Let’s say you’ve been shopping for a home for a few months and you finally found one you like. You’ve negotiated the purchase price and you are now under contract. You probably think it’s all downhill from here and you have nothing to worry about. All you need to do now is finish shopping for a mortgage to find the lowest rate and fees and you’ll be set.
Not so fast! Or actually….you better be damn fast about it because the clock is ticking and time can cost you the deal. In reality, once you sign a contract it’s too late to be shopping for a mortgage. The problem is that the contract you signed to buy the home obligates you to a very tight timetable for getting your mortgage. Sure, if you miss the deadlines you can ask for an extension from the seller. It happens all the time and normally the seller will grant you an extension.
However, there’s a bit more to the story. If the seller receives a better offer and that other buyer is waiting on the sidelines for you to screw up this is how you are going to play right into their hands. And I’ve seen it happen. Once you ask for an extension of a deadline you have officially notified the seller that you either have or are about to miss that deadline and under the terms of the contract the seller has the right to terminate your contract and you have no recourse in the matter. So, buyer beware!
Let’s check out some of the pertinent wording of the new standard contract that is now recommended for use across Illinois. It’s referred to as the Multi-board Residential Real Estate Contract 6.0 and it essentially imposes 4 different deadlines for the buyer and their mortgage lender.
Deadline For Applying For A Mortgage
“Buyer shall make written loan application within five (5) Business Days after the Date of Acceptance … ; failure to do either shall constitute an act of Default under this Contract” However, the contract does not provide for the seller to demand proof of application from the buyer so I’m not sure how you enforce this provision. It’s possible that the right to proof is implied.
Deadline For Ordering An Appraisal
From the same section of the contract: “Buyer shall … cause an appraisal of Real Estate to be ordered by the lender no later than ten (10) Business Days after the Date of Acceptance; failure to do either shall constitute an act of Default under this Contract” Again, there is no provision that gives the seller the right to proof that the appraisal was ordered in a timely fashion.
Deadline For Underwriting
“If Buyer, having applied for the loan specified above is unable to provide written evidence that the loan application has been submitted for underwriting approval by Buyer’s lender on or before ________, 20__ , (if no date is inserted, the date shall be thirty (30) days after the Date of Acceptance) either Buyer or Seller shall have the option of declaring this Contract terminated by giving Notice to the other Party not later than two (2) Business Days after the date specified herein or any extension date agreed to by the Parties in writing.” In this case the seller does have the clear right to demand proof of underwriting submission.
Deadline For Receiving Clear To Close
“If Buyer, having applied for the loan specified above is unable to obtain a written “Clear to Close” from Buyer’s lender on or before _____, 20__ , (if no date is inserted, the date shall be forty-five (45) days after the Date of Acceptance) either Buyer or Seller shall have the option of declaring this Contract terminated by giving Notice to the other Party not later than two (2) Business Days after the date specified herein or any extension date agreed to by the Parties in writing.” I would argue that the seller’s right to demand proof of the clear to close is implied.
So the timetable imposed on the buyer in this contract is actually pretty onerous and buyers should not waste any time once they are under contract. The Chicago Association of Realtors has their own contracts, which are not quite as onerous as the Multi-board. They just focus on getting a mortgage commitment. But the conclusion is still the same: buyers should not waste any time getting their mortgage.
Oh…did I mention that you shouldn’t be shopping for a mortgage once you are under contract?
Further Thoughts From A Mortgage Advisor
After reading this post Russell Martin of Perl Mortgage emailed me the following thoughts that I thought were worth sharing:
I’d say 90% of borrowers start shopping for their mortgage after they’ve gone under contract. This is one of the major reasons why there are so many last minute [screw] ups in the process. It causes a variety of problems. One of the major issues is that no mortgage lender can tell you actual rates until you are under contract and for most borrowers, that is all they care about. For the vast majority of borrowers, they are penny wise and pound foolish. Literally shopping for an .125% and a few dollars in closing costs but not understanding the overall transaction risk. The desire to save money on the mortgage is so strong because the mortgage cost is very visible, that their decision making skills suffer. I don’t care how smart the borrower may be in the real world. This is why they are willing to jeopardize contract terms over seemingly small savings amounts.
Most mortgage lenders don’t want to offer real pre-approvals because there is no loyalty to the lender, so the lender does not want to commit resources to approving files that may not result in a closed loan. When I say pre-approval, I mean real pre-approvals where an underwriter reviews the file with a TBD address and issues a firm mortgage commitment so you know going in that the loan is really approved and will be a smooth closing pending appraisal. Vast majority of lenders won’t do this anymore, so the borrower has to depend upon the expertise of the loan officer.
Additionally, borrowers don’t understand that just because Lender A approves the loan does not mean Lender B will approve the loan. So a borrower may actually have a great deal for their particular situation because the loan officer understands some of the nuance involved with the borrower’s scenario, however, the borrower may not be aware and essentially causes their own loan decline or other problems by switching lenders.
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