August 15th, 2022 at 1:39 pm
A. The appraisal came in below the purchase price.
B. The buyer has insufficient funds for the down payment.
C. The buyer refuses to provide prior tax returns.
D. The lender requires the buyer to sell the buyer’s existing home.
E. None of the above.
Answer: Answer A is wrong. A buyer can only cancel under an appraisal contingency if the appraisal comes in low. The RPA specifically disallow a buyer from cancelling under the loan contingency if the appraisal comes in low (see paragraph 8A(1) of the RPA).
Answer B is wrong. Obtaining the down payment is not a contingency of the purchase agreement, regardless of whether the lender declines the loan for that reason (see paragraph 8A(3) of the RPA).
Answer C is wrong. The RPA specifically requires a buyer to “act diligently and in good faith to obtain the designated loan” (see paragraph 8A(1)). A buyer’s refusal to provide prior tax returns is likely to be a failure to “act diligently” to obtain the loan. Additionally, if the refusal stems from the buyer overstating his or her own income on the loan application, that may be a failure to “act in good faith” (or honestly).
Answer D is wrong. A buyer cannot back out under the loan contingency if the lender requires the buyer to sell the buyer’s existing home (see paragraph 8J of the RPA). Both the purchase of the subject property and the buyer’s ability to obtain financing cannot be contingent upon the sale of the buyer’s existing property, absent a Contingency For Sale of Buyer’s Property (COP).
Answer E is the correct answer. Do not make the mistake of telling your buyer-clients that their loan contingency allows them to cancel the contract if they cannot obtain their loan. That’s an oversimplification of the RPA. There are certain circumstances (such as Answers A to D above) where buyers cannot cancel under their loan contingency, even though their lender has declined their loan.
-Thank You to Andy Achen (Studio City Office) for suggesting this week’s legal tip!
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