Contingencies and Time Frames
The next set of details will take into account the contingencies and the time frames related to them. All contingencies need to be released within a specified period of time, preferably before close of escrow and not on the day of close. If the contingencies are not released before close of escrow, you may end up moving without total assurance that the buyers are going to proceed.
When the contingencies are not met, you receive no compensation if the buyers do not go through with the purchase. Contingencies outlined should include loan approval or proof of funds for a cash transaction; inspections, evaluations, and disclosures; sale of another residence; and time frame to respond to the offer. Time frame to respond to the offer is usually a period of several days, after which any offers that have not been responded to will expire. Read on for explanations of the other contingencies.
Loan Approval or Proof of Funds for a Cash Transaction
Proof of funds for a cash transaction can occur in a matter of five days or less. Loan approval takes more time. The buyer must fill out a loan application and submit it to the lender. The lender will order an appraisal and will have to work with the appraiser's time frame. An appraisal can take three weeks or more to schedule and perform. Once the lender receives the loan application, they will need to verify everything on the application. They will send notices to the buyer's bank or other financial institutions, asking for average balances and balances to date. They will get verifications of employment and proof of other incomes. They will need a preliminary title report and any documentation relating to a homeowner's association, if one exists. They will run a credit report and obtain a credit score for the buyer. This gathering process takes about thirty days.
Once they have gathered all the necessary information, the lender packages the loan and sends it to underwriting for approval. The underwriter may request additional information, such as bank statements for the past two years or an explanation of a credit glitch. Once the underwriter is satisfied, they approve the loan, and it goes to the next department for the drawing of the loan documents. Loan documents are then sent to the escrow company or attorney or to the main lender's office for the buyer to sign. Once signed, the loan documents are then sent back to the lender and reviewed to be sure they were completed properly. When the final review is complete, they are sent to the funding department. From there, the loan is funded. This is usually accomplished by wire transfer to the escrow company or attorney handling the transaction, and the property is ready to close escrow. There are subcategorized dates for the loan contingency, such as the date to complete the loan application and the date that the lender will review the credit report and submit a prequalification letter.
Although there are buyers who pay cash, the majority of buyers are looking to obtain financing. It is important to know, as soon as possible, if the buyer is qualified. By having her complete a loan application and a credit report in the first few days and having the lender review it, you can receive what is commonly known as a prequalification letter. This letter basically says: The buyer's credit is good, and as long as everything on the application checks out, the house appraises at an acceptable value, and there are no surprises on the title, the loan will be approved.
Inspections, Evaluations, and Disclosures
Inspections are the next most common contingency, after the loan. A buyer wants to be sure he is purchasing a home that is in good repair. He does not want to discover any hidden defects after purchasing the home, especially defects that are expensive to fix. Having this knowledge up front allows the buyer peace of mind that he is making a purchase with no later hidden costs. There is a time frame for ordering the inspections, a time frame for receiving the inspections, and a time frame for getting a cost on the repairs outlined in the inspections. The final time frame is approval of the inspections and the cost of the repairs relating to it. This is usually expected to be accomplished within fifteen to twenty-one days. The contract will outline who pays for the repairs. There is usually a maximum dollar amount for which the seller is responsible. If the costs exceed that amount, there are three things that can occur.
The buyer can decide to pay the balance of the costs not covered by the seller.
The buyer and seller can negotiate who will pay the balance of the costs.
The buyer may cancel the contract.
There are homes that look great on the surface but have underlying problems that are in need of repair. It is possible that the seller is not even aware of these items since they may have deteriorated slowly over time and gone unnoticed. Having an inspection will remove the potential of surprises later.
There are a number of different kinds of inspections. The primary ones are a general physical inspection and a pest inspection. Usually, a professional home inspector or a licensed contractor will perform the general home inspection, and a licensed pest control operator will perform the pest inspection. Once a physical inspection is obtained, there may be questions on certain items that are outside the scope of the inspector's expertise. The inspector may recommend that further investigation be done on one or several of the components of the house. Further inspection may be necessary by another type of inspector. These may include:
Fireplace or wood burning stove and chimney
Hazardous materials (radon, asbestos, lead paint)
Underground storage tank
Sewer, septic, and/or leach field
Spa, swimming pool
Building department or other regulatory agency
Seller's disclosure statement (required by most states)
Sale of Another Residence
This contingency is usually expected to be removed within a few days of the close of escrow on the property a buyer is purchasing. Subcategorized dates include a time when the property is to be listed for sale and a time when it must be in escrow.
The majority of buyers cannot purchase one house without selling another. The contingency on the sale of another house is common. When this contingency exists, it is important for the seller to learn about the other house. The other house should be on the market for sale. If it is not for sale, you will have a contingency that will tie your house up with no chance of getting it sold.
If the other property does not sell within the specified time frame, you may either cancel the contract or give the buyers an extension, allowing them more time to sell. An extension may be in order, if the buyer's house is in escrow and subject to only a small delay. Why put your house back on the market if you are close to having a completed transaction? However, when a contract is subject to the sale of another house, it is wise to solicit backup offers. If the buyers cannot perform on the sale of the other residence, you'll have a ready opportunity to sell your house to someone else. If you receive another offer, you give the current buyers a time frame in which to remove the contingency on the sale of their house, usually 72 hours. (This needs to be outlined in your original offer.) You may wish to have the buyers increase their earnest money deposit when they remove this contingency. If they cannot remove the contingency of the sale of their house, you can move on to the new buyers.