Understanding Home Purchase Contracts

Understanding your Purchase Contract prior to making an offer is an extremely important step in successfully navigating the home buying process. Most people, including industry professionals, do not have a sufficient understanding of how home purchase contracts work.  There are several components of Real Estate Purchase Contracts that you should pay particular attention to when buying a home.  It is important to note that not all contracts are written the same.  There are several standard templates that Realtors and Attorneys utilize, and these templates may tilt in specific sections in favor of the seller or buyer.  

Additionally, contracts may be modified on a case by case basis.  Below is an explanation of the basics, but we STRONGLY suggest you consult your Real Estate Attorney to understand the contract from a real estate law perspective.  We also strongly suggest (as you’ll see below) that you send a draft of the contract to your Foundation Mortgage Banker to review it from a financing perspective.  Note that once the contract is fully executed changes can’t be made without the seller’s consent.  Preparation & Review by your professional advisers PRIOR to signing will help to ensure that you are protected and your transaction proceeds smoothly.  

 

Offer, Counter Offer, & Acceptance

Real Estate Contracts are based on common law contract principles.  The basic principles of:  Offer, Counter Offer, and Acceptance apply.  In most states there are standardized contracts used by real estate agents and attorneys.  

The Offer
When you have found the house you wish to buy, the next step is to prepare an “Offer”.  The Offer is typically drafted by your Realtor or Attorney.  Prior to signing any offer you should do the following:

  1. Review the basic offer terms with your Realtor

    • Purchase Price

    • Down Payment

    • Loan Type

    • Inclusion of contract contingencies for:

      • Inspection

      • Appraisal

      • Financing Contingency or Mortgage Commitment

    • Additional Inclusions such as furniture, credits, and other requirements

  1. Review the important milestone dates of the contract

    • Deposit Due Dates

    • Application for Financing

    • Completion of Home Inspection

    • Completion of Appraisal

    • Financing Contingency/Mortgage Commitment Due Date

    • Closing Date

  1. Provide a copy of your contract to your Mortgage Banker to review prior to signing

  1. Provide a copy of your contract to your Real Estate attorney to review prior to signing (if you have one)

It is important that you complete the above steps BEFORE you make your offer.  Once your offer is submitted & accepted by the seller you can’t make changes without the seller’s agreement & written amendment/consent. Communication and coordination between your Mortgage Banker and Attorney and Realtor is important to make sure you are covered for the various perspectives of the parties involved in the process.

Your offer will contain an “Acceptance Date”, by which the seller needs to accept your offer or it will expire.  If the seller does not accept the Offer by the Acceptance Date then your offer is considered cancelled.

The Counteroffer
Oftentimes a negotiation ensues after you have presented your initial Offer to a seller.  Many items may be negotiated; such as:

  • Purchase Price

  • Deposit Amount & Timing

  • Closing Date

  • Financing Approval Deadline

  • Seller Credits to Closing Costs

  • Improvements or Repairs to the Property

Counteroffers can go back and forth several times between buyer and seller before the final terms are agreed upon.

Acceptance
Once the counteroffer stage has been completed and the final terms and conditions have been agreed upon by both buyer and seller, the contract is accepted.  When the final version of the contract has been signed, dated, and initialed by the last party, the contract is considered in effect.  This is called “The Effective Date” and the timeline to fulfill the various contract milestones begins.   To be clear, the effective date of the purchase contract is considered to be the date the final signature is made.

What are the Basic Requirements of a Residential Real Estate Purchase Contract?

Mutual Consent
To be effective, there must be “mutual consent” or a “meeting of the minds" between both buyer and seller.

Made In Writing

With few exceptions, a Residential Real Estate Purchase Contract but be made in writing to be enforceable.  For example, if a buyer makes an Offer in writing and the seller accepts verbally and then backs out; the contract is considered to never have been agreed upon or accepted.

Clearly Identifies the Parties
The contract must clearly identify the parties. A contract commonly will include the full legal names of the individuals signing the contract.  In cases where the seller or buyer is an entity (corporate title) or trust, lenders will require that the name of the individual signing on behalf of the entity be printed and initialed below each signature line on the contract.  

Identifies The Property

The contract must identify the property address.  The offer should include the actual postal address and legal description. Ie. a vague description such as “my summer home” may not be specific enough to create a binding contract.

Purchase Price
The contract must state the Purchase Price.  

Consideration/Deposit
To be valid, there must be “consideration”.  Consideration refers to a monetary deposit made by the buyer as proof of the buyer’s intent to buy the property.  Imagine the deposit as a “promise” and is often considered to be the glue that binds the contract together.  The amount of the deposit is not important- it could be for Five Dollars- but without one, it is not enforceable.  

