Watch out for those financing contingencies…Mortgages are taking longer and it’s about to get worse

Most sellers don’t give too much thought to what goes on behind the scenes when their buyer is using a mortgage to purchase their home. After all, it’s the buyer’s obligation to obtain the financing and have it secured by the closing date indicated in the purchase agreement.

In today’s lending environment, however, sellers and their agents must take a more active interest in the buyer’s financing progress. Because the rules are changing once again.

We all recognize that the lending landscape today is significantly different than it has been over the last few decades. Buyers have fewer mortgage programs to choose from, underwriting criteria is significantly stricter, and lenders have been trimming staff over the past few years as refinancing activity has slowed. That means they’re operating at or above full capacity, and that’s slowing underwriting response times.

And if that isn’t enough, new government rules known as “TRID” (TILA-RESPA Integrated Disclosure) are scheduled to go into effect in August 2015 which has lenders scrambling to become compliant with unfamiliar new procedures and paperwork that will likely cause closing delays.

We’ve heard from lenders who are telling Realtors to plan for and expect at least 45 to 60 days for a buyer to get to the closing table, not the 30 days or so we’ve been accustomed to for so long. We highly recommend accounting for this extra time when negotiating your closing date.

Why?

Because closing date extensions aren’t automatic, especially when documents include verbiage stating “Time is of the essence.”

If a buyer misses a closing date most contracts allow the seller, at their option, to declare the deal void and return the deposit to the buyer. And a contract with a financing contingency might just let the buyer walk away if they cannot get their final approval in time. In either case, unless you’ve received a better offer while you were waiting for your sale to close, it’s best to reduce the risk of needing to execute an extension later on while waiting for the mortgage process to be completed.

As a seller you’re not entitled to know the specifics of your buyer’s mortgage terms, as that would be a violation of privacy. However you do have a right to know the progress of your buyer’s application and any potential problems that could impact their approval or the contracted closing date. It’s one of those things that a good agent takes care of, but if you’re selling your home yourself you’d better be prepared and you’d better know your options if something is amiss.

Before accepting any offer you should be looking for a loan pre-approval dated within the past 30 days that states the lender has actually seen or reviewed the buyer’s income, credit and source of down payment funds…and you should follow up to be sure that nothing has changed since it was issued. Approximately 10-14 days into your deal you should be verifying that their mortgage is approved subject only to review of property-specific items like appraisal, title or survey. And make sure the mortgage is “cleared to close” before scheduling the closing.

Communication is key! While it’s common for issues to arise, responsive agents and loan officers plus a cooperative buyer and seller are a combination for success.
The closing should be a formality, not a struggle. The more you know and the sooner you know it the happier everyone will be at the end. Especially you.