FHA and VA Addenda Part III: A Deadline On Appraisals?

I had an "A Ha!" moment while teaching a class on Appraisals in Virginia and the new FHA and VA Financing addenda. In my previous post I describe the new FHA financing contingency as it is laid out in the new FHA Addendum to the Regional Sales Contract, and point out that there is language which makes it impossible to remove the financing contingency until a satisfactory appraisal has been received.

What I didn't explain, and didn't fully appreciate until I got an excellent question at last night's class, what why. The question presented to me was, where is the "Appraisal Deadline" in the new form? My reply, as I explained in my earlier post, was that federal law protects purchasers and their earnest money deposits from low appraisals, right up until the date of settlement,therefore there is no deadline. The follow up question was, "How do we protect or Sellers if several weeks have gone by, and we still haven't had any news about the appraisal?"

It was then that I realized that there is a way to kick out a Purchaser who is unable to provide evidence of a satisfactory appraisal, even when they are using FHA or VA Financing. The Seller simply provides a notice to the Purchaser that the contract will become void if the the Purchaser fails to deliver Form 100 removing the financing contingency. If the appraisal hasn't been done, the Purchase may not deliver Form 100 . . . effectively allowing the Seller to void the contract for lack of progress on the Appraisal.

In other words, the Financing Contingency Deadline is also the Appraisal Contingency Deadline. Anytime after that deadline has passed, the Seller can void the contract if the Purchaser's lender has not received a satisfactory appraisal.

Buyer's Agents should keep this important fact in mind when filling out the FHA and VA Financing Contingency Forms. While your buyer may be pre-approved and be an excellent credit risk, you may not want to put in a short deadline to try to improve the quality of your offer.

Next Post:

More the FHA and VA Addenda "Appraisal Provisions" paragraph.

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More on the new FHA and VA Financing Addenda

Today I will continue to breakdown the FHA Financing Addendum released with the new 2009 version of the Regional Sales Contract. We'll begin with the Financing Contingency. Without retyping the entire contingency (the form is available to view or download two posts down) lets look at how it is similar and how it is different from the Conventional Financing Contingency that many of are far more familiar with.

The new language is similar to Paragraph 10 of the Regional Sales Contract in that:

There is a definite date after which the Seller can force the Purchaser to remove the contingency or the contract become void (the Financing Deadline);

• The Contingency may only be removed by using Form 100;
• The parties must decide if Form 100 must be accompanied by a Lender's Letter, and the lender's letter is defined as containing the same 6 representations we use in the Paragraph 10 (although they are lettered rather than numbered);
• The Purchaser must provide a written rejection to Void the Contract, merely being unable to secure financing by the Settlement Date won't excuse the Purchaser's non-performance.
  

The are some important differences as well. This contingency introduces the concept of removal using a “Loan Option” or an “All Cash Option." The Loan Option is the procedure described above, and is designed to require the Purchaser to provide some evidence that they are really capable of securing their loan before they are allowed to remove the contingency, depriving the Seller of the right to kick them out should another offer present itself. The All Cash Option is to be used in the event the Purchaser elects to buy the property without taking out a loan at all, which is a theoretical possibility, but doesn't seem likely in the FHA context.

The real reason for defining the terms this way appears to have been to create mechanism to tie the Financing and Appraisal contingencies together: "Unless Buyer is removing the Financing Contingency using the All Cash Option, Form #100 shall not be delivered prior to lender’s receipt of a satisfactory appraisal(s)."

Note that this line doesn't require the Purchaser to remove the Appraisal Contingency prior to removing their financing contingency. Under Federal laws regulating the FHA loan process, there is no circumstance under which the buyer can be REQUIRED to close the loan if the house appraises below the Sales Price, nor can they be required to forfeit their deposit under those circumstances. As a result, the contract remains contingent on Appraisal until it has closed, funded and disbursed. What this line does, though, is preserve the Seller's potential to kick the buyer out if, for example, an all cash back-up offer were to come in, rather than be stuck with a non-contigent FHA financed offer that might still blow up a day or two before settlement over a low appraisal, or at least that's the idea.

