A Case Study in How to Avoid Disaster.
The seminal moment in any real estate transaction is when the purchaser has been cleared to close by their lender, thereby removing, in most transactions, the last bar on the way to a successful closing. However, just because the lender has issued a clear to close letter, it does not mean the contractual finance contingency has been satisfied.
The death of your deal may be, truly, in the details of that clear to close letter.
There is no such thing as an “unconditional” clear to close letter. All clear to close letters come with “subject to” conditions that must be satisfied before the loan is actually cleared to close. It is a misnomer to say that a loan is clear to close unless these “subject to” conditions have been satisfied. The clear to close letter must be read carefully to make sure it satisfies all aspects of the financing contingency requirements so there is no threat of your client being in breach of contract.
Case In Point: A Clear to Close Letter Fails
A Fornaro Law client received his lender’s clear to close letter and was ecstatic about closing on his acquisition. However, that letter did not clear the financing contingency of the executed contract.
On average, clear to close letters have two general categories of “subject to” conditions that must be satisfied before a loan is actually cleared to close:
1. Conditions prior to closing.
2. Conditions prior to funding.
The latter of these is the most critical and must be examined vigorously. Typical approval conditions for this category include, but are not limited to:
• Employment verification.
• Barring of secondary financing.
• Contract credits being capped at a specific dollar amount.
• Seller contributions being capped at a specific dollar amount.
• Documents being executed in accordance with lender guidelines.
• Lender closing instructions being properly executed.
While the above conditions are generally considered standard, they should not be considered rote and all conditions need to be thoroughly vetted.
For the case at hand, one of the conditions “prior to funding” was that our client sell a specific property prior to closing on his acquisition.
Although our client thought he may have to sell one property before purchasing another property, he was ecstatic when his clear to close letter came through without him having to part with one of his holdings. Unfortunately, he was unaware that his realtor had written his acquisition contract without a sales contingency. A careful review of the lender’s clear to close letter alerted Fornaro Law to an impending disaster and allowed us to suitably extend financing and closing, thereby avoiding a breach of contract by our client, and subsequently protecting his earnest money.
Being that the finance contingency is typically the most important contingency for the vast majority of real estate transactions, it is crucial that all aspects of this contingency be scrutinized for satisfaction, and no stone left unturned to keep your client out of breach.
Careful review of the clear to close letter is paramount among the items to be scrutinized before releasing the financing contingency, even if it is lesser known.