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. –James
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.
In fact, my mortgage broker says 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.