Let’s talk about a document that is typically used in writing a contract on a property, and it’s called the Third Party Financing Addendum. Assuming that you’re not paying cash for a home and you’re going to be getting a loan, then you would be using this document called Third Party Financing. What it does is it just kind of lays out what the loan is going to be, and then what the obligations are for the person getting the loan.
The first part of the document talks about the amount the loan is going to be for usually 30 years, sometimes 15-year loan, and the percentage, the interest rate, which right now would be maybe three, a little over 3%, and for how many years. That is the first part of the document. But the important part of the document is found towards the bottom, where it says that the buyer will make every reasonable effort to have obtained this loan. Meaning they will have gotten every document to the lender that the lender has asked for. Typically, just for starters, it’s two years tax returns, two months of pay stubs, and two months of bank statements. That’s the typical thing that they look for just as a minimum, or anything else that has any financial bearing on your life would also need to be disclosed to the lender.
The bottom part goes on to say that the buyer will have achieved their credit worthiness by blank date. How long will that take? Well, it shouldn’t take more than about 20 days. And that’s if a lender is not really on top of things very well, that should be shorter than that. But at a minimum, 20 days is I guess, reasonable.
The first part of that document talks about the credit worthiness of the buyer, but the second part talks about the credit worthiness of the house. How is the house credit worthy? Well, let’s talk about that. It needs to appraise for the amount that the lender’s willing to loan on it. It has to be insurable and the title policy is clear, the survey, all of those things go into the property’s credit worthiness. We take the buyer’s credit worthiness. We put it with the house credit worthiness, and together you get a loan. If one of those things is out of line, you’re not going to get a loan.
The buyer’s credit worthiness has a timestamp on it. Meaning you’ve got so many days to accomplish that, whatever that negotiable time is between you and the seller, but the house credit worthiness, meaning the appraisal, the survey, the insurability, that can go on till almost closing. It’s incumbent on everyone to get the lender to get on that appraisal, to get the buyer to get their insurance on the property to know that there’s no red flags that are going to jump up there. It’s a really important document and it carries some heavy weight with the contract. Understand what you’re signing and what you’re agreeing to as you’re filling out that third-party finance.
It does go on to talk about an FHA financing or a VA financing. And when you use those types of loans, it has a built-in appraisal clause, meaning the house must appraise for the amount that you’re buying it for, or FHA or VA will not give you the loan.
Now, can the buyer for a VA or an FHA put more money up to make the difference? Absolutely.
Let’s just say, for example, you put in an offer on a $300,000 house and it only appraise for 290,000. Could the buyer on either one of those come up with 10,000 more dollars to make up the difference? Absolutely. They have every right to do that, but understand that the lender has every right to say, “No, we’re not going to loan the money if you cannot come up with that additional money.” You also have to prove to the lender, where’s that additional money coming from? They want to make sure that you didn’t borrow the extra money to make up the difference. That’s always the operative question when the lender asks questions, where’d the money come from? That’s all they want to know. Was it in a savings account? Was it under a mattress? I mean, where was that money?
Can VA and FHA pay over appraised value? Yes, they can. They just have to talk with their lender about it and make sure everyone understands where the money’s coming from.
There’s a lot that goes on in that one document. Be sure you understand it. And if you don’t, then make your realtor explain it to you so that you know what you’re signing and what you’re agreeing to and the time limits that are in there. If you have any questions or want some help with that, please feel free to call on us.