Closing Chaos

Closing delays can be costly when buying new home

Q: I have signed a contract to purchase a newly built home. The homes have been on the market for 420 days. 

My lender is having issues meeting the closing date agreed upon, and now the builder is charging me $300 per day for each day closing is delayed. 

Do I have any legal recourse to back out of the purchase?

I am using a Department of Veterans Affairs (VA) loan and paid a $2,750 deposit on the home, and now I am looking at approximately $3,500 in fines before closing. All my required documents have been with the lender for 35 days and we were prequalified before the purchase. 

A: Thirty-day escrow time frames were once the norm. On today's market, though, many lenders and real estate brokers write even the best-qualified, most fully preapproved buyers up for escrows to run at least 40 days -- minimum -- because of changes in the market and the mortgage regulatory system that have removed much of the control any given loan broker or lender has over how quickly a transaction can be done.

Many mortgage brokers say the only deals that close in 30 days or less anymore are cash purchases.

Here are a few things you should be aware of and think about:

1. Your 35 days was probably not a true 35 days. When you look back from today on the calendar, you'll see at least five days' worth of federal and banking holidays have fallen within the previous 35 days, what with Christmas and New Year's Day, both their eves and Martin Luther King Jr. Day. Take those and all the weekends out, and your mortgage broker, appraiser, and underwriter have really had more like two weeks to work on your loan.

2. It's tough to turn a loan around in 35 days on this market. And while two weeks sounds ample, it's really not when considering the current mortgage marketplace. Most mortgage lenders now are required to order appraisals through a third-party appraisal management service, which then reaches out to appraisers. 

This middleman arrangement was designed to eliminate any lender-appraiser influence, but in actuality has created a number of logistical problems, one of which is extending the time it takes an appraisal report to be issued. 

It's not at all uncommon for just the appraisal portion of a loan underwriting process to take three weeks, assuming everything goes smoothly; only then does the lender actually do its in-depth underwriting review of your application and financials to ready the loan for funding, a process that can also take two or three weeks in the best-case scenario.

3. Whether you have recourse to back out depends on the contract. Most home purchase contracts have a loan contingency that enables you to cancel the deal if you are unable to qualify for the loan. In some cases, the contract loan contingency actually stays in place until the loan is funded.

However, the home purchase contracts that are most likely to veer outside of normal standards and practices are, you guessed it, new-home sales contracts. Because the builder often has its own lawyer write these contracts, they frequently have clauses that weigh in the builder's favor, such as a $300 per day late closing fee.

If you are working with a real estate agent, you might consider talking with his broker or manager to see if they can help you (a) negotiate for an extension of time without the penalty fee, or (b) help you get out of the transaction entirely if you feel the $3,500 is truly worth giving the home up. 

In any event, it might not hurt for you to have an hour's consultation with a local real estate attorney who can read the contract, advise you of your rights and any legal bases for getting out of the penalty or the transaction, and perhaps even write a letter or make a phone call on your behalf to the builder to try to get things back on track. 

For example, with Department of Housing and Urban Development-insured FHA loans, there is a little-known clause every seller has to sign that requires the earnest money to be refunded if the buyer is unable to secure the loan. VA loans are quite specialized, but a good real estate attorney will be able to comb through your contract, any loan-related documents that the seller/builder might have signed, and your state's body of law to detect all your rights and powers in this situation.

Before you do any of this, though, I'd urge you to contact your mortgage professional to get a firm sense of when the loan will actually close. Whatever he says, you should add a few days for good measure. 
Almost any builder would prefer to have you close the deal over collecting the $3,500 penalty, so even if you do find a way out, any approach you make to the builder should be prefaced with the fact that you'd prefer to find a way to close the sale without the fee than to kill the transaction entirely. Then, you (through your broker or attorney) can offer the information you have from the lender about whether and when the loan process is truly likely to close escrow, and offer the builder two alternatives: an extended closing time frame or no deal at all.

The Home Buying Process from Start to Finish

Now that you've found the perfect home, it's time to get the deal rolling. You'll need to sign a residential purchase agreement, make an offer, possibly put down a deposit, conduct inspections and close the sale. If this all sounds overwhelming to you, don't worry; your REALTOR® will guide you through each step.

Making An Offer/Residential Purchase Agreements and Buyer Representation Agreements

If you're ready to purchase the home, you must get all the details in writing. The offer begins with a written proposal spelling out your price and any stipulations regarding the purchase. If the seller has agreed to pay part of the closing costs, for example, that needs to be specified in the accepted offer. In addition, sometimes offers to purchase are contingent upon factors like the buyers' ability to obtain financing or the sellers finding housing within a certain time frame.

The residential purchase agreement contains the comprehensive terms of the deal, including sales price, deposit, closing date, disclosure requirements, inspections, and fees agreed upon by both parties. Other provisions also are included, such as the buyer's final inspection and the method by which all real estate taxes and other bills will be pro-rated between buyer and seller.

The CALIFORNIA ASSOCIATION OF REALTORS® offers its own official agreement, the C.A.R. Residential Purchase Agreement and Joint Escrow Instructions (RPA-11). This multi-functional document serves as an offer to purchase real property, a completed contract when its signed by the buyer and seller and communication of acceptance is received, a receipt for good faith earnest money deposit, and more.

Summaries of the Residential Purchase Agreement are available in Spanish, Chinese, Korean, Tagalog and Vietnamese. To purchase these summaries, please click here and select "Multi-Language" in the menu on the left side of the page. Then click on item #BC610A.

