In today’s market, there may be no clause in your contract more important than paragraph 3(C) relating to loans. This is true because that clause, when filled out correctly, helps define when it is appropriate for the buyer to use their loan contingency. Given how difficult and complicated the world of loans is these days, it is obviously critical that your buyer protects themselves in every way possible. So, what do you need to be aware of when filling out this paragraph? First, and most importantly, you need to remember to fill in the blanks, WITH NUMBERS, in every deal. Those numbers will identify a “not to exceed” percentage rate and points, thereby protecting your buyer and establishing what loan they have to take in order to be in compliance with the contract. For example, if paragraph 3(C) provides that the buyer will get a first loan in the amount of $500,000, with an interest rate not to exceed 5%, and the only loan they can get is at 5.25%, then it would appropriate and reasonable for the buyer to exercise their loan contingency and cancel the deal. On the other hand, in the same case if they got a loan at 4.99% but decided they no longer want the house, the use of their loan contingency would probably be a breach of contract. After all, in the contract they said they would take a 5% loan, so turning down one with a lower rate would not be good faith performance. Of course, the same discussion applies to the amount of points your client is willing to pay.
With all this in mind, you also need to realize that leaving these blanks empty deprives your clients of the specific protection we discussed above and, according to some people, deprives them of their right to use the loan contingency at all. After all, the argument goes, you can always get some loan, even if it is at 20% amortized monthly. By not putting numbers in this clause, these people would argue that if you can get any loan you have to take it and close escrow. You only limit what loan you need to take by putting a number in the blank. Without any number, these people claim you must take whatever loan someone is willing to give you.
Similarly, please use numbers, not terms like “prevailing” or “best available rates.” Like we have said many times in the past, contracts need to be as objective as possible. No one can argue what “4%” means, but they can have a different understanding of best available rates. Those terms just ask for a fight. So please use numbers to protect your buyer and eliminate any ambiguity. Thanks and feel free to contact us with any questions you may have.
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