FAQ about the Financing Section of the 2011 AAR Residential Resale Real Estate Purchase Contract

Posted on January 1, 2011 by Michelle Lind, Esq

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Sample Form: Residential Resale Real Estate Purchase Contract This form will go live on zipForm® as of February 28, 2011.

QUESTION C-1 Q: Why doesn’t the Residential Resale Real Estate Purchase Contract (“Contract”) require the buyer to submit a Pre-Qualification Form with the offer? A: The Contract does not require the buyer to submit a Pre-Qualification Form with the offer because there are circumstances in which the buyer may wish to submit an offer prior to consulting with a lender. A listing broker should consider discussing the advisability of accepting an offer that does not include a completed Pre-Qualification Form with the seller.

QUESTION C-2 Q: When must the loan contingency be fulfilled? A: The Contract provides that the buyer’s obligation to complete the sale is contingent upon the buyer obtaining loan approval for the loan described in the AAR Loan Status Update (“LSU”) form without Prior to Document (“PTD”) conditions no later than three days prior to the close of escrow (“COE”) date. (See “Contract”, Section 2b.) If the loan contingency is not fulfilled, the buyer has no obligation to close escrow. Therefore, the Contract can be considered cancelled or terminated because it is unenforceable against the buyer. Even though the Contract is no longer enforceable, the parties should execute written mutual cancellation instructions to avoid any confusion. Further, if the seller agrees to allow the buyer additional time to obtain the loan, the parties should execute an amendment to the Contract extending the close of escrow date.

QUESTION C-3 Q: Why does the loan contingency expire three days prior to COE rather than at COE? A: The loan contingency was moved to expire three days prior to COE rather than on the actual COE Date to increase the probability that the seller will be informed prior to the COE Date whether or not the buyer will be able to qualify for the loan and close escrow. Thus, the Contract requires the buyer to sign loan documents or deliver a notice of the inability to obtain loan approval no later than three days prior to the COE Date. (An Unfulfilled Loan Contingency Notice is available for this purpose.)

QUESTION C-4 Q: Why was the loan contingency changed from “loan approval without conditions” to “loan approval without Prior to Document (“PTD”) conditions”? A: To obtain loan approval without PTD conditions, the buyer must submit all necessary documentation, the appraisal must be completed, any appraisal conditions met and the loan underwritten. (See “LSU,” lines 41-55.) The remaining prior-to-funding loan condition requirements, such as approving the pre-audit and receiving the signed loan documents, are primarily ministerial acts that are unrelated to the buyer’s ability to qualify for the loan. (See “LSU,” lines 52-65.)

QUESTION C-5 Q: What does the term “Prior to Document (“PTD”) conditions” mean? A: PTD conditions are what lenders call all the actions/approvals necessary before the lender actually orders the closing loan documents and instructions. (See “LSU,” lines 41-55.) PTD conditions include items that must be provided and reviewed by the underwriter before the loan documents can be requested.

QUESTION C-6 Q: What if the buyer is unable to obtain loan approval without PTD conditions? A: If the buyer is unable to obtain loan approval without PTD conditions, the buyer must deliver a notice of the inability to obtain loan approval without PTD conditions to the seller or escrow company no later than three days prior to the COE Date. In such an event, the contract is cancelled, and the buyer is entitled to a return of the earnest money.

QUESTION C-7 Q: Must the buyer sign the loan documents three days prior to COE? A: Yes. The buyer is obligated to sign the loan documents three days prior to COE. (See “Contract,” Section 2g.)

QUESTION C-8 Q: What is the seller’s remedy if the buyer fails to sign all loan documents three days prior to the COE Date? A: The seller should deliver a cure notice to the buyer. If the buyer fails to sign the loan documents within three days after the cure notice, the buyer is in breach and the seller may pursue the remedies set forth in Section 7b.

QUESTION C-9 Q: What if the buyer does not deliver a notice of the inability to obtain loan approval without PTD conditions or sign loan documents three days prior to the COE Date? A: The seller should deliver a cure period notice to the buyer specifying that the buyer has not complied with the contract by signing the loan documents or delivering a notice of the inability to obtain loan approval to the seller or the escrow company. Thereafter:

  • If the buyer signs the loan documents within three days and is prepared to close escrow on the COE Date, the seller must close.
  • If the buyer delivers notice of the inability to obtain loan approval without PTD conditions within three days, the contract is unenforceable against the buyer and the buyer is entitled to a return of the earnest money, assuming that the buyer made a diligent and good faith effort to obtain the loan.

If the buyer does neither, the buyer is in breach of contract, and the remedy for the breach depends on the specific noncompliance, as set forth in Section 7b:

  • If the buyer failed to obtain loan approval without PTD conditions and failed to deliver the notice, the buyer is in breach for the failure to deliver the notice, and the seller is entitled to the earnest money.
  • If the buyer obtained loan approval without PTD conditions or failed to make a diligent and good faith effort to obtain loan approval, the buyer is in breach, and the seller may accept the earnest money as the seller’s sole right to damages or pursue the buyer for the actual damages or specific performance.

QUESTION C-10 Q: If the buyer fails to close escrow on the COE date, what should the seller do? A: The seller should deliver a cure notice to the buyer specifying that the buyer has not complied with the Contract by failing to close escrow. If the buyer closes escrow within three days, there is no breach. (Note: To avoid any issue regarding the buyer’s ability to obtain loan approval, the cure notice should be delivered as set forth above.)

