I've Got Good News and Bad News
Interest rates just hit a 60-year low, that's the good part. Getting banks to complete the underwriting process, not so easy...
A Complicated Question
Recently, a client who was a first time home buyer of a co-op, asked me when the loan commitment letter is deemed "issued" by his bank. Some background: The printed form of the standard co-op contract seems to say that once the bank has a " satisfactory" appraisal, then the loan commitment is effective. When that happens, one would think that the buyer could forward the loan commitment to his or her broker for inclusion with the Board package and the Board approval process would begin. Actually, when the loan commitment letter is first issued by the lender, even if the appraisal has been approved, the bank is still only "in like" with the buyer.
When Does a Bank Show the Love?
As I have discussed recently, banks have developed a bad habit of issuing commitment letters that are chock-full of conditions that must be satisfied by both the buyer and the co-op or condo in which the apartment is located. Until those conditions are cleared by the underwriting department, the buyer does not know whether the bank will agree to make the loan. Conditions that relate to the co-op or condo are reviewed by a separate underwriting group at the lender and often do not get attention until late in the underwriting process. Query: If there are substantive conditions that are outstanding, even though the appraisal huddle has been crossed, when should the buyer feel comfortable that a commitment has been obtained for purposes of submitting the Board package?
A Complicated Answer
It turns out that determining when a firm commitment has been issued is a bit tricky. Should the Board package be submitted before the co-op or condo is approved by the bank? What if the co-op or condo is required to increase insurance coverages before the bank will underwrite the building? What if unexpected credit issues arise for the buyer? Weeks can go by before some conditions get resolved. Sellers, buyers, brokers and loan officers would engage in a 360 degree exorcist head spin if I were to suggest that the Board package should not be submitted until the bank notifies the buyer that the loan is "cleared to close." But isn't that really the moment when the parties know that the bank will actually go ahead and fund the loan?
The Funding Contingency: Now More Than Ever...
For starters, the Board package should not be submitted until the co-op or condo has been approved by the bank. Whether the Board package should be submitted when other material conditions are still outstanding is a matter for the buyer's attorney and the loan officer to determine. But proceed with caution. The above being said, contracts that are subject to a mortgage contingency must also contain a funding contingency in order to protect the buyer against the inability to satisfy a condition. Simply stated, if the bank decides not to make the loan for any reason, other than the buyer's submission of an application in bad faith, the buyer should have the right to exit the transaction. Although there is a provision in the co-op printed form that sort of covers this issue (the condo form does not), the contract should include a clear and unequivocal right on the part of the buyer to cancel the contract if the bank withdraws its underwriting at any time, even if the Board package has been submitted and the buyer has been approved. Yes, even if the buyer has been approved.
Residential Reality: Residential Lending Bonds with Uncertainty
Thousands of residential co-op and condo loans close each day, but many of those loans have taken a great deal of time and effort to complete. As any mortgage broker or loan officer will tell you, every time a loan is submitted to underwriting, the residential loan serenity prayer is uttered: "Underwriter in that back office, please clear the conditions on this loan in one phase of the moon and don't raise anything else at the last minute"...Repeat...