Some months back I posed the question whether you had ever taken a good look at the Section 8 financing contingency in the FAR/BAR contract forms? I then went into some detail about how that contingency, if not properly monitored, could have unintended consequences leaving a seller with no hope of compensation in the event of a late-occurring buyer cancellation for failure of financing.
Fast-forward to the newly-promulgated FAR/BAR-2 forms (published 9/3/13), which address some of the old Section 8’s shortcomings by providing a more clearly defined process for cancellation, along with deadlines that help to avoid potential closing day bombshells. Whether the revisions are panacea is up to you to decide once you’ve given the updated forms a test drive. In the meantime, what follows is my initial analysis of what the rewrite accomplishes, and how that impacts both listing and selling agents:
The revised Section 8 now reins in a buyer’s unfettered right of cancellation up to the day of closing for lack of receipt of loan commitment. The updated provision requires a buyer to provide notice of loan commitment when received. And, if the loan commitment is not received by the loan commitment deadline, then thereafter “either party may cancel [the] Contract up to the earlier of: (i) Buyer’s delivery of written notice to Seller that Buyer has either received Loan Commitment or elected to waive the financing contingency of [the] Contract; or (ii) 7 days prior to the Closing Date.” The contract goes on to provide that the buyer is entitled to their deposit back, but only if the cancellation is timely and buyer is not otherwise in default when the cancellation occurs. Most importantly, “if neither party has timely cancelled [the] Contract pursuant to…Paragraph 8, then [the] financing contingency shall be deemed waived by Buyer.”
What the revised provision does not do is remove the caveat that allows the buyer, having given notice of receipt of the loan commitment, to thereafter cancel for the 4 reasons enumerated in lines 110-113 of the contract form (seller’s failure to perform, failure of property-related loan conditions, failure of appraisal, or bank failure), in which case the buyer’s deposit is returned.
My advice to listing agents therefore remains the same: keep abreast of the so-called Loan Commitment Date, and have your seller be prepared to cancel the contract if the Loan Commitment Date comes and goes with no notice from the buyer of receipt of the loan commitment (note – only notice is still required, not an actual copy of the commitment). At the very least, the threat of cancellation can spur some conversation between the parties to perhaps bring this portion of the contingency to a conclusion so the seller has peace of mind going forward. If such an approach is too aggressive for your seller’s taste, then at least you can rest assured knowing that the contingency comes to a somewhat timely conclusion by virtue of the new terms and deadlines it contains.
Once you are beyond that hurdle, though, you still have the issue of the appraisal carve-out. A non-confrontational way to timely nip that in the bud is to ask that the FAR/BAR appraisal addendum be included with the contract. A more specific approach is to have the closing attorney perform surgery on the contract by deleting language and/or preparing replacement language for the contract or in an addendum. The risk you run with the surgical approach is that the buyer will construe your seller’s quest for peace of mind as an attempt to de-claw his/her financing contingency and become offended, putting your negotiations in jeopardy.
Likewise, if you are on the selling side, my advice is also essentially same as before: a fair deadline for the Loan Commitment Date gives most lenders the time they need to resolve appraisal and other underwriting conditions, so a seller’s counter-offer seeking to tighten the reins on this contingency is not out of line, and should not be construed as anything other than what it is – an attempt to give the seller certainty that after a specific date, the deal is solid.
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