Written By: Frankie Lacy
A thorough review of the purchase agreement (P/A) or sales contract is critical to the accuracy of your loan package. Some of the initial points of review are the property description, parcel identification numbers, and the seller and buyer names. The property description and parcel ID numbers on the contract should match the title report and the appraisal report.
Take note if the P/A contains multiple parcel ID numbers. This may indicate the borrower is purchasing an empty lot adjoining the subject property. Refer to investor and agency guidelines for the appropriate conditions for multiple parcels. Compare the seller name to the title report and appraisal to verify the seller is the vested owner of record. Compare the buyer names to the loan application and credit report for identity authentication.
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Next, review the purchase price and compare it to the 1003, appraisal, and AUS findings. If the purchase price changes at any time during the loan process, obtain a fully executed P/A addendum showing the new purchase price. Forward the addendum to the appraiser so they can update their report. If the purchase price is lower than the appraised value, the purchase price will be used to determine the LTV ratios.
The financing type on the P/A should match the loan type (conventional, FHA, etc.) on the 1003 and AUS findings. If the loan type changes in the course of the process, an addendum or revised P/A is required. The earnest money deposit (EMD) should match the details of transaction/assets section of the 1003. In addition, the processor or underwriter must verify source of funds for the EMD prior to close. If the EMD is sourced with a personal check, verify the check was cashed prior to close.
Be advised; personal items should not be included in the sales contract. If the contract includes furniture, electronics, etc., they must be removed and cannot be included in the property valuation. Double check the appraisal report to insure these were not included. Provide an updated contract to the appraiser if personal items need to be removed.
Along the same lines, carefully review the seller’s disclosure statement which will provide valuable details about the condition of the property. If any habitability or safety issues are noted, have the appraiser comment on these issues in their report. If the appraiser notes the deficiencies still exist and repairs are needed, additional conditions will apply. The seller may have to complete repairs prior to close, or an escrow holdback may be required.
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Seller concessions are acceptable and, like all other contract details, must be listed on the appraisal. In addition, seller concessions should be listed on the details of transaction section of the 1003. Refer to agency and investor guidelines for max allowable interested party contributions based on property type, occupancy type, and LTV.
Take note of the contract expiration date on the P/A. If the contract is set to expire prior to close, a contract extension is required. Read the addendum carefully to determine if the buyer is required to pay extra fees to get the extension approved. Condition for proof the fees were paid and source of funds for those fees prior to closing.
Finally, review your contract carefully for non-arms length transaction red flags. Identify any relationships between the buyer, seller, or agent. Agency and investor guidelines have limitations on LTV, seller concessions, and gift funds on non-arms length transactions. A field review of the appraisal may be required to strengthen the collateral valuation.
About The Author
Frankie Lacy - As an active NAMP® member and a NAMU®-CMMU designee, Ms. Frankie Lacy is a 13-year mortgage industry veteran with extensive conventional mortgage underwriting experience. Frankie is also a mortgage instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
