The VA amendatory clause is similar to the FHA amendatory clause, but states that the buyer will not incur any penalty by forfeiture of earnest money or otherwise if the Agreement purchase price or costs exceeds the reasonable value of the property established by the VA.
In essence, the effect of these two provisions is that the buyer’s earnest money is not at risk until these agencies or their delegates conclude that the property is worth what the buyer is paying for it. Unlike with the Conventional Financing Contingency, the fact that the seller is willing to reduce the sales price if the property does not appraise cannot be used to force a buyer to purchase the property at the reduced price. If the property does not appraise based on the governmental standards, the buyer can walk from the transaction without penalty. This would be the case even if the buyer does not otherwise comply with the other obligations set forth in the VA and FHA financing contingencies.
The biggest frustration with the VA and FHA Financing Contingency Exhibits is that there is nothing requiring the buyer or the lender to timely start the appraisal process. The GAR Forms Committee is evaluating whether some procedural requirements can be added to the exhibits to try to speed up the process.
8 >> Can the seller still request evidence of buyer’s ability to close?
The answer to this question is yes. If the financing contingency ends without the buyer terminating the Purchase and Sale Agreement, the seller has the right to request the buyer to provide seller with written evidence of the buyer’s financial ability to purchase the property. The buyer normally fulfills this obligation by providing the seller with a copy of the loan commitment from each institutional mortgage lender from whom buyer is seeking mortgage financing.
In order for the seller to receive this information, the seller must request it in writing from the buyer. The buyer then has seven days to provide the information to the seller. If the buyer misses this deadline, the buyer would be in breach of the contract.
9 >> If the property appraises low, can the buyer and seller agree to a price that is higher than the appraised price?
If the appraisal comes in low, the buyer and seller can always negotiate a price somewhere in between the contract price and the appraised price. Of course, this means that the buyer will have to fund the amount over the appraised price (in addition to the down payment and the other buyer costs to be paid by the buyer).
Some sellers, particularly in multiple offer situations, will require all buyers making their best and final offers to add a special stipulation stating that in the event the property does not appraise for the purchase price, the buyer will fund the entire difference in cash (or fund the difference up to a pre-agreed amount). Typically, with these types of special stipulations, the buyer also warrants that he or she has sufficient cash to fund the difference between the appraised price and the contract price. An example of such a special stipulation is set forth below:
Sample Special Stipulation:
IN THE EVENT THE APPRAISAL USED BY THE BUYER’S MORTGAGE LENDER TO DETERMINE THE AMOUNT OF THE MORTGAGE LOAN IS FOR LESS THAN THE PURCHASE PRICE, BUYER AGREES TO PAY THE DIFFERENCE BETWEEN THE LOAN AMOUNT AND THE PURCHASE PRICE IN CASH AT THE CLOSING PROVIDED THAT THE SAME DOES NOT EXCEED THE SUM OF $___________________ (“CASH NEEDED AT CLOSING”) PLUS ALL OTHER COSTS AND FEES TO BE PAID BY BUYER AS PART OF THE CLOSING OF THE TRANSACTION). IN THE EVENT THE CASH NEEDED AT CLOSING EXCEEDS THE ABOVE-REFERENCED AMOUNT, BUYER SHALL NOTIFY SELLER OF THE SAME AND SELLER SHALL HAVE THE RIGHT, WITHIN THREE (3) DAYS THERE AFTER, TO EITHER REDUCE THE SALES PRICE OF THE PROPERTY SO THAT THE CASH NEEDED AT CLOSING (EXCLUDING ALL COSTS TO BE PAID BY BUYER AS PART OF THE CLOSING OF THE TRANSACTION) DOES NOT EXCEED THE AMOUNT REFERENCED ABOVE. IF SELLER DOES NOT AGREE TO REDUCE THE SALES PRICE OF THE PROPERTY SO THAT THE CASH NEEDED AT CLOSING DOES NOT EXCEED THE ABOVE-REFERENCED AMOUNT (EXCLUDING ALL COSTS TO BE PAID BY BUYER AS PART OF THE CLOSING OF THE TRANSACTION) WITHIN THE THREE (3) DAY TIME PERIOD, BUYER MAY TERMINATE THIS AGREEMENT UPON NOTICE TO SELLER.
In conclusion, financing contingencies are a source of both questions and controversies in the REALTOR®community. Hopefully, this article answers some of the most commonly asked questions in this area.
SETH G. WEISSMAN IS GAR’S GENERAL COUNSEL, AN ATTORNEY AT WEISSMAN, NOWACK, CURRY & WILCO, P.C. AND A PROFESSOR OF THE PRACTICE OF CITY PLANNING IN THE COLLEGE OF ARCHITECTURE AT GEORGIA TECH.
16 I GEORGIA REALTOR® FALL ISSUE 2016
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