Paragraph 3H of the Purchase Agreement sets forth much of the mechanics of the loan process. It provides a time frame for the buyer’s delivery of a prequalification letter and the removal of the loan contingency. As a result, while there are not many blank lines to fill out in this clause, there are certain things you can do to better represent your client. First, paragraph H(1), regarding the prequal letter, has a box you can check at the end which states, “letter attached.” In other words, you can satisfy the requirements of this clause at the time of your offer by attaching the letter to your RPA. I think that is a great idea for multiple reasons. First, it satisfies the buyer’s obligation and is one less thing they need to worry about. Additionally, however, it makes your offer better and distinguishes you from other buyers. After all, the seller doesn’t have to wait for your proof of qualification. They get it with your offer and can include that fact in their decision regarding which offer to accept.

Next, paragraph H(3) provides three separate options for removal of the loan contingency: (1) that it be removed in 17 days; (2) that it be removed in some other, specified number of days; or (3) that it remain in effect until the loan is funded. Of course, the interests addressed by these three options depend on the specifics of your transaction and the side of the deal you represent. For example, if you are the listing agent, in almost any instance, it is in the seller’s best interest to keep the loan contingency reasonable, but around the 17 days. Obviously, the seller does not want the buyer to have a cancellation right any longer than is necessary. So, when representing the seller, you need to review this clause and make sure the “open till funding” clause is not checked. If it is, be sure to counter it out. With regard to an offer requesting more than 17 days, your advice to the seller will depend on the circumstances. We know that in today’s market, most loans do not get approved in 17 days. So, a request for a 21 or 24 day loan contingency is not unreasonable. On the other hand, if your listing is popular, and there are multiple offers, you can insist on 17 days or less to protect your seller. Regardless, it is our job to advise our seller on the risks and benefits of each potential period and let them decide what they are willing to do.

If you represent the buyer, on the other hand, the concerns are much different. After all, no matter when a loan contingency is removed, the buyer’s deposit money is, to some extent, at risk. This is true because, until the loan funds and the deal closes, things can happen and the bank can pull its loan commitment. As a result, even if the buyer removes a loan contingency the day before the scheduled close of escrow, their deposit is not totally safe. Something could still go wrong.

With that in mind, how should we advise our buyer’s with regard to their offer? Of course, the answer to that question, as always, depends a lot on the specifics of your deal. For example, if you are in a multiple offer situation, you should not check the “open till funding” box. In that circumstance, you are trying to make the buyer’s offer as attractive as possible to the seller. As a result, you should advise the buyer of the risks involved in a short contingency period, but advise that they stick with a shorter period in order to make the offer more attractive. If you get your offer accepted, you have more control over when the contingency is actually removed and can more likely get the seller’s agreement on an extension.

If, on the other hand, you are the only offer on the property, then the calculation is somewhat different. Of course, from the buyer’s perspective, a contingency until funding is a good thing. As a result, all things being equal, a buyer’s agent should recommend checking the box. In most instances, if the listing agent catches the check mark, they will counter the clause out. If they do you have not lost anything. Further, in some cases the listing agent misses the check mark and your buyer gets their long contingency. So, in those situations checking the box works for your buyer. On the other hand, in some instances, “all things are not equal.” For example, some listing agents seem to be looking for a reason not to accept your offer. Perhaps they hope to have their own buyer. In such a case, you should again explain the risks to your buyer and recommend a shorter period. Similarly, if you are writing a really clean offer that you think has a good chance of being accepted as is, then you may recommend against checking the box since it significantly increases the likelihood of a counter offer. In short, this decision is not a simple one and depends on the circumstances of your deal. In any case, the decision is your buyer’s and it is our job to explain the risks and benefits of each course of action (to check the box or not) and let them decide how to proceed. If you are unsure on how to deal with this issue, contact your manager or the legal department. We will be happy to help.