I have been thinking a lot lately about mortgages, the mortgage contingency, and the lenders’ role in a real estate transaction. My recent experience is that lenders are busy – darn busy! This might be the result of the industry not ramping up its support staff as the recovery and “new” real estate boom have become a reality, the high volume of closings and refinances that are the result of low interest rates, or the raft of new rules and regulations that make the lending process more arduous than before. Whatever the reason, it seems that more and more lenders are missing mortgage contingency dates and, worse yet, requiring that closings are delayed from the contemplated date in the real estate contract.
And that leads to a problem or maybe a few problems. Buyers and sellers want certainty. They want to be able to rely on dates in a contract. They yearn for this certainty. Buyers want to be able to plan their move. They want to be able to make plans to take time off from work to attend their closing. They want to be able to schedule their movers. Sellers want that same certainty. They want to know that a loan is approved to remove the anxiety that their sale might “not go through”. They want to be able to plan their next purchase. They want to know when they need to be out of their soon-to-be ex-home. Everyone benefits from certainty. But, do you know what I have learned over twenty years in this business?
Lenders don’t care.
Lender’s don’t care for a minute whether the loan commitment is obtained on time. Lender’s don’t care if a deal closes on time. Lender’s don’t care that the buyer and seller don’t like it that they don’t care. Lender’s care about one thing – that they are “protected”.
Read that again. Lender’s care that they are protected. Of course, they want happy customers and, of course, they want to make money. But, most of all, lenders want to comply with the myriad of rules, regulations, and formalities that surround a real estate closing transaction and they want to be sure that their lien interest in a property is properly secure and their loan can be sold on the secondary market.
As a result, the lender’s interests do not line up with the buyer’s interests or with the seller’s interests. And there, the rubber meets the road because without the lender, there is no deal. And the golden rule comes into play. he who has the gold makes the rules.
Perhaps the committee that advises on the Multi-Board Residential Real Estate Contract or the Chicago Association of Realtors Forms Committee should revise our customary form real estate contracts in Illinois to read like this:
This transaction is contingent upon the lender being fully satisfied and agreeing to make a loan and then actually making the loan. The transaction will close when the lender is ready and not before. If the lender feels like something is wrong or they don’t feel comfortable or secure, the deal will not close.
I know that sounds like a joke, but it would better reflect the reality of the lender’s role in the real estate transaction.
Oftentimes, we get to a mortgage contingency date (that’s the date by which a buyer is supposed to have their mortgage loan commitment or they can get out of the deal and get their earnest money back) and the lender does not have their loan commitment yet. In response, a buyer’s attorney will almost always notify the seller’s attorney of this fact and ask for an extension of the mortgage contingency. This makes sellers mad. They want to know why the loan is not yet approved. They get annoyed that they can’t go about their other business of shopping for another property or getting ready for their move. As a result, buyers get cagey. If the buyer’s attorney asks for a 7 day extension, they respond by saying they will agree to a five day extension “to put the pressure on the lender”. Guess what? The lender does not care. Not even a little bit. If the loan isn’t ready to go five days later, do you know what will happen? The buyer’s attorney will write another letter asking for another extension of the mortgage contingency. That just adds to everyone’s frustration (and waste’s the time of the buyer’s attorney and seller’s attorney).
It is even worse when it comes to closing. Sometimes, for one reason or another, the lender can’t close on the projected closing date. Sometimes that is because the loan was just approved (one or two days before the closing) and the lender can’t get documents or money to the closing table in time for the anticipated closing date. Sometimes it is because of lending regulations (the TRID rules require a correct closing disclosure to be made three business days before the loan is set to close or a closing cannot take place). As a result, there are times a lender is just not ready to close on time. What happens when that is the case? The closing gets delayed. That probably leads to a ton of inconvenience for everyone involved – the buyer, seller, title company, attorneys, movers, and a host of other people can be affected. Other deals, like the seller’s deal to purchase their next property, can be delayed. It leads to a lot of headaches. And, it can not be stopped. It can, however, be somewhat planned for. The old realtor trope of setting a closing for the final Friday in any given month can be adjusted. Rather than seeking to close on a Friday, the parties can choose to close on a Tuesday. If the lender needs a few days of delay, there is still ample time during the week to get a closing in before that planned weekend move!
We will close when the lender is ready. Buyers and sellers need to understand and accept this cold hard fact. They can carp, complain and whine about it, but one thing is true on every real estate deal where the purchase price will be financed – we will not close until the lender is ready. A buyer or seller who understands and accepts this can better cope with the twists and turns that come about in a real estate transaction. We can’t control the banks, but we can be better prepared to handle their delays and, buyers and sellers armed with this knowledge can better plan how to handle their transition from one place to another with contractual devices like pre-closing or post-closing possession or more flexible closing dates built into their contracts.