Statewide Form 22A—Financing Contingency: The Seller’s Perspective

A word from The Tim: This three-part series of posts is from long-time Seattle Bubble participant Kary Krismer, managing broker with John L. Scott/KMS Renton. Kary’s expertise in both real estate and law gives him a good perspective on issues like the nuances of real estate sales forms here in Washington State. Thanks, Kary!


Most offers written within the Northwest Multiple Listing Service area use what are referred to as the “statewide forms,” a collection of real estate forms which can be selected and completed by real estate brokers and others. While some attorneys might argue those are not the best forms, they are in general well balanced between the interests of buyers and sellers, and serve the parties well. In contrast, there is one form, the Form 22A financing contingency, which some argue heavily favors the interests of buyers, and which I would argue is poorly drafted. The vast majority of non-cash offers in our area contain Form 22A.1 This piece will address the financing contingency from a seller’s perspective, while future pieces will look at the contingency from the buyer’s side and then from the broker’s perspective.

The intended purpose of a financing contingency is somewhat obvious. If a buyer cannot complete a purchase due to an inability to obtain financing, and their offer contains a non-waived financing contingency, then they will not be deemed to be in breach of contract. In most cases that means the buyer would get their earnest money returned, and the seller would simply be out of luck. In many ways the application of Form 22A is just that simple, but in application it can be more complex.

The most misunderstood aspect of Form 22A may be that a form providing for the default 30 day financing period is not a 30 day financing contingency. Form 22A containing the default 30 day period terms does not expire merely with the passage of time, and may continue up to the closing date. That means that an offer providing for only a 20 day contingency period may not be better than an offer containing 30 or 40 day periods. That is because after the expiration of the specified number of days the seller only has the right to send the buyer a Form 22AR “Right to Terminate” notice, which in effect asks the buyer to waive their financing contingency. If the buyer does not waive the contingency within the next 3 days, then the seller has the right to terminate the contract, but they cannot force the buyer to waive the contingency. If the seller does terminate, then the buyer gets their earnest money returned. Unless the seller has a better offer in hand, preferably not subject to other contingencies, the threat to terminate the contract is likely little more than an empty threat.2 If the buyer does not waive, that leaves the seller subject to the contingency through closing.

How this affects a seller depends on their situation. If the seller’s house is subject to a large mortgage, and they are not living in the house, then interest paid while an offer is pending could be significant. Similarly, if buyer cannot get financing and the property is later foreclosed or the seller faces higher tax consequences from selling in a subsequent year, those losses could also be significant. In contrast, a seller living in a house free and clear of any mortgage debt might not suffer any significant loss if a sale falls through. Absent drafting custom language, there is no way around the seller bearing whatever risks they face if the buyer does not waive their financing contingency.

There is one major exception to the financing contingency surviving through closing if the buyer does not voluntarily waive the protection. The buyer can involuntarily waive their financing contingency, and one way of doing so is by not applying for financing in a timely manner. Unfortunately for sellers the July 2015 form changes made such a waiver much less likely. Prior to the July amendments a buyer was required to apply for financing within 5 days of mutual acceptance, and failing to do so resulted in waiver of the contingency. The act of applying was commonly thought to mean actually submitting a formal loan application to a loan originator. Under the new version, “application” is now a defined term, and a loan “application” is no longer really a loan application. Instead an “application” is merely the submission of certain basic information to a loan originator without any instruction to actually start the loan process.3 In making this change the intent was apparently to use the same definition of “application” as the new rules of the Consumer Financial Protection Bureau (“CFPB”). Unfortunately those rules serve entirely different purposes, and envision a buyer possibly making “application” with multiple lenders. Without a specified deadline for a buyer to actually start loan processing, sellers are now offered less assurance that a buyer will obtain a loan in a timely manner.

The July revisions did give sellers one additional right, but those revisions were not well thought out or terribly valuable. After a specified number of days (default 10) the seller can now send a Form 22AL, and that requires the buyer to return a Form 22AP. The latter form, if returned by a buyer, lets the seller know what information the buyer has given their lender, such as tax returns, and also a warranty that they have provided everything the lender needs. It also gives express permission to contact the lender. If the buyer does not return the form, the seller can terminate the contract, with the earnest money again going back to the buyer. If the buyer returns the form with information which raises significant concerns, the seller is powerless to take any action to terminate the contract. Thus the process leaves the seller with relatively little additional power.

