In this article we are going to discuss the second section (FINANCING) of the Arizona Residential Resale Real Estate Purchase Contract. The FINANCING section is used only if the buyer is planning on getting a loan to pay for part of the purchase price. For all cash transactions, the FINANCING section is skipped.
Please note that this article applies only to the Real Estate Purchase Contract in use in Arizona. For information on Real Estate Purchase Contracts in use in other states please check with the Association of REALTORS in each state.
The FINANCING section has 11 subsections. We will cover the first 6 subsections in this article and the remaining 5 in part 2.
2a. Loan contingency – this is probably one of the most important clauses in the whole Purchase Contract. It states that the buyers will not be obligated to complete the sale if they can’t obtain the loan to buy the property. One important point is that the buyers will have to provide a Loan Status Report (also known as LSR) when they submit an offer to purchase the property. The LSR describes in detail the type and terms of the loan the buyer is pre-approved for. The buyer is required to seek the specific loan with the lender that signed the LSR. If the buyers change the loan product or the lender and can’t obtain the loan, they will not be able to use the loan contingency to cancel the contract.
2b. Unfulfilled loan contingency – states that the contract can be canceled and the buyers will be entitled to receive a refund of the earnest money if they can’t obtain the loan. It is important to note that the buyers will have to demonstrate that they did all they could to obtain the loan. Failure to have the down payment and other funds to close the transaction; or failure to provide required documentation to the lender is not an unfulfilled loan contingency; and as a result can’t be used to justify contract cancellation and refund of earnest money.
2c. Appraisal contingency – another important clause to protect the buyers. If the property does not appraise for at least the sales price, buyers are not obligated to complete the transaction. Buyers will be entitled to cancel the contract and receive a refund of the earnest money. Buyers have five days after notice of the appraised value to cancel the contract. If they fail to cancel the contract within that timeframe, the appraisal contingency will be waived.
2d. Loan Status Report – LSR is a document issued by the lender which shows that the lender has pre-approved the buyer for the loan product and amounts described in the LSR. This subsection includes language to incorporate the LSR into the Purchase Contract.
2e. Loan application – states that buyers are required to complete their loan application within five days of Purchase Contract acceptance. Buyers are required to (1) complete, sign and deliver to the lender a loan application with requested disclosures and documentation; (2) grant lender permission access buyer’s credit reports; and (3) pay all loan application fees.
2f. Loan processing during escrow – requires that buyers work diligently during escrow period to provide lender with additional information and documentation necessary to obtain the loan. This subsection also authorizes lender to provide loan status updates to all real estate brokers involved in the transaction and to the sellers.