s more pressure on the seller now to say yes.
Last week, I had a buyer offer to split the difference with the seller when the appraisal came in low. Seller agreed. Deal stayed together. It closes next week.
Unreasonably short timelines for loan approval and appraisal had been another sometimes-untenable obstacle. Get it down in X days to avoid risking the ugly notice to perform demand.
The residential purchase agreement, or RPA, commonly used by California real estate professionals, doesn’t contain boiler-plate language for unforeseen issues like appraisal delays, late answers to homeowner association questionnaires (called seller’s HOA) or even delays in getting loan approvals. (The best-priced lenders always have the longest turn times.)
The contract requires loan and appraisal contingencies to be removed within 17 days, shortened from 21 days in earlier versions, according to Arciniega.
Sellers’ agents and their transaction coordinators pepper loan originators and their processors with phone calls, texts and emails demanding the buyers remove their contingencies or else. Or else means release the contingencies or we’ll cancel escrow.
But if contingencies are released and the loan doesn’t get approved, the earnest money deposit is potentially at risk. A 3% deposit on a $1 million sales price is $30,000.
According to Fullerton real estate attorney Jim Stearman, the seller isn’t entitled to the deposit unless the following conditions are met:
“It’s not uncommon to end up in a fight, (although) it is uncommon to go to mediation,” said Stearman. “Waiving contingencies upfront is dangerous.”
If you are a buyer, especially with a complicated loan file, or you are buying in a rural area with hard-to-find appraisers, consider asking your agent to add “seller will allow additional time so long as buyer is making best efforts” language to the appraisal and financing timelines.
Or remove the seller’s ability to keep the earnest money deposit based on deadlines.
The best thing any buyer can do is find a level-headed, mature real estate professional who can properly negotiate terms and conditions upfront that are in your best interest, now that the shoe is on the other foot.
Freddie Mac rate news: The 30-year fixed rate averaged 5.81%, 3 basis points higher than last week and the highest rate since November 2008. The 15-year fixed rate averaged 4.92%, 11 basis points higher than last week.
The Mortgage Bankers Association reported a 4.2% increase in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $1,066 less than this week’s payment of $3,802.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 4.875%, a 15-year conventional at 4.625%, a 30-year conventional at 5.375%, a 15-year conventional high-balance ($647,201 to $970,800) at 5.25%, a 30-year conventional high-balance at 5.625% and a 30-year jumbo purchase loan at 5.375%.
Eye catcher loan of the week: A 30-year jumbo purchase mortgage, locked for the first 10 years at 4.375%, with 0.75-point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011