If you are buying a home in Colorado

If you are buying a home in Colorado, and require a mortgage loan to purchase the home, you need to be aware of some key terms and conditions in the standard Colorado Real Estate Contract.

Contract Overview

When purchasing a home, there are a couple of key points regarding the real estate contract to keep in mind:

Like any contract, almost everything is negotiable between you and the property seller.
The Colorado Department of Real Estate has developed a standard Contract that is used for almost all transactions involving residential real estate.
For the home buyer, the real estate contract is either “specific performance” or "liquidated damages". With a liquidated damage contract, if you fail to comply with the terms of the contract you will forfeit your earnest money deposit. With a specific performance contract, if you fail to comply with the contract, not only do you lose your earnest money deposit, but the property seller could also have legal recourse to recover additional monies from you.
It is not uncommon for a real estate contract to have “conditions” (also know as “contingencies”). For example, if you are selling your current home, you could make the contract conditioned upon the sale of your current property. By placing conditions in the contract, it allows you to “escape” from the contract and recover your earnest money deposit if the condition is not met. However, attempting to place conditions in the contract needs to be weighed against the possibility that the seller will not agree to a contract with numerous conditions.

Key Contract Language

Most people who buy a home need a mortgage loan to pay for the home. And at the time the real estate contract is executed, very few homebuyers know definitively that they can obtain a mortgage loan (or at least very few homebuyers want to risk their earnest money deposit on whether or not they can obtain a mortgage loan).

The language in the Colorado Real Estate Contract that relates to mortgage loans is as follows:

Loan Commitment. If Buyer is to pay all or part of the Purchase Price by obtaining a new loan as specified in Section 4b, this contract is conditional upon Buyer obtaining written loan commitment including, if required by lender, (1) lender verification of employment, (2) lender approval of Buyer’s creditworthiness, (3) lender verification that Buyer has specific funds to close, and (4) specification of any remaining requirements for funding said loan. This condition shall be deemed waived unless Seller receives from Buyer, no later than Loan Commitment Deadline (Section 2c) written notice of Buyer’s inability to obtain such loan commitment. If Buyer so notifies Seller, this contract shall terminate. IF BUYER WAIVES THIS CONDITION BUT DOES NOT CLOSE, BUYER SHALL BE IN DEFAULT.

When you negotiate the purchase of the home with the property seller, one of the negotiating items is the “Loan Commitment Deadline”. This will be some date that will between the date you sign the contract and the date of closing.

With this language in the contract, you have until the Loan Commitment Deadline (date) the ability to notify the property seller that you have not been able to obtain a Loan Commitment. If you make such notification to the seller before the Loan Commitment Deadline, the contract is cancelled and your earnest money is returned. But if you do not make such notification by the Loan Commitment Deadline, this condition is eliminated, and you may not escape from the contract if you are unable to obtain a mortgage loan. And if you are unable to “close” on the contract, your earnest money is lost. And if you agreed to a specific performance contract, the property seller could possibly have additional legal recourse against you.

It is important to note that you are under no obligation to affirmatively notify the property seller that you have received a Loan Commitment.

Loan Commitments

To the typical homebuyer, the usual reaction to the above information "that's interesting information, but what’s the big deal?” The big deal has to do with Loan Commitments.

Almost all Loan Commitments issued by lenders will have conditions. The typical Loan Commitment will state that the lender will provide a mortgage loan to the borrower provided certain conditions are satisfied. Some conditions will be standard in every Loan Commitment, and some conditions will be unique to your specific transaction.

Where problems could arise is if the Loan Commitment has a condition that you cannot satisfy. If you receive the Commitment before the Loan Commitment Deadline that has a condition that you are unable to satisfy, you cannot notify the property seller that you did not receive a Loan Commitment without risking perjury. But if you cannot meet the condition, you cannot obtain the loan, which means you cannot close, thus at a minimum losing your earnest money deposit and possibly subjecting yourself to other legal action by the property seller.

Suggested Actions

Given this language in the standard contract, set forth below are actions we would suggest you consider.

Because it is important that your liability be limited, it is very important that your contract calls for liquidated damages and not specific performance.
The optimum time for the Loan Commitment Deadline is about 3 weeks after the contract is executed and about a week prior to the closing date. This gives the mortgage lender enough time to issue you a "clean" Loan Commitment (i.e. no conditions). And if you encounter problems with the lender issuing the Loan Commitment, this will give you the opportunity to either solve the problem or find a new lender.
Make sure you are dealing with a lender that can issue you a written Loan Commitment by the Loan Commitment Deadline, and make sure that the lender is knowledgeable about this real estate contract language.
Ask the lender to verbally review with you the conditions in the Loan Commitment before the written Commitment is issued to you. This will allow you to determine whether or not you can meet the conditions. If you cannot meet the conditions, tell the lender not to issue the written Commitment. This will allow you to notify the property seller that you have not received a written loan commitment (which is true), cancel the contract, and obtain your earnest money deposit.

At Reed Mortgage, we review all the conditions in the Loan Commitment verbally with you prior to issuing you a written Loan Commitment.

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