This Form 22AL/AP process demonstrates a failure of the statewide form drafters to understand not only how real estate brokers operate, but also what sellers need to know. Two weeks into a transaction neither listing brokers nor sellers really need to know that a buyer submitted their paystubs and tax returns to the loan originator. That is the type of information that a listing broker and seller might want to know before the seller accepts a buyer’s offer. Obtaining that detailed information after mutual acceptance is pointless at best, and really provides the seller with little in the way of additional protections.

If the above analysis makes it seem as if Form 22A greatly favors buyers, then that is because in many ways it does. Not even mentioned is the fact that Form 22A does not contain any provisions requiring timely notification that a loan was denied. But even though Form 22A does greatly favor buyers, it also does not manage to serve the needs of buyers well. Buyers have their own risks and concerns using Form 22A. That will be the topic for the next piece.

Note: This piece is not intended to provide legal advice, and is merely the author’s interpretation of Form 22A and related forms. A party wanting legal advice needs to hire and consult with their own attorney regarding their own specific facts. That attorney’s opinion may vary from that of the author.

Part 2: Statewide Form 22A—Financing Contingency: The Buyer’s Perspective
Part 3: Statewide Form 22A—Financing Contingency: The Broker’s Perspective

Footnotes

1 – Form 22A was amended effective July, 2015 and October, 2015, the later form created apparently to correct drafting errors. Inexplicably, both forms have the same 7/15 revision date—a very poor practice. The issues addressed here were not affected by the October changes.

2 – Whether or not a seller should even send a Form 22AR will be covered in the third part of this series.

3 – An “application” is now the submission of basic information like name, income, social security number, property address, purchase price and loan amount, for the purposes of obtaining a loan.

About Kary L. Krismer

Kary Krismer is a frequent contributor at SB and a managing broker with John L. Scott/KMS Renton. His real estate interests include keeping track of current real estate issues and developing risk avoidance strategies for buyers, sellers and agents. Kary is also a lawyer, but he is not your lawyer, and his posts do not constitute legal advice.

25 comments:

  1. 1

    Informative Legal Article Kary

    You covered all the main points well. I’d add hidden defects that the building inspections understandably miss [some can be very serious]….they don’t have an x-ray machine.

  2. 2

    RE: softwarengineer @ 1 – Different form. Also, I’m only dealing with parts of Form 22A. For example, I won’t be covering the appraisal provisions of 22A at all.

  3. 3
    Kamal Jain says:

    Kary, great review of the financing contingency and many of the if-then-else scenarios.

    There are many reasons that the planned financing may fail. Some of these reasons has nothing to do with the house, e.g., if the buyer loses his/her job. Still in the conventional process, the seller may end up taking this outside risk. Lender’s appraisal of the home is yet another reason for a transaction to fail. This reason has to do with the home.

    In Faira’s default process, Faira covers the risk of low appraisal. Faira will return the Faira’s platform fee if the transaction fails due to lender’s appraisal coming below the purchase price (terms and conditions apply).

  4. 4
    Deerhawke says:

    Kary this is a really useful analysis.

    Many of my sales have been all-cash with no contingency. In my last sale the high bid involved a financing contingency and over time it became clear the agents on both sides really didn’t understand it, the actual timelines involved, the implications, etc. The deal was much more of a nail biter than it should have been. I regretted not taking the second highest offer–all cash but $15k less.

    Next house I sell, if I am presented with a financing contingency, I will have a print-out of your article in a file for reference.

  5. 5

    By Deerhawke @ 4:

    Kary this is a really useful analysis.

    Thanks.

    Next house I sell, if I am presented with a financing contingency, I will have a print-out of your article in a file for reference.

    If only Tim had some sort of a section called “reference” or some such thing. ;-)

    http://seattlebubble.com/blog/useful-reference-posts/

    Seriously, keep in mind that my analysis only applies to the current form, and although it’s been relatively the same for a while on the waiver issues, that could very well change.

  6. 6
    redmondjp says:

    RE: Kamal Jain @ 3 – Kamal – just go away. If you want to turn every comment into an ad for your company, start your own blog and have at it.

  7. 7
    Cap''n says:

    RE: redmondjp @ 6

    This.

  8. 8

    RE: Kamal Jain @ 3

    “…Faira covers the risk of low appraisal. Faira will return the Faira’s platform fee…”

    Returning your fee doesn’t cover the risk of a low appraisal for a seller any more than an inspector returning their $450 fee would cover the risk of their missing a major system item. I don’t know what your fee is, but a house failing over an appraisal issue would likely be an amount many more times your fee I would think.

