QUESTION L-2
Q: Why is the information from the Pre-Qualification Form repeated in the LSU?
A: The information from the Pre-Qualification Form is repeated in the LSU because a Pre-Qualification Form may not have been submitted with the offer or the information contained in the Pre-Qualification Form submitted with the offer may have been incomplete or may have changed.

QUESTION L-3
Q: Why is the “Closing Loan Documents Delivery Date” included in the LSU?
A: The buyer’s obligation to complete the sale is contingent upon the buyer obtaining loan approval for the loan described in the LSU without Prior to Document (“PTD”) conditions, and the buyer is obligated to sign all loan documents no later than three days prior to the close of escrow (“COE”) date. The “Closing Loan Documents Delivery Date” was included so that the lender and all parties will be alerted as to the date the loan documents must be at the escrow company so that the documents can be signed as required.

QUESTION L-4
Q: If the Contract provides that COE is Friday, when must loan documents be signed?
A: Pursuant to Section 8i (Calculating Time Periods) of the Contract, if COE is Friday, March 11, the loan documents must be signed by 11:59 p.m. on Monday, March 7. (Note: Pursuant to Contract Section 8h, all references to “days” are calendar days.)

QUESTION L-5
Q: What if the buyer fails to provide an LSU five days after Contract acceptance?
A: If the buyer fails to deliver the LSU as required, the seller may deliver a three-day cure notice to the buyer pursuant to Contract Section 7a. If the buyer does not deliver the LSU within three days after delivery of the cure notice, the failure becomes a breach of Contract, and the seller may proceed as set forth in Contract Section 7b.

QUESTION L-6
Q: What if the buyer provides an LSU five days after Contract acceptance, but lines 1-40 are not completed?
A: As set forth above, the seller may deliver a three-day cure notice to the buyer.

QUESTION L-7
Q: What happens if the Buyer’s Lender refuses to complete an LSU?
A: The buyer should complete and sign the LSU. The failure of the buyer’s lender to complete the LSU is not a potential breach and, therefore, is not subject to a cure period notice because the lender is not a party to the Contract.

QUESTION L-8
Q: What is the Seller’s recourse if the Seller “disapproves” of the buyer’s LSU?
A: The Contract does not provide the seller an opportunity to “disapprove” the LSU. If the LSU indicates changes in the loan program, financing terms or lender described in the Pre-Qualification Form submitted with the Contract and those changes adversely affect the buyer’s ability to obtain loan approval, increase seller’s closing costs or delay close of escrow, the seller may deliver a cure notice pursuant to Contract Section 7a for the failure to obtain the Seller’s written consent. If the buyer’s offer was accepted without a Pre-Qualification Form, the seller may only issue a cure notice if the seller can establish that the buyer is not diligently working to obtain the loan as required by Contract Section 2g or is not acting in good faith.

QUESTION L-9
Q: In a short sale, when is the LSU required?
A: Pursuant to the AAR Short Sale Addendum to the Contract, the date of the seller’s delivery of the Short Sale Agreement Notice to the Buyer is deemed to be the date of Contract acceptance for purposes of all applicable Contract time periods. Therefore, the buyer is required to deliver an LSU to the seller five days after delivery of the Short Sale Agreement Notice.

QUESTION L-10
Q: If the buyer changes lenders after submitting the LSU, is the buyer required to submit an updated LSU?
A: No. However, pursuant to Contract Section 2l, the buyer is obligated to immediately notify the seller of any changes in the loan program, financing terms or lender described in the LSU. The buyer is entitled to make any such changes without the prior written consent of the seller if the changes do not adversely affect the buyer’s ability to obtain loan approval without conditions, increase the seller’s closing costs or delay close of escrow.

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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.

(“Contract” refers to the 2011 AAR Residential Resale Real Estate Purchase Contract.)

QUESTION P-1 Q: What is the purpose of the Pre-Qualification Form? A: The Pre-Qualification Form was developed to provide information on the buyer’s ability to qualify for a loan without a Good Faith Estimate (“GFE”). The new form provides more information than provided on the current Loan Status Report. The form sets forth the loan amount for which the buyer can prequalify, assuming a maximum monthly housing payment.

QUESTION P-2 Q: Why isn’t the Pre-Qualification Form property specific? A: The Real Estate Settlement Procedures Act (“RESPA”) requires a property address before a GFE may be provided by a lender. Thus, the Pre-Qualification Form is designed to provide information on the buyer’s ability to qualify without a GFE.

QUESTION P-3 Q: Who should complete the Pre-Qualification Form? A: The lender.

QUESTION P-4 Q: Why is marital status requested? A: The lender will require the buyer to disclose marital status to obtain a loan. Arizona is also a community property state. If a married borrower is purchasing a property in Arizona without their spouse, there will be specific title requirements that may impact the ability to close a transaction. HUD also requires lenders to consider the debts of a non-purchasing spouse when the property being purchased is located in a community property state.

