Mistakes to Avoid When Signing Residential Real Estate Contracts (Part 2)

by James J. Cummings III on February 13, 2011

In Part 1, we talked about some of the basic aspects of choosing the right contract forms and the fundamental information to be included. Here I will give you some brief tips on other portions of a good residential real estate contract.

With increasing frequency I am seeing buyers asking for a “seller concession” and the latest form of contract even has a section that you can just fill in for a seller concession in some specific amount of money. This assists buyers who are tight on cash and this money is used toward your costs at closing. The seller often wants the price increased by the amount of the seller concession, but it still can help by reducing the cash needed to close. Keep in mind, however, many mortgage lenders will not permit a concession that exceeds 3% of the purchase price (but most FHA loan programs allow up to 6%). So check with your lender ahead of time if possible.

A recurring problem that I see in recent transactions is insufficient time allowed in the contract for obtaining a mortgage commitment letter. Locally, lenders are taking about four weeks from when you actually submit your application. But if you only allow four weeks from the date you sign the contract, you will actually end up with only about three weeks since you will lose about a week while the seller considers your offer, possibly makes a counter-offer, etc. So I advise you to insert a date in the mortgage contingency clause allowing about five weeks from the date you make your offer. Keep in mind the importance of meeting the mortgage commitment deadline in the contract because the seller can cancel the contract if you do not have your commitment on time!

When establishing a closing date for insertion in the contract, you should allow a minimum of two weeks (three weeks would be better) after the commitment date to close. It takes at least that long between when you receive the mortgage commitment and when the lender gives you a “clear to close.” Remember the commitment just says that the bank plans on making you the loan, but you will still have some documents to obtain for them and then the file has to go to “underwriting” for a final clearance. Some of the first time homebuyer loan programs take a couple of weeks longer, such as mortgages made by SONYMA.

There is a section in the MCBA contract for making the contract subject to your attorney’s approval. This is critical and you must not forget to check that box so that your attorney can help you if you make a serious error in filling out the contract forms. There is a small space where you insert the amount of time allowed for attorney approval – insert at least 7 days for this approval.

You will also need to decide on a few other contingencies. You should make the deal contingent on a satisfactory inspection by a professional inspector. Allow at least 7 days to obtain this inspection and if there are problems found that you find unsatisfactory, you must promptly notify the seller in writing to preserve your rights to cancel the contract if such becomes necessary. Use the MCBA inspection addendum form and append it to the main contract form. Similarly, if the property has a septic system or well, use the MCBA addendum for well and septic inspection contingencies. If you have to sell a property that you now own before you can buy the new property, there is a MCBA addendum for that too and it is of critical importance.

I hope the tips in this article (and in Part 1) have been helpful. Remember, however, these articles are no substitute for consulting with your own attorney, which I strongly encourage you to do. Everyone has somewhat unique circumstances that will effect the terms of your contract. I would be happy to help you when you decide to proceed with a purchase offer.

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