The MN Mortgage Financing Contingency – What it is and what it isn’t

signingacontract1The “Written Statement” of Lender Commitment is a misunderstood, under-utilized, and yet incredibly significant component of the Minnesota Association of Realtors’ (MAR) Residential Purchase Agreement. Despite the almost universal acceptance of the MAR forms in MN purchase transactions, the “Written Statement” or Lender Commitment Letter component is seldom explained to a buyer or seller.

The Financing Contingency (Conventional, FHA or DVA) which functions to describe the financing that a buyer is attempting to obtain, contains the clause referring to the Lender Commitment Letter (referred to as a “Written Statement”.)  The Financing Contingency requires an option to be chosen at the time of purchase agreement. In short, those two options are:

  1. Should the buyer(s) be unable to obtain the type of financing described in the Financing Contingency and the Purchase Agreement does not close by the chosen closing date, buyers and sellers are to sign a cancellation and any earnest money deposited would be directed to the chosen recipient (almost always the buyer.)  This option looks great on paper (for the buyer), however, since it is a weak option for the seller, it reduces the buyer’s overall negotiating strength.
  2. The buyer should provide the seller (or seller’s agent) with a “Written Statement” of Lender Commitment by a chosen date.  Such written statement shall confirm that the buyer is approved for the loan needed to purchase, as well as any subordinate financing.  This option includes further clarification and remedies for lack of compliance:
  • Such statement should specify that an appraisal, found satisfactory to the lender, has been completed. This statement should also list any yet unsatisfied conditions needed to close the loan.  Once the statement has been provided to a seller, the buyer accepts responsibility for all remaining conditions of the loan and if the Purchase Agreement does not close by the contract closing date, the seller has the option to declare the Purchase Agreement cancelled and retain any earnest money deposited.
  • If the “Written Statement” is not provided by the agreed upon date, at any time prior to receiving the “Written Statement” the seller has the option to cancel the contract.  If the seller exercises this option, the earnest money is directed back to the buyer.  Buyers should understand that a purchase agreement is put in jeopardy if their real estate agent and loan officer overlook this critical detail.
  • If the “Written Statement” is never provided to the seller, regardless of buyer or seller preference, the language of this provision states that the Purchase Agreement is technically cancelled as of the contract closing date and earnest money is directed back to the buyer. This provision is typically overlooked as many purchase agreements close without a “Written Statement” of lender commitment ever having been provided. (Does anyone else think that we are creating a heyday for lawyers here?)

It is a fact that Lender Commitment Letters often show up late, if at all and often lacking the required components described above.  This begs the question, “Why are these details overlooked?”

Because the fundamental core of a Purchase Agreement is an agreement, (a buyer wishes to purchase and a seller wishes to sell) adherence to the details of the Purchase Agreement often gives way to the pursuit of the mutual end goal (the successful closing).  Although the “mutual pursuit” nature of a real estate transaction should be viewed as overwhelmingly positive, the danger of the resulting institutional sloppiness can surface when the “end goal” changes for one of the parties.

For example: If a seller decides post-contract that he no longer wishes to sell, a disregard for, or even a loose adherence to the above provisions of the Financing Contingency will create an easy exit strategy.  Perhaps a seller has received a back-up offer for considerably more money than the existing offer.  In such a case, a seller may be waiting (with a cancellation in hand) for a failure to deliver the “Written Statement” by the agreed upon date.

As many lenders work in multiple states, they encounter the challenge of navigating the differing contracts of those jurisdictions.  Although the use of “Lender Commitment Letters” is typical across state borders, the language of the Financing Contingencies in the Minnesota Association of Realtors forms calls for specific requirements of the “Written Statement”.  If a lender fails to include each of the specific requirements of the “Written Statement”, an argument could be made that the bar was not met in delivery of an acceptable statement and remedies of cancellation may apply.

There are many considerations in choosing a Realtor or Loan officer.  Too often, however, the most important skills are not evaluated until something goes wrong. For both pre-contract negotiation and post-contract follow-through, please be sure that “knowledge of contracts” and “attention to detail” makes it into your Realtor/Loan Officer shopping cart.  This point cannot be emphasized enough.

Guest Post by Adam Duckwall, Edina Realty, 651-353-4650, adam@adamduckwall.com