In response to requests from C.A.R. members practicing in the greater San Francisco Bay Area, C.A.R. developed a second version of its RPA-11 in late 2000. The Area Edition Residential Purchase Agreement (and Joint Escrow Instructions) (AEPA-11) addresses the contractual approach to the real estate transaction adopted in this area of the Golden State. The publications Understanding and Completing The C.A.R. Residential Purchase Agreement and Joint Escrow Instructions and the Area Edition Supplement to Understanding and Completing The C.A.R. Residential Purchase Agreement and Joint Escrow Instructions explain both forms in detail.

Another standard form produced by C.A.R. and typically used by California REALTORS®, BR-11 (Buyer Broker Representation Agreement) is an agreement between a potential buyer of real property and a real estate broker. The agreement defines the scope of the tasks and duties to be performed by the buyer and broker leading up to the completion of a real estate sale. The form also provides a written consent to a dual agency if one develops, and informs the buyer that the broker or agents for the broker may be working with other buyers looking for similar properties. The agreement does not, however, obligate a buyer to pay the broker for services rendered. Even if an agreement is signed, a broker must still look to a seller or a listing broker for compensation. This form is non-exclusive and may be revoked at any time by either the buyer or broker. In addition, the agreement places a limit on the time within which a legal action can be brought against the broker. More information about C.A.R.'s buyer-broker representation agreements is available by clicking here.

There are ways for buyers to look more appealing to a seller, thereby possibly gaining a negotiating edge. All-cash buyers and those already pre-approved for a mortgage have an advantage. In addition, sellers who are ready to move prefer buyers who don't have a present house to sell first.

An offer to purchase is often followed by a counteroffer by the seller, which can be countered again by the buyer. This is common practice as both sides attempt to negotiate an agreement that meets their individual needs.

Completing the residential purchase agreement is a complicated part of the transaction process that buyers shouldn't enter into without the assistance of a REALTOR®. REALTORS® have access to the standard forms needed and receive updates from their local, state and national associations on state and federal laws regulating agreements. REALTORS® can either answer any questions you might have or refer you to the appropriate authority.

Buyers' Up-Front Fees

In conjunction with the residential purchase agreement, buyers are usually expected to put down a deposit at the beginning of the transaction. If the buyer completes the sale, this money will be credited toward the buyer's downpayment. If the buyer doesn't complete the sale for legal or contractual reasons, the money is typically returned. However, if the buyer doesn't complete the sale for other reasons, the seller may be entitled to keep the deposit. The U.S. Department of Housing and Urban Development (HUD) advises that deposits should be "substantial enough to demonstrate good faith," usually 1 to 5 percent of the purchase price. Often, buyers may put up to 20 percent down.

Because buyers frequently pay for most inspections, it may be a good idea to investigate the costs of the inspections you plan to obtain before an offer is made.

Home Inspections vs. Appraisals

Home inspections vary greatly. Some check the home's structure, construction and mechanical systems, and appliances, which may be transferred with the property. Although different inspectors look for and test different things and may not discover everything that is wrong with a property, obtaining inspections is the best way to become informed of necessary repairs or problems with the home. Be advised that inspectors do not assess the value of your home.

According to HUD, an inspector typically checks the electrical system, plumbing and waste disposal, the water heater, insulation and ventilation, the HVAC system, water source and quality, ceilings, walls, floors, and roof.

In addition to being inspected, the home will undergo an appraisal by a trained professional. An appraisal is an opinion of the property's value used primarily to protect the lender's interest. In contrast to home inspections, appraisals are based on past sales data, the location of the home, the size of the lot and the condition of the home. For mortgages insured through the FHA, appraisers must disclose potential problems relating to the physical condition of the home; there are no similar stipulations for non-FHA mortgages.

Your REALTOR® may recommend a qualified inspector or appraiser. Also, the California Real Estate Inspection Association and the Appraisal Subcommittee of the Federal Financial Institutions Examination Council offer member directories on their Web sites.

Closing

The closing is the day you've been waiting for: when ownership of the home officially transfers from the seller to you! Prior to the closing, the escrow agent will present you with scores of legal documents to review and sign, and you'll be expected to pay your downpayment and closing costs. In addition, a number of other legal procedures must be completed before the sale can close, including approving the mortgage application, clearing the title, appraising the property and recording the deed.

The Real Estate Settlement Procedures Act (RESPA) provides specific protection to buyers before, during and after closing. If a settlement service has referred you to a REALTOR® with whom the service has a business connection, an Affiliated Business Arrangement Disclosure is required prior to closing. You're entitled to receive a preliminary copy of a HUD-1 Settlement Statement, which lists estimates of all settlement fees to be paid by buyer and seller, if you request it 24 hours before closing; the final HUD-1 Statement is a requisite part of closing. In addition, an Initial Escrow Settlement Statement is required at closing or within 45 days of closing. This details the estimated taxes, insurance premiums and other charges that must be paid from the escrow account during the first year of the loan.

Within three days after your loan application is received, your lender must deliver or mail you a "good faith estimate" of the total amount due at closing, as well as a copy of the HUD publication Settlement Costs: A HUD Guide. Closing costs typically are comprised of attorneys' or escrow fees, property taxes, interest, loan origination fees, recording fees, survey fees, first premium of mortgage insurance, title insurance, loan discount points, first payment to escrow account, paid receipt for homeowner's insurance policy and any documentation preparation fees. Fannie Mae estimates that most buyers' closing costs amount to 3 to 6 percent of the sales price.

As with the other components of the buying transaction, your REALTOR® can answer your questions and provide additional information to ensure a smooth closing.