  9. 9
    Marc says:

    By Deerhawke @ 4:

    I regretted not taking the second highest offer–all cash but $15k less.

    Next house I sell, if I am presented with a financing contingency, I will have a print-out of your article in a file for reference.

    I definitely agree that you should fully consider the relative strength of a buyer with a financing contingency and that of the lender they’re working with. However, $15,000 is a lot of money to forego simply on the basis of the brokers involved not understanding the workings of a financing contingency. In my experience, the majority of deals do not fail based on financing (although delays to the closing date are not uncommon). Accordingly, I would think it more beneficial to select a broker who has this understanding and knows how to screen the buyer (on the basis of financial capacity), the loan officer (for competency), and the lender. Better still, an attorney/broker who understands it, knows how to screen, and knows how to modify the financing contingency to better suit the seller’s objective. Hint, hint. (yes, this is a lame plug for my company but the point is valid anyways)

  10. 10

    RE: Marc @ 9 – I agree with your comments about screening, and that is the main reason I don’t like the Form AL/AP process discussed in the first piece. When an offer comes in containing a financing contingency work needs to be done prior to accepting (or countering) that offer. The idea of the drafters of the statewide forms that you start asking questions 10 days after mutual acceptance is a bit absurd.

    But the fact that a seller during the course of a transaction faced enough concern about their buyer’s financing that they wished they’d accepted a cash offer for $15k less–that says something. I suspect that concern though related more to the actual loan processing than the knowledge of the agents, but perhaps more knowledgeable agents could have avoided some of the problems.

  11. 11

    RE: Kary L. Krismer @ 10

    Both Marc and Kary. The buyer has 5 days from acceptance to shop and lock rate and the lender may end up as someone different than on the pre-approval letter. The buyer needs a mutually accepted agreement to shop for and choose lender. How do you pre-screen the lender when the lender is unknown at time of acceptance?

  12. 12

    RE: Ardell DellaLoggia @ 11 – First, the 5 day rule is no longer the 5 day rule. See the the discussion of “application” above. There is the language regarding “changing the lender . . . after the agreed upon time to apply for financing expires.” What if the buyer has submitted the information to three lenders prior to even submitting the offer but then selects one to proceed with that is different than the approval letter? It’s not clear that is “changing the lender,” because by submitting an approval lender is not a representation that you’ll use that lender. That it isn’t clear is a evidence of ambiguous form drafting.

    Ignoring that, my main screening of the lender is simply asking the buyer’s agent who found the lender–the agent or the buyer? I’m much more comfortable with the lender if the agent knows then and has had multiple transaction with them. But that can obviously fail, because the buyer could go with someone else, or maybe the broker’s lender just isn’t any good. I think I even had one of my own buyers switch to another lender once.

    As to the buyer, the main reason to talk to the lender is to find out what they’ve done. Was this a buyer they’ve been working with at least a couple of weeks, and they’ve gathered all the information they need? Was this a buyer that they only learned of yesterday, and they rushed to get as much put together as possible to be minimally comfortable issuing an approval letter. Hopefully you’ll find out more, but that depends on how forthcoming the lender is.

    Connecting the prior two paragraphs up, the concern over a bad lender is more a concern that they might not get their documents done in time. The concern over a bad buyer is that the loan won’t get done at all. Actually talking to the lender about the amount of information they’ve collected assesses the second concern.

    Finally, nothing is 100% foolproof. I’ll admit that. For one thing, lenders can lie.

  13. 13

    RE: Kary L. Krismer @ 12

    Given I have never had a sale fail on financing in 25 years whether I was on the buyer side or the seller side, I always think this topic gets too much attention. It makes me wonder what I am doing differently than other agents. I don’t as a rule talk to the buyer’s lender when I’m on the seller side. I think it is a breach of confidentiality and most often unnecessary. If agents would only write offers for people who can close, as it was when I started in the business, wouldn’t that solve the problem? I started in the biz shortly before there were pre-approval letters. Any agent who brought an offer that couldn’t close was pretty much black-balled after that.

    Are there really a lot of people making offers to buy homes who can’t get a mortgage, and just as many agents willing to write those offers? I find that to be mind boggling. I can see it happening once in a blue moon, but regularly?

    I have had a few close calls for various reasons, but we worked through those issues. Seems the new forms will discourage everyone from doing their very best to close. Worries me that sellers will now be kicking buyers out of escrow after they have spent money on inspection who can close…but a nervous nilly seller now has more opportunity to quit vs proceed. I don’t see this as a good thing. I see it as a breach of everyone “proceeding in good faith”.

