Monday, April 13, 2009

Buyers: What to Verify Before Removing Loan Contingency

Buyers, beware. Even for qualified borrowers, loans are difficult to obtain and have many more underwriting conditions than in years past.

Buyers should be especially vigilant about removing the loan contingency. We've heard too many stories about buyers who are given additional conditions to fulfill after the loan contingency was removed (and sometimes a few days before closing.)

If the loan is not approved, Buyers risk: 1) losing the property; and, 2) losing their earnest money deposit (typically 3% for California residential sales.)

Easy loans of yesteryear led to lax practices where buyers would get a verbal sign-off from the lender and then would remove the loan contingency.

No longer. Buyers should request a Letter of Commitment from the lender prior to removing loan contingency. They should also ask what underwriting hurdles might exist that could prevent the loan from funding.

This wise advice comes courtesy of Dana Dukelow at MetroSunset Mortgage in West Hollywood, CA. These are questions you should ask your lender prior to removing the loan contingency:

1) Have all the "Prior to Docs" conditions been cleared? These are the loan conditions that the lender requires before they will allow loan docs to be drawn.

2) What are the "Prior to Funding" conditions? These are the conditions that have to be cleared before you can fund the loan. Many times these conditions are related to the escrow company.

3) Has the "4506T Form" been processed and have they received the tax returns back from the IRS? This is a new thing in the past couple months. The lender submits this "4506T Form" to the IRS to request copies of the tax returns the borrower submitted. We are seeing many issues where the returns coming back from the IRS have info that was not included in the loan application. SO MAKE SURE THEY HAVE RECEIVED AND APPROVED THE 4506T TAX RETURNS!

4) Has the appraisal been approved? If so, have they asked for a "desk review or field review"?

5) CONDOS - have they received and approved the "Condo Certification Form" or the "Limited Condo Cert"? Be very aware of any litigation with a building!

6) CONDOS - has the underwriter asked for info on pre-sale requirements, budgets, insurance? Most condos now go through a condo approval in addition to the underwriting. This generally happens after the loan has been underwritten. Ask if the condo building has been approved by their condo department.