We all have our stories from the trenches of new and unusual requirements by mortgage lenders and how they impact the successful conclusion of an otherwise pleasant closing. An alarming trend we have experienced involves mortgage lenders dictating contract addenda. I use the word “alarming” on purpose, since what might appear to be a reasonable request might have significant, unintended consequences. At the very least, it can prove to be inconvenient and inappropriate.
Cases in point:
1) Two weeks before closing a diligent buyer liquidated a six-figure amount from his stock account in anticipation of the cash he would need to close. The buyer alerted the mortgage lender that he was sending the funds direct to the closing agent, rather than having to deposit them into his own account, then turn around and wire out prior to the closing. Two days before the the scheduled closing, as the buyer was struggling to get the lender to give its coveted “clear to close” signal, the underwriter said “please forward a contract addendum showing the $***,000 in escrow as additional earnest money deposit.”
As a savvy Realtor, you know what this means legally – suddenly the cash to close would be subject to claim in the event there was a failure to perform under the contract. Not to say that the transaction had been contentious, but there were some notable hiccups here and there, and most importantly, there was no reason at all for the buyer’s substantial equity contribution to be at risk. When pushed, the lender capitulated and waived the requirement.
2) A the result of some minor walk-through issues the morning of closing, a Realtor agreed to a small (<$500) credit to her client, to be paid from her commission. She called and had her broker quickly provide us with authorization for the adjustment, and as the parties sat at the table the revised HUD was sent out for re-approval. The lender’s response was”we need a contract addendum to document the credit.” While the parties were all accommodating, it was uncomfortable for the Realtor and her clients, who were first-time home buyers, and who had specifically instructed her not to say anything to the seller.
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Since there is no way to prevent a mortgage lender’s request for a contract addendum, the best approach is to remain vigilant about the substance of the request, and if it involves anything at all unusual or off the beaten path, do not hesitate to ask the closing agent or the buyer to seek clarification or push back as needed. Oftentimes the underwriter making the call has no clear understanding of the practical impact of the addendum they’re demanding, and is just trying to check a box as to a perceived issue and move the file off their desk. As a shrewd professional, you understand the potential pitfalls, and can help work through the problem the underwriter’s demand creates by getting to the heart of what is driving their request, and re-framing the conversation.
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