QUESTION C-11 Q: If the buyer provided the seller with a notice of the inability to obtain loan approval without PTD conditions, but the seller believes that the buyer failed to make a diligent and good faith effort to obtain loan approval, what are the seller’s options? A: If the seller believes that the buyer failed to make a diligent and good faith effort to obtain loan approval, the seller should contest the notice in writing. If the buyer does not produce evidence of the inability to obtain loan approval after a good faith effort that is satisfactory to the seller, the seller can initiate mediation to resolve the dispute.

QUESTION C-12 Q: Is the buyer obligated to lock the interest rate during the Inspection Period? A: No, the Contract does not require the buyer to lock the interest rate during the Inspection Period. However, if the buyer does not lock the interest rate during the Inspection Period, for example, at 5 percent, but at COE can get the other loan terms described in the LSU at, for example, 6 percent, the buyer will be obligated to close escrow or will be in breach of contract (after the expiration of the cure period). However, if the buyer does not lock but cannot obtain loan approval for some other reason, the loan contingency is unfulfilled, and the buyer is entitled to a return of the earnest money.

QUESTION C-13 Q: What if the buyer fails to deliver the LSU with, at a minimum, lines 1-40 completed within five days after Contract acceptance? A: The seller should deliver a cure notice to the buyer. If the buyer fails to deliver the LSU within three days after the cure notice, the buyer is in breach, and the seller may pursue the remedies for breach of contract as set forth in Section 7b.

QUESTION C-14 Q: What is the seller’s remedy if the buyer fails to complete the loan application and provide the lender all Initial Requested Documentation listed in the LSU at lines 32-35 during the Inspection Period? A: The seller should deliver a cure notice to the buyer. If the buyer fails to complete the loan application and provide the lender all Initial Requested Documentation within three days after the cure notice, the buyer is in breach, and the seller may pursue the remedies for breach of contract as set forth in Section 7b.

QUESTION C-15 Q: Why were Seller Concessions included in the Contract? A: In today’s marketplace, Seller Concessions are a prevalent loan condition. Instead of requiring buyers to write concessions in the Contract with various verbiage, the concession, if any, is specifically defined as the maximum amount that the seller agrees to pay for buyer’s loan costs, including pre-paids, impounds and buyer’s title/escrow closing costs. Of note, Private Mortgage Insurance (PMI) is a loan cost which would be included in the seller concession amount. PMI is extra insurance that lenders require from most buyers with less than a 20 percent down payment.

QUESTION C-16 Q: What fees are not included in Seller Concessions? A: Fees that are not attributable to the buyer’s loan costs or the buyer’s title/escrow closing costs are not included in the Seller Concessions. For example, inspection fees, home warranty plan fees, HOA transfer fees and any other fees unrelated to the buyer’s loan or the buyer’s title/escrow closing costs are not included in Seller Concessions. Appraisal fees may or may not be included in the Seller Concessions, as indicated on the Contract at line 90.

QUESTION C-17 Q: What VA loan costs are not permitted to be paid by the Buyer? A: The VA loan costs that are not permitted to be paid by the buyer include the escrow fee, any processing fee, tax service and notary. (See VA Pamphlet 26-7, revised November 8, 2010, for complete list.) Notably, the VA does not obligate the seller to pay these loan costs and the seller is not required to pay these costs unless the seller agrees to do so in the Contract. If the buyer does not indicate in the Pre-Qualification form that the type of loan is a VA loan, zero or N/A should be indicated on line 79. Of note, the VA periodically changes the costs that VA buyers are not permitted to pay, and at present, these costs could be as much as $1500.

QUESTION C-18 Q: Is the buyer entitled to make changes in the lender, loan program or financing terms without the seller’s prior written consent? A: Yes, pursuant to the Contract at Section 2l, a buyer may make changes in the loan program, financing terms or lender without the seller’s prior written consent as long as the changes do not: (1) adversely affect the buyer’s ability to obtain loan approval without conditions, (2) increase the seller’s closing costs, or (3) delay close of escrow. However, the buyer is obligated to notify the seller immediately of any such changes.

QUESTION C-19 Q: Does the appraisal contingency apply to any appraisal required by the lender? A: Yes. If the Premises fail to appraise for the purchase price in any appraisal required by the lender, the buyer has five days after notice of the appraised value to cancel the Contract and receive a refund of the earnest money, or the appraisal contingency will be waived.

QUESTION C-20 Q: What are the buyer’s rights if the Premises do not appraise for the purchase price in any appraisal required by the lender? A: The buyer has five days after notice of the appraised value to cancel the Contract, or the appraisal contingency is waived. If the buyer waives the appraisal contingency and is thereafter unable to close escrow due to the appraisal, the buyer will forfeit the earnest money. (See “Contract,” Section 7b.)


The AAR Residential Contract Revision Workgroup was led by Jim Sexton, chair, with the valuable assistance of workgroup members Amy Swaney (lender representative),  John Lotardo (title/escrow representative), Kelly Hand,  Martha Appel, Holly Mabery, John Foltz, Kerry Melcher, Jerome King, Paula Monthofer and AAR staff Christina Smalls and Jan Steward. 

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