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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