QUESTION P-5 Q: What is a USDA loan? A: A USDA-guaranteed loan is a government-insured purchase loan. USDA loans are only offered in rural areas and serviced by direct lenders that meet federal guidelines.

QUESTION P-6 Q: Why are Planned Unit Development, Manufactured Home and Mobile Home included on the form as property types? A: These types of property are eligible for different loan programs. Therefore, these properties are evaluated based on different loan criteria and documentation than other properties.

QUESTION P-7 Q: What is the difference between a manufactured home and a mobile home? A: A “manufactured home” means a structure built in accordance with the National Manufactured Home Construction and Safety Standards Act of 1974 and Title VI of the Housing and Community Development Act of 1974 after June 15, 1976. A “mobile home” means a structure built prior to June 15, 1976, on a permanent chassis, capable of being transported in one or more sections and designed to be used with or without a permanent foundation as a dwelling when connected to on-site utilities, except recreational vehicles and factory-built buildings. (See A.R.S. § 41-2141 et. seq.)

QUESTION P-8 Q: What “other” property types are there beyond those listed? A: Co-op or condo-tel (condo hotel) properties would be examples of other property types.

QUESTION P-9 Q: Why is the maximum total monthly housing payment indicated on the form? A: The loan amount that a buyer can qualify for is based not only on a monthly principal-and-interest loan payment but on a total monthly housing payment, which includes property taxes, homeowner’s insurance, HOA fees and flood insurance costs.

QUESTION P-10 Q: Why is the lender company’s Arizona license number requested? A: As of July 1, 2010, in order to transact business as a mortgage originator, the originator must work for a licensed mortgage banker, licensed mortgage broker or an exempted entity. An exempted entity would be a federally chartered institution and thus would not have an Arizona License number. All non-exempted entities will be licensed as either a BK (Banker) or MB (Broker). (See A.R.S. § 6-991.02(14): http://www.azleg.state.az.us/FormatDocument.asp?inDoc=/ars/6/00991-02.htm&Title=6&DocType=ARS.) For more information, visit the Department of Financial Institutions website at http://www.azdfi.gov/Licensing/NMLSLO/nmlslo.html.

QUESTION P-11 Q: What is the difference between a mortgage broker and mortgage banker? A: As set forth above, the lender’s license number will indicate whether the entity is a banker or a broker. A mortgage banker is a lending institution that offers a variety of loans, funded with the bank’s assets or by use of a credit line issued in the bank’s name. A mortgage broker generally is an intermediary who brings borrowers and lenders together but does not use its own money to fund the loan.

QUESTION P-12 Q: Why is the lender’s loan officer’s NMLS number requested? A: “NMLS” means the National Mortgage Licensing System, and all residential loan originators must be licensed or registered through this system. (See A.R.S. § 6-991.02(14): http://www.azleg.state.az.us/FormatDocument.asp?inDoc=/ars/6/00991-02.htm&Title=6&DocType=ARS.) For more information, visit the Department of Financial Institutions website at http://www.azdfi.gov/Licensing/NMLSLO/nmlslo.html.

QUESTION P-13 Q: Why is there an expiration date on the Pre-Qualification Form? A: A pre-qualification generally expires when the credit report expires – typically within 60 days.

QUESTION P-14 Q: What happens if the buyer makes an offer without submitting the Pre-Qualification Form?
A: Section 2e of the Contract requires the buyer to deliver an LSU to the seller describing the current status of the buyer’s proposed loan within five days after Contract acceptance. The LSU will contain most of the information contained in the Pre-Qualification Form.

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. 

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. 

The Multiple Counter Offer form was revised  to clarify when the seller was agreeing to the terms of the Multiple Counter  Offer or submitting an additional counter offer. The Multiple Offer/Counter Offer form is a new form that essentially  mirrors the Multiple Counter Offer form. This form is intended for use by  buyers making offers on multiple properties. The Counter Offer form, which has  remained unchanged since 1996, was revised for consistency with the Multiple  Offer/Counter Offerand Multiple Counter  Offerforms. The acceptance language  in all three forms now references the Notice section of the Contract (Section  8m) for acceptance delivery purposes.

The Residential  Buyer’s Inspection Notice and Seller’s Response (BINSR) form was  expanded to three pages by adding additional lines. The additional lines were  added to respond to members comments that more  space was needed for a seller to respond to a buyer’s notice of items disapproved.

A  small but significant revision was made to the Short Sale Addendum to the Residential Resale Real Estate Purchase  Contract. The line in the Short  Sale Addendumrequiring the buyer to  pay all loan costs was removed because it is becoming more common that the  seller will pay some loan costs in a short sale transaction. As a result, the  parties responsible for paying loan costs in a short sale transaction will be  as set forth in the Contract. As an aside, a short sale workgroup will be  formed in the near future to again discuss AAR’s short sale forms, as well as  other issues arising from this type of transaction, and recommend any actions  that AAR might take to make a positive impact on the industry in this regard.