  14. 14

    RE: Ardell DellaLoggia @ 13 – I’ve only had one fail to close, and that was on the listing side. After the buyer’s lender admitted they couldn’t close a LO we use regularly got access to the file to see if she could salvage it. It was apparent that the original lender had been lying for some time, and right up until the day of closing. She had been having major issues with the underwriter, not just waiting for a paper to come in from a third party verifying payments. I’m not 100% certain, but I think she was even lying to the buyer!

    I agree with you on the “proceeding in good faith” argument. Even that Form AL/AP request for information is something that should be able to be handled by the agents informally. Sending a notice to get information under the threat of being able to terminate if it isn’t provided in 3 days is just wrong. Once you get past the inspection both sides should be working together to close, not shooting shots across the bow.

  15. 15
    Deerhawke says:

    Kary, in the post above, I said I would be printing this out the next time I face a form 22A. Well here I am and the printer is chugging away.

    Thanks for writing this. Still very useful. Any updates that you can think of?

  16. 16

    RE: Deerhawke @ 15 – Nothing comes to mind on the seller’s side related to the form, but keep in mind none of these articles can discuss every possible ramification of the Form 22A from any party’s side.

    Not necessarily related to the form would be the discussion we had lately about Quicken Loans. Since that discussion I discovered an even worse lender than Quicken. USAA is an even worse entity than Quicken Loans for a buyer to get an approval letter from (assuming they want their offer accepted). They like to keep sellers totally in the dark, including the point in time where the seller is considering between accepting two different offers.

  17. 17
    Deerhawke says:

    Thanks for the update Kary. Basically what we did is tighten up all the timelines and tie them to actual dates (so the whole issue of whether or not 3 days over a weekend ends up being 5, etc. is eliminated).

    In essence, what we ended up is verbiage that gives the buyer a little over two weeks to go hard on their earnest money and requires them to close in 30 days. After 30 days, there is a substantial daily penalty paid by the seller if their lender does not close.

    This buyer realizes that getting anyone to take a form 22a for new construction is a rarity, so they have been very transparent and their lender gives weekly updates on progress.

    I think that at some point I will just end up re-writing the form 22a and making it an optional part of my builder’s addendum so that it is simpler and I really understand what is in it.

  18. 18

    RE: Deerhawke @ 17 – In this market a builder’s financing addendum should have a provision that if the buyer can’t perform the builder will give the buyer $5,000—recognizing the fact that the builder will probably sell to someone else for $20,000 more! ;-)

    Seriously, actual dates would be fine, but I’m not sure changing the rules on counting days is a good idea for an institutional seller. That would mean deadlines could end on a weekend (depending on how you accomplished that task) or that two of the three days for the seller to act would be weekends.

    As an aside on the counting rule, only recently was it realized that the not counting weekend rules also applied to possession after close, such that possession three days after closing would mean Tuesday for transactions with a Thursday closing. Most people would think that meant Sunday, which it now does.

  19. 19
    apairofcleats says:

    As a first-time homebuyer navigating the waters of the Seattle housing market, thank you for posting this article, which I have found very useful.

    I agree that there is a lot of confusion around these forms. Having studied the forms (and signed them) a few times already (my wife and I are currently in the market and have submitted a few offers (three) on houses but none of them have “hit” yet), I feel that I understand them but every time we are ready to sign an offer I have a moment of “wait how does this work again” and have to review this post. Thank you for your analysis which I have referred to a few times now!

    I have one question on the contract mechanism that many people in this competitive market are using to make offers that are “all-cash” or where they “waive financing”. Do these offers typically not contain form 22A at all? Or do they contain both form 22A and form 22AR (waiving financing) right from the get-go?

    We have spoken to multiple realtors who essentially say they “clear the table” of any offers that aren’t all-cash or have waived financing, which I understand is the (unfortunately for us) nature of this market, but I was also curious about what these competitive contracts look like?

  20. 20

    RE: apairofcleats @ 19 – Thank you.

    First note that the forms have changed since this was published, but most the changes pertain to what happens if an appraisal comes in low.

    As to your question, while there’s probably more than one way of doing things, I don’t see the point of doing 22A and 22AR waiving together. If it’s truly cash, just don’t include the 22A and provide proof of funds to the seller so that they know you’re legit and not maybe hiding a contingent sale situation. Doing 22A and 22AR.

