Purchase Contract Guide

by Brian Berman on February 25, 2010

Home purchase can be become much more complex than the average individual expects.  Certain aspects of the contract can have a significant impact not only on the success of your purchase transaction, but on your stress level as well. Below are some of the important items you should be aware of, that require you to make decisions as a buyer entering into a purchase contract.  At Mortgage Atlanta, we always recommend using a qualified Realtor to assist you in buying a home.  If you do not have a realtor or are not satisfied with one that you have worked with give us a call and we can recommend a realtor we have worked with in the past in your area.  

Pre-Approval and Pre-Qualification

Before you go out and see home with your realtor you need to speak with a mortgage specialist to be pre-qualified.  During this process your loan specialist will ask you a series of questions, check your credit and discuss with you your financing needs.  They will work with you to determine How much can you afford? and What price house you should look at!  A letter or email should be sent to your realtor once this is complete.  
Sellers can be leery of the stability and reliability of the buyer if the buyer is only capable of making a down payment of 10% or less. This can cause the buyer to lose a significant amount of negotiating ability, by being perceived as a weak buyer rather than a strong one. When working with Mortgage Atlanta, when you are ready to make an offer, a Pre-Approval letter is drafted for the property you are making an offer on.  Sometimes before the pre-approval letter is drafter your loan officer will ask you for items off of the What’s Needed list.  It is a good idea to send these to your loan officer as soon as possible. 

Contract Period

The contract period is the period of time in which all due diligence must be completed, including obtaining loan approval, property appraisal, home inspection reports, termite inspection, etc. Give yourself enough time for all due diligence to be completed for this very important purchase you are about to make. Typically, purchase contracts are drawn up for a period of 30, 45 or 60 days. However, while it is not typical, a purchase contract can be written for a term in excess of 60 days if the parties involved need that long of a period to complete all aspects of due diligence.

Loan or Financing Contingency

Loan contingency is the period of time the seller is giving you to obtain full, formal loan approval. Always include a financing contingency when making your offer!  In the unlikely event your loan is turned down or your loan terms change this contingency gives you specific rights to cancel the contract without costing you money! 

Always ask you loan officer how many days they will need for this contingency.  Typically, in a normal market, this should be between 15 and 30 days. The earnest money deposit you make at the time the offer is accepted will be put in jeopardy once the contingency for the loan has expired. If you do not purchase the home after the contingency period has elapse, you could lose your earnest money deposit and not have the failure of obtaining loan approval to lean on as an excuse. Written pre-approval will help to eliminate problems in this area. Please note: pre-approval is not the same as pre-qualification.
One other important item is the Appraisal Contingency.  Sometimes included in the financing contingency, you want to make sure you are protected if the house you are buying does not appraiser for or above the contract price.  You should ask your loan officer how many days is needed for this contingency, usually 10-14 days is enough!

Home Inspection Contingency
As part of the negotiation in your purchase contract you and the seller will mutually agree upon the amount of time needed to complete all the home inspection procedures that are required. Mortgage Atlanta can recommend you a few third party inspectors if you do not have a company in mind.  We always recommend utilizing a third party company to complete these inspections because they can not be influenced by the sellers! 

You will be provided with a report by the home inspection company that you should review very thoroughly to make sure there are no material defects in the property that you were not aware of, and which could subsequently have an impact on the value of the property. Once your home inspection contingency has expired, you no longer have the leverage to go back and renegotiate with the seller to resolve any issues revealed by the home inspection. If there are material defects, you and your real estate agent should renegotiate either a reduction in the purchase price to offset the cost of any necessary repairs or having the seller make the repairs prior to the close of the transaction. Buyers with limited cash reserves should most likely negotiate to have the repairs made prior to closing.  Please make sure your loan officer is aware of any major structural or material defects if they are on your report.

Termite Inspection
A termite inspection is may be required by the lender if it is listed in the purchase contract. The lender may also require an inspection if the appraisal states there is evidence of termite damage. On FHA loans inspection is required only under the following circumstances: when there is evidence of active infestation, if mandated by the state or local jurisdiction, if customary to the area, or at the lender’s discretion.

If termites are present it is up to both parties to determine who will be responsible for the remedy of the problem. When you negotiate your contract make sure you state up front whether you want the property checked for termites.

Seller Rent Back
If the sellers are not able to move out of the house prior to, or the day of closing you may negotiate a “rent back” period.  This means the transaction closes, the loan funds and ownership of the property is transferred into the buyer’s name, but the buyer does not take occupancy of the property until several days later.  The seller often pays a sum of money to the buyer for this rental period.  This period should never be more than 60 days.  Always let your loan office know you are offering this to your sellers because some banks may or may not require additional documentation. 

Seller Contributions
When negotiating the purchase contract with the sellers it may be wise to ask them to pay some or all of your closing costs, origination points and/or pre-paid items (interest, hazard insurance, tax escrows). This common strategy can be very beneficial to the buyer, particularly if the buyer is short on funds to close. It can also be the vehicle that effectively drives the interest rate down and provides the buyer with a more affordable monthly payment.
Depending on the type of loan the buyer is obtaining the seller may be limited on how much they can contribute.  Typical seller contribution can range from 3% to 9% of the purchase price, based on the size of the down payment. Most lenders will not permit the seller to contribute funds back to the buyer after the close of the transaction to accommodate repairs to the property. Items such as roof leakage or new carpet cannot be covered by any seller contribution clauses and must be repaired before closing!  

Share |
Mortgage Atlanta, LLC. 601 Woodlawn Dr,, Suite 340. Marietta GA 30067. Phone: 678-564-1522 info@mortgage-atlanta.com

Leave a Comment

Previous post:

Next post: