Buyers changing financing AFTER contract signed and Inspection & Appraisal done (contingencies, agent)

[miakelly]

Oh please help! This is a first for me.

We signed a purchase & sale agreement approx. two weeks ago. At the time, we had a few offers but chose this particular offer because they were putting 35% down and going with a conventional mortgage. They are foreign nationals, living here. They were going through a reputable lender in the area that deals specifically with foreign nationals and has about 14 years experience in this area.

We agreed to a price, had the home inspection which produced one minor issue that we prompty had professionally fixed, then had the appraisal and home appraised at the price we agreed to in the contract.

We then received signed addendums removing the inspection and appraisal contingencies. Just waiting for loan to go through and get to closing.

Today, my agent calls and says Buyers have changed lenders. They are now going FHA with Bank of America and putting 20% down.

What are my rights as a seller here? Isn't FHA more difficult to deal with than a conventional? Will I incur any additional closing fees due to the FHA loan? What if the FHA appraiser gives a lower appraised value, or finds other things in the home that need to be fixed, do I need to fix these things? (there isn't anything wrong with the home, but I know that FHA sometimes has weird rules).

I mean seriously, are buyers allowed to completely change the type of loan and financing that was originally agreed to once the P&S is signed by all, price agreed to, inspection and appraisal both passed satisfactorily?

I reallly need help here, I have no idea why they are doing this, what is going on, what should I do? Please help.....any ideas, suggestions? What are the possible financial ramifications to me as the seller? What should I do? Help please! Thanks kindly in advance.

[JackandJill76]

First: calm down.

Yes. Buyers are allowed to completely change the type of loan and financing even if everything is signed off. More than likely in your contract it states that buyers have the right to obtain alternate financing as long as there is no cost to the seller. They may have thought they could get a conventional loan and once the numbers were crunched their debt-to-income ratio was too high and they had to switch to an FHA. Again, that is more than likely their right stated in the contract. Check it to make sure. I doubt they are trying to pull a fast one on you, sometimes buyers think they are on one side of the debt-to-income ratio and it turns out they are too high for the conventional.

In my experience if your house is in good condition you really don't need to worry. If the FHA inspector finds any additional repairs or safety features that need repair the buyers may ask you to contribute up to $1000 for those repairs but you are certainly allowed to say no. (Remember, they have the right to pursue alternate financing as long as there is no additional cost to you!) Those items WILL have to be repaired at the buyers cost if you decline to contribute them and the FHA appraiser will come back check to make sure they have been completed before closing. If your house is in good shape you shouldn't worry. FHA will be looking at safety features like hand rails on staircases, sash locks on windows, paint in good condition (not peeling), and just general safety issues.

If you think your first appraisal was pretty much in line with comps and what's happening in your real estate market then more than likely, the FHA appraisal should come in pretty close. It probably won't be higher but still close. If it comes in lower and you don't want to eat the cost then that's up to you to terminate the contract or accept the lower appraisal.

Good luck!

[JackandJill76]

PS-When I said "comps" I meant recently sold listings....

[rjrcm]

Read your contract for what is allowed regarding the buyer's financing as contract requirements vary across states. Also consult with your agent for what is allowed and what may be your best response. Your agent should be counseling you on this issue. Normally, there are no additional seller fees unless you negotiated to cover some of their closing costs. There used to be what were called "non-allowable" buyer fees, but are no longer an FHA requirement.

[miakelly]

First, thank you so much for your reply!

Question - the original appraisal contingency was released, and we signed off agreeing to a certain price. So even if the FHA appraisal comes in lower, aren't the buyers bound to pay the contract price? We already had one appraisal that met contract price, just because they change their financing which possibly results in a lower appraisal, that should not change the agreed to price. The decision to change banks was theirs.

I would think they are legally obligated to pay the original price, if I am wrong, could you kindly explain why? Thanks!

[miakelly]

Originally Posted by rjrcm

Read your contract for what is allowed regarding the buyer's financing as contract requirements vary across states. Also consult with your agent for what is allowed and what may be your best response. Your agent should be counseling you on this issue. Normally, there are no additional seller fees unless you negotiated to cover some of their closing costs.

It doesn't say anything specifically about what is allowed. It just says:

This contract is contingent upon buyer obtaining a written loan committment for a CONVENTIONAL loan on the following terms within 55 days of the effective date for a FIXED rate loan in the principal amount of 65% of the purchase price.

Then it just has a few lines about the interest rate and length of loan.

Is there somewhere else in the contract this would be specified?

Thanks!

[rjrcm]

Originally Posted by miakelly

First, thank you so much for your reply!

Question - the original appraisal contingency was released, and we signed off agreeing to a certain price. So even if the FHA appraisal comes in lower, aren't the buyers bound to pay the contract price? We already had one appraisal that met contract price, just because they change their financing which possibly results in a lower appraisal, that should not change the agreed to price. The decision to change banks was theirs.

I would think they are legally obligated to pay the original price, if I am wrong, could you kindly explain why? Thanks!

The real issue is that the FHA appraisal is used by the lender to decide whether or not to issue the loan. The appraised value must be at least as much as the purchase price. You may have a loan contingency in your contract that would let the buyer cancel if they can't get loan approval (again, you need to read your contract to check this). This all assumes that the buyer is allowed to change lenders per your contract.

[rjrcm]

Originally Posted by miakelly

It doesn't say anything specifically about what is allowed. It just says:

This contract is contingent upon buyer obtaining a written loan committment for a CONVENTIONAL loan on the following terms within 55 days of the effective date for a FIXED rate loan in the principal amount of 65% of the purchase price.

Then it just has a few lines about the interest rate and length of loan.

Is there somewhere else in the contract this would be specified?

Thanks!

Sorry I can't be too helpful as I'm not familiar with your contract and local requirements. You need to review with your agent, and possibly an attorney.

[JackandJill76]

I'm sure it varies state to state and agency to agency but you should be looking at a part that reads "Residential Contact of Sale." There should be a variety of numbered paragraphs: date, seller, buyer, purchase price, payment terms, settlement, financing, home inspections, inclusions/exclusions, etc...after the financing application and commitment paragraph there *should* be an alternate financing paragraph that explains the buyers' rights. See anything like that?

[rjrcm]

Assuming that they can't change their loan terms per the contract, then you need to read the contract to determine your remedies and review with your agent.