Signatures

A contract must signed to be enforceable. The party signing must be of legal age.  A notary’s signature is not required. A power of attorney specific to the purchase/sale may be used in cases where a party is unable to sign. Fax and E-signing are now common and is usually acceptable.


Important Items to Pay Attention To On Your Purchase Contract

Purchase Price

Be sure to confirm the purchase price prior to signing your Offer.  Review comparable sales closely with your Realtor prior to submitting your offer to make sure you understand the market & the likelihood that the property will appraise.  “Lowballing” your offer may appear to be a good tactic but runs the risk that the seller will ignore your offer and walk way.  Submitting an offer above the purchase price may be necessary in a market where you are competing against multiple offers but runs the risk of the property not appraising and the buyer needing to bring additional money to closing if they are applying for financing.

Deposit Amount & Timing

The deposit is an important & required part of a valid purchase contract.  The deposit is the money that a buyer deposits into escrow after Acceptance of their offer.  Be sure to review the amount of the deposit associated with your Offer.  Larger deposits may signal to the seller that you are a “serious” buyer, but a large deposit also increases the risk the buyer has invested into the transaction.  

The deposit represents the amount of money the buyer stands to lose if he/she does not fulfil the obligations required under the purchase contract.  The timing of the deposit is also significant as you need to make sure the contract gives you sufficient time to liquidate and transfer the deposit money into escrow.  Some contracts may have multiple deposits so be sure to read this section of your purchase contract carefully.

 

Closing Date

The Closing Date is one of the most basic and significant aspects of a home purchase contract.  There are several considerations when determining what closing date to include in your Offer.  Standard closing dates are now 45-60 days from the effective date of the contract.  Very long closing dates may be considered negatively by the seller.

You should consult with your Mortgage Banker prior to making an offer in part to get their guidance on how long it will take to get your loan approved.  Negotiating closing dates prior to consulting with your Mortgage Banker is one of the main reasons for stress within Real Estate Transactions.  Rushing to complete your financing in time causes undue stress & can often be avoided by going over the contract dates with your Mortgage Banker prior to submitting your offer.

Important Dates

Application for Financing
Typically your contract will require that you apply for your loan within 3-5 days of the effective date of your contract effective date.

Home Inspection
The home inspection date is the date you have to complete your home inspection by.  The home inspection is an important part of the process of buying a home.  The home inspection is a close review of the property by a professional that looks at the structure of the property for deficiencies such as termites, electrical issues, roof problems, leaks, broken appliances, etc.  All deficiencies are then noted in a report with an estimated cost to repair.  

Appraisal
The appraisal is ordered by the lender and is an independent analysis of the value of the property.  It allows the lender to determine whether the purchase price you agree to with the seller is supported by similar sales in the neighborhood in the recent past.  If the property does not appraise at value you can either cancel the contract or renegotiate with the seller as long as it is completed prior to date specified in your contract.

Financing Contingency (Mortgage Commitment)
This is perhaps the most important date in your contract.  The mortgage commitment date refers to the date your loan must be approved by.  Typically, the seller or seller’s realtor will ask for a “commitment letter” from the buyer’s lender on the mortgage commitment date.  Once the commitment letter is provided to the seller, the purchase contract is considered “firm” and can no longer be cancelled by the buyer if the financing is ultimately denied.  

Once the “commitment letter” is provided the buyer’s deposit is considered at risk and if the loan does not close due to a denial of the financing the seller can make claim to keep it.  For this reason, it is very important that you consult with your Mortgage banker and discuss whether the mortgage commitment date listed in your Offer to the seller is realistic and can be met based on your financing scenario. This is one of the biggest mistakes that inexperienced Buyers & Realtors make when rushing to get an offer submitted to a seller.  Make sure you let your Mortgage Banker review your draft contract PRIOR to submitting the Offer.

 

Seller Credits to Closing Costs

A Seller Credit to Closing Costs can be a valuable negotiating tool and is commonly included in Offers made by First Time Home Buyers.  The wording used when including a Seller Credit to Closing Costs is significant and you should let your Mortgage Banker review the language used and amount of the credit to be given to confirm that it meets lender & loan program (Conventional, FHA, VA, USDA, Jumbo) guidelines. Click Here to Read More About Seller Credits To Closing Costs.

Inclusion of Furniture and Personal Property

Inclusion of personal property or furniture in a Purchase Contract can have unwanted complications when it comes to the financing approval.  Inclusion of furniture that has monetary value is considered a “concession”.  The lender may require that the furniture be appraised and may reduce the loan amount offered.  Best Practices is to review any comments regarding Furniture with your Mortgage Banker prior to submitting your offer.

Improvements or Repairs to the Property

Language surrounding improvements or repairs to be made can also have an impact on the lender’s financing approval. Please review any improvement or repair comments with your Mortgage Banker prior to submitting/signing your purchase contract.