Purchase and Sale Contract: Financing

Purchase & Sale Contract Series Part 2 

 

Understanding the Finance Section of an Idaho Real Estate Contract

Financing the Home Purchase: The big guns of the contract: How much and how are you paying for your purchase?  

This next section of the contract is the Finance Section and it covers how much you’re paying for the property and how, including different financing options.

Quick Tip: It’s going to be quite handy if you have already had a conversation with your lender and if you have a pre-approval letter ready (If purchasing with a loan.)

There are several parts of the Finance section

How much are you offering, aka, the purchase price? This includes where the funds are coming from that you are using to pay for the property. 

How much Earnest money are you putting down? 

Are you financing?  If so what type of loan are you getting?  How much cash are you bringing in?  What interest rates are you willing to pay?  

Is your purchase contingent on the sale or refinance of another home?   

 Proof of Funds 

 IF you are all cash, you will be asked for proof of funds.  A large down payment might also need proof of funds or a letter from the lender that they have verified funds.  

Typically your bank can write you a letter saying there are funds to cover whatever dollar amount that you need.  You don’t necessarily have to show them the exact dollar amount that is in your account.   

Pay special attention to the fact that you are waiving any financial contingency!  That includes appraisal contingency etc.  Yes, you can have an appraisal done if you want to pay for it but you cannot back out of the purchase because of it.   

 Example: 

“IF CASH OFFER, BUYER’S OBLIGATION TO CLOSE SHALL NOT BE SUBJECT TO ANY FINANCIAL CONTINGENCY. BUYER agrees to provide SELLER within _____ business days (five [5] if left blank) from the date of acceptance of this agreement by all parties written confirmation of sufficient funds and/or proceeds necessary to close the transaction. Acceptable documentation includes, but is not limited to, a copy of a recent bank or financial statement. “

 

Earnest Money 

All contracts are going to need some earnest money to prove that you are serious and are making a binding legal contract. 

Typically it’s going to be at least 1% of the purchase price.  You will need to plan on paying that within a few days of an accepted offer. 

There are usually several options for how you want to tender that: either a personal check, a cashier’s check, a wire transfer, cash, etc.  As long as it doesn’t bounce there is no right or wrong way to tender the Earnest Money.

You will want to make sure that your agent knows how you plan on paying that so they disclose in the offer what you are doing. 

Example: Earnest Money of $3,500.00 of personal check due 5 business days after offer acceptance.

If you are financing: For your lender’s sake that money will need to be coming from your account.  

 How are you financing? 

Since you have already checked out your options with your lender and got pre-qualified, we should know this prior to writing your offer. 

Why does this matter?

It’s going to change or adjust the terms of your purchase.  And, it’s also going to affect how competitive your offer is.  You certainly don’t want your Real Estate Agent to write your offer committing you to more down payment than you have or marking a less competitive loan than what you’re approved for.  

Be sure to read our blog on different types of loans here.  

 Example:

“FIRST LOAN of $________________________ not including mortgage insurance, through __ FHA, __ VA, __ CONVENTIONAL, __ IHFA, __ RURAL DEVELOPMENT, __ OTHER ________________ with interest not to exceed ______% for a period of ______ year(s) at: __ Fixed Rate __ Other _______ In the event BUYER is unable, after exercising good faith efforts, to obtain the indicated financing, BUYER’s Earnest Money shall be returned to BUYER. “

 Interest Rates 

Along with what type of loan you are getting, we will also be entering in the interest rates that you are comfortable with. 

Let’s say we are sitting at a 3% interest rate for your pre-approval and you know that if interest rates were to rise suddenly (for example 4.25%) that you would not be able to afford the house payment for the home that you are getting. So, we would write into your financing contingency “not to exceed 4.25%.”

This means that if the interest rates were to go above what we are planning then you could use the financing contingency part of this contract to get out of the contract and have your earnest money refunded.

 

Appraisals 

This financing contingency also has a low appraisal section which means that if the home does not appraise for the sales price, you could potentially back out of the purchase and get your Earnest Money back.  Although, in a super competitive market some buyers are waiving this section of the financing contingency. You can do that, but it needs to be decided prior to making an offer.   

Appraisals Required by the Lender

“If an appraisal is required by the lender, the PROPERTY must appraise at not less than the PURCHASE PRICE or BUYER’S Earnest Money shall be returned at BUYER’S request unless SELLER, at SELLER’S sole discretion, agrees to reduce the purchase price to meet the appraised value, in which case SELLER shall be entitled to a copy of the appraisal and shall have the option to notify BUYER of any price reduction. BUYER may also apply for a loan with different conditions and costs and close transaction provided all other terms and conditions of this Agreement are fulfilled, and the new loan does not increase the costs or requirements to the SELLER. “

There is a lot in this little section to protect you if the house doesn’t appraise or if you don’t get the interest rate that you want etc.  There is also a decent little chunk to protect the seller, as in you have x number of days to be getting information to your lender. Your lender can only go as fast as you can get documents to them.   

 Downpayment 

And last but not least, a disclosure of how much money you are putting down. You are probably going to have already decided that with the lender, but this is where you want to be disclosing it.  So if you are not sure, that is a lender conversation prior to making an offer.    

 Time is of the Essence! 

As you will learn with Real Estate contracts, time is of the essence. You want to be very detailed in how you respond to the things you need to do.  Sellers do have the right to cancel your contract if you cannot provide from your lender proof that you qualify and that you are getting them all the documents that they need.  

Your contract will usually specify within 10 days but that can be adjusted. The smaller the number, the more competitive you are, and of course the larger the higher risk there is for the seller in keeping their home off of the market waiting on you.   

 Don’ts When Buying a Property

Some VERY important don’ts when you get to this stage:

  1.  Do NOT buy anything else on credit during your home buying process!
  2. Do NOT spend large sums of cash!
  3. Do NOT Quit or Change your job!
  4. Do NOT give Notice that you are quitting your job!

Do absolutely nothing that changes your financial portfolio once you start this process!  No new cars, no new furniture, no deposit on furniture, etc. 

I know it sounds a little crazy to say this in 50 different ways but it’s unbelievable when you live in this industry how many people lose their home purchase for something above.  I know you’re excited to have your new home, but please do not buy decorations for it prior to paying for the home!   

 Special Considerations 

Help from Family/Friends

Are parents, family, or friends helping with the down payment? 

A bank is always going to want copies of bank accounts that any money (that isn’t yours) is coming out of.  If, for example, your parents are helping you with the down payment and they don’t want to have to give copies of their bank accounts, they may consider transferring that money to you 60 or 90 days prior to you making an offer on a home. 

You are always going to have to give the bank at least 2 months of bank statements.  So, if that money has seasoned in your account for a few months and doesn’t sit there looking like a big fat deposit, your family will manage to escape the proof of where the funds came from in bank statements.   

 Mattress Money 

Mattress money is money that doesn’t live in your verifiable checking account/savings account.  That money also needs to be seasoned for a couple of months at a minimum or more.  And it gets trickier all the time on getting that money back into an account, so be sure to pay special attention to the laws as you are re-instating it.   

 Closing Costs 

We will discuss seller-paid closing costs in a separate blog post.  But, in your planning stages of home buying: plan on about 2.5 to 3% of the purchase price for closing costs.  This would include tax holdbacks, setting up escrow accounts, bank fees, title closing costs fees, etc. This is not to be confused with the money that you are putting down on the home.   

 

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