As many of us have learned from experience, lender's "receipt of a satisfactory appraisal" is often not the end of the story. Many FHA loans in the DC area are subject to a two appraisal requirement. Does that mean you can't remove the financing contingency until the second appraisal is received? The standard form doesn't say that. Also, the underwriter reviewing the loan package may take issue with elements of the appraisal long after it "received" by the lender. Still, this langauge should help when, as frequently happens on bank owned properties, the appraiser notes the presences of mold, a lack of copper piping or kitchen appliances.

Speaking of Appraisals, tommorrow's post will fully explore Paragraph 3, Appraisal Provisions. Note that the title of the paragraph is careful to avoid the use of the word Contingency. There is no contingency period, as noted above, after which a Purchaser's earnest money is put at risk in the event of a low appraisal . . . but more on that in the next post.
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Breakdown of the new VA and FHA Addenda

I've now had some time to digest the new FHA and VA addenda and they are available for download at NVAR.com and elsewhere. I understand that some of the vendors don't have them in their systems yet, but they will soon.

Before I launch into a Paragraph by Paragraph breakdown, a couple of important points should be made up front.

1) The Forms do not contain an option to proceed without a Financing Contingency when you are using FHA or VA financing. You may still elect to proceed without a financing contingency. We on the Standard Forms Committee are working on a library of useful "clauses" that have found there way in and out of our standard forms over the years. Rather than redoing all of our forms every time the market changes, these clauses will be made available on line as suggested language of the association. A clause to make the contract non-contingent on FHA or VA financing will be among the first included. I would imagine you could simply take the language of Option 2 from Paragraph 10 of the Regional Sales Contract and insert FHA or VA as appropriate, before the word financing.

2) The Forms suggest to some that the Purchaser must give the Seller the option to lower the price in the event of a low appraisal. If you read more carefully, though, you'll see language giving the Purchaser the right not complete the transaction, at no penalty, if the appraisal comes in low.

Over the next few days I'll post more . . .and I'll try to moderate your comments quickly so we can get a little bit of a discussion going over these new forms.

FHA FINANCING ADDENDUM

NOTICE:
THE PARTIES SHOULD NOT INCLUDE A SEPARATE APPRAISAL CONTINGENCY IN THIS CONTRACT, SINCE THE FEDERALLY MANDATED APPRAISAL LANGUAGE FOR FHA LOANS IS CONTAINED IN THE FHA AMENDATORY CLAUSE BELOW. - This is just a reminder not to use the Conventional Loan Appraisal Contingency Forms, which DO require the Purchaser to accept the property if the Seller is willing to lower the Sales Price to the Appraised Value.


1. FIRST DEED OF TRUST: Buyer will obtain a First Deed of Trust loan in the amount of $__________________ amortized over _____ years at a
Fixed or an
Adjustable rate bearing (initial) interest of _____% per year or market rate available. Buyer shall pay upfront and monthly mortgage insurance premiums (MIP) as required by FHA regulations. Subject to lender’s approval, Buyer reserves the right to finance any upfront MIP, in which event such
amount shall be added to the loan amount.

In addition to filling out basic loan terms, such as How Much, How Long a Term, Fixed or Adjustable, and the Interest Rate this paragraph states that the Buyer pays the up front mortgage insurance premium (MIP), and that it may be financed. This is necessary because the loan amount shown on Page 1 of the Sales Contract which defines the Specified Financing, generally does not include the MIP so that the numbers on Page 1 (Down Payment + Total Financing = Sales Price) will add up correctly. This provision allows the buyer to increase the loan amount without disturbing the “Specified Financing”

Tomorrow: Paragraph 2: FINANCING CONTINGENCY and Paragraph 3. APPRAISAL PROVISIONS:

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