    If you’re still going to get a loan, but don’t want to make the transaction contingent on getting that loan you could do 22EF (Evidence of Funds) where you disclose that you are getting the loan, but that the transaction is not contingent. If you do that and you can’t get financing for any reason, then the seller would get to keep your earnest money.

    Finally, please do not consider this legal advice, as opposed to disclosing a couple of possible options. Although unlikely, it’s possible other facts or something in your personal situation might come into play, particularly on the use of 22EF. For example, you might want to include some lender inspection language in case your lender wants an inspection–otherwise the seller could refuse and just keep your earnest money. There are a few other considerations, but to obtain legal advice you’d need to consult your own attorney.

  21. 21

    RE: apairofcleats @ 19

    I generally remove all contingencies except the Finance Contingency and win often. I don’t like the risk of job loss, which no one can predict. I weaken the contingency in areas where the buyer has control, but do not eliminate the protective portions where the buyer has no control. That has ALWAYS been sufficient for winning for my clients in multiple offers.

    There are a few ways to strengthen the Finance Contingency. Such as IF you have enough money to put 50% down, you put 50% down on the 22A and then close with 20% down. I do this often. You can’t lie about having the 50% and you would have to put 50% if you could not get a loan without that much down, but if you close with less down that works too. The 50% impresses the seller and assures them you have enough money to deal with low appraisal issues. You couple that with a Pre-Approval saying the lender WILL give you a loan with only 20% down. That leaves 30% of purchase price as assurance for the seller.

    There are a few other forms needed to supplement the promise that the extra 30% is available, if needed, for low appraisal. But eliminating it in its entirety is the “lazy” way and usually overkill at the buyer’s expense and unnecessary IMO.

    Technically putting 50% vs 20% on the form is not better for the seller, but they and their agents perceive it to be so when they choose “the winner”. So its part logic, part good forms practice and part doing what it takes to win without leaving yourself unduly exposed to risk.

  22. 22

    RE: Ardell DellaLoggia @ 21 – That brings up the new 22 Low Appraisal form, which I would advice against using–and that is legal advice (but you should still consult an attorney). There’s a situation where the form does not give a clear provision as to who gets the earnest money. That and their calculations are wrong. But other than that, it’s a great form! /sarc

    That form can be replaced with relatively simple language. But what Ardell is getting at is if you use 22A, an offer with 20% down and an offer with 50% down will both trigger the low appraisal provisions, even though the buyer at 50% technically shouldn’t care because it wouldn’t affect their loan. Many agents don’t realize that and will give the 50% offer preference, even though the buyer could still trigger the low appraisal provisions.

  23. 23
    apairofcleats says:

    RE: Kary L. Krismer @ 22

    Thanks very much Kary and Ardell, those are both great observations I hadn’t thought of before, particularly signalling the strong financing via the high downpayment but standard 20% down pre-approval letter.

    Using form 22EF sounds like it might be useful in a situation when one is receiving a private loan (say from a family member), that isn’t contingent on inspection, or appraisal, or anything else, does that sound right?

    The issues you mention with the form(s) are a bit troubling… sheesh!

  24. 24

    RE: apairofcleats @ 23

    Every case is a little different. Sometimes it’s not so much what the form means as it is what the seller and their agent thinks it means. Kind of the old Dr. Phil “Do you want to be right or do you want to be successful”. Different listing agents often means different strategy and sometimes I don’t use a form unless the seller side counters that we must in order to get the house.

    That said the part you learned is of value. :)

  25. 25

    RE: apairofcleats @ 23 – As to the family loan type situation, paragraph A of the standard purchase and sale contract indicates that you have sufficient non-contingent funds to purchase. Loans are a contingent source of funds (as is holding stock–btw), so you need to disclose in some way that you’re going to need that loan unless you’ve already received the funds from the loan (or liquidated the stock). Thus, even if you have had a HELOC in place for two years, unless you’ve actually drawn on the loan and received the funds, you need to in some way disclose the loan.

    That could be done with a 22A, which would make the obtaining the funds a contingency, or 22EF, which would mean if you didn’t get the funds you would be in breach of contract and lose your earnest money. You could also do something as simple as add a sentence to a blank addendum or 22D (optional clauses) that says the buyer intends to use a loan of a specified type. If you fail to do any of those things, and just not disclose the loan in any manner, you’d not only be in breach of contract but arguably committing a form of fraud. So you don’t have the option of just not using a form and waiting for the seller to counter.

    Same disclaimers as before.

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Please read the rules before posting a comment.