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  • Writer's pictureJamie Koehler

Don't Fall For These 5 Weak Financing Terms In Your Contract

Weak financing terms add undue stress to a transaction. It's avoidable - don't fall for these terms in your contract.

You've heard that inventory is low in the Greater Baltimore Area and it might be a good time to sell you home. There are more buyers looking than homes available and you might be able to get favorable terms if you sell. There's a lot of fine print in the standard real estate contract. Don't fall for these five weak financing terms in the contract. Negotiate favorable financing terms. You deserve to get the best terms possible when you sell.

My name is Jamie Koehler and I've been in the Baltimore real estate industry since 2008. Prior to becoming a full-time realtor, I spent eight years operating a large rental portfolio consisting of more than 700 single-family homes in the Baltimore area. During this time I learned what it really meant to operate real estate, how to boost income and limit expenses to see the most profit possible. Now I help home sellers in the Greater Baltimore Area do just that when I list their homes. To do so, I provide outstanding marketing to generate leads and then work to negotiate the best terms possible on your contract. Many sellers aren't aware of all the terms within a contract and a weak agent might not take the time to comb through them and explain their impact. This month, I'm sharing information on five weak financing terms to avoid in your contract when you sell your home.

Top Things To Look Out For In Your Real Estate Contract

If you’re even thinking about selling your home now, you may have realized that the housing inventory levels in the Greater Baltimore Area are very low. In Baltimore, we have more buyers looking than we have home available. As a result, if your home is priced correctly and doesn’t have any major deterrents (latent defects, a dysfunctional layout, odors, a challenging location, to name a few), you could potentially earn multiple offers when you list, as my two most recent listings did (one in Clarksville, MD earned seven offers, another in Baltimore City, MD earned four offers, both in February 2023).

While even new sellers are aware of some of the major points of evaluation of an offer – price, inspection contingency, and closing time frame, there are so many other facets of a standard Maryland real estate offer that I review in detail and discuss with my seller, whether we have one offer in hand or many. It’s important to make sure that the terms of the offer are strong through-and-through upfront and to avoid what other sellers or other agents may overlook as weak terms.

What's one of the top things to look out for in your real estate contract? Financing Terms. And there are many. A critical review of the financing terms is imperative to both determine the financial strength of the buyer, but also ensure that the buyer is serious about your home and moving swiftly to procure it. Here are the five major terms to review and what terms are most ideal. Note these pertain to terms that will be executed if and when the offer is accepted. Before you even get to this stage, you should make sure that the buyer is qualified. For more information on making sure that a prospective buyer is qualified to purchase your home, visit my article on that specific topic here :

#1 - Weak Deposit Amount

Every contract of sale should indicate the amount of the buyer’s deposit. 1% of the sales price is typical. So, for a $500,000 home, a $5,000 deposit is normal. A deposit higher than 1% indicates that the buyer is quite serious. While any deposit below 1% would cause me to call the buyer’s agent; it’s just unusually low.

Why does the deposit even matter? If the offer is accepted, the buyer will place the deposit into an escrow account, typically held either with the buyer’s agent’s brokerage or the title company. Assuming everything goes as planned and the contract goes through, those funds stay there until closing day. On closing day, the deposit is applied to the funds the buyer needs to bring to closing to purchase the home. So why does the amount of the deposit matter? Maryland is a very buyer-friendly state. The truth is, if the buyer walks away within a contingency period, the buyer will likely get the deposit back. But if the buyer walks away for any reason at all outside of a contingency period, just because he or she got cold feet for example, the most the buyer stands to lose is the deposit. So, if a buyer of a $500,000 home is only putting up a $1,000 deposit, my immediate concern, especially given the low inventory levels, is that the buyer is considering the home as an option. If the buyer finds a better home or just loses interest, all he or she stands to lose is $1,000.

What you should aim for : A deposit of 1% or more of the purchase price

#2 - Long Time Frame To Deliver The Deposit

Every standard MAR (Maryland Association of Realtors) contract is going to indicate the time frame by which the buyer must pay the deposit into escrow. Under no circumstances, should this time frame be more than two days. Most brokers or title companies can accept a deposit by wire. Aside from a Sunday when some banks that require in-person wire initiations will be closed, there’s no reason a wire couldn’t be sent any other day. I have seen some buyers indicate that they will perform an inspection within five days and put their deposit in escrow within seven days. You certainly don’t want that. You run the risk of a conflict at the inspection phase and the bottom line is, there can’t even be a discussion about who is due the deposit if it hasn’t yet been placed in escrow. So, it goes without saying that I always aim to get the deposit placed in escrow within two days and further follow up on the second day to obtain confirmation that the deposit has been received by the escrow holder.

What you should aim for : 2 days or less for the buyer to deliver the deposit to the escrow agent

#3 - Long Loan Application and Financing Commitment Deadlines

The MAR contract also requires that the buyer enters the amount of days the buyer has to submit a formal loan application to the lender and the amount of days the buyer has to receive a loan commitment from the lender.

Any offer you receive should include a recently dated preapproval letter from the lender confirming that, based on the buyer’s credit score, income, and assets, the buyer qualifies for and can afford a mortgage based on the sales price of your home. The preapproval letter is often based on the buyer and is often not property specific. Once the buyer’s offer is accepted, the buyer needs to submit a formal loan application to the lender for the purchase of your particular address. Again, there is no reason this should not be able to be done within about three days of contract acceptance. The buyer simply needs to supply some additional information to the lender to get the loan in motion.

Nearly every lender can deliver a loan commitment within about 28 days. Still, I always contact the lender to be sure that they are aware of the loan commitment deadline and confirm that they are able to feasibly achieve it.

Should the loan application time frame be more than about three days, I question it – is there something going on that needs to be addressed in order for the buyer to be able to move forward with the loan? For example, does the buyer need to pay down a credit card, does the credit score need to improve slightly, does the buyer need to be approved for a grant? Similarly, if the buyer is requesting more than 28 days to obtain a loan commitment, I need to know why.

What you should aim for : 3 days or less for the loan application deadline; 28 days or less for the loan commitment deadline

#4 - Obligating The Seller To A High Dollar Amount If There Are Lender-Required Repairs

You will need to know what kind of loan the buyer is seeking – the three most common types of loans I encounter are FHA loans, VA loans, or conventional loans. It is very rare that I have seen lender-required repairs arise on conventional loans. However, with FHA loans and VA loans, the appraiser, in addition to performing an appraisal of the property, will also perform a health and safety inspection. This could lead to repairs that the lender will require to be completed before the loan will be approved. Whether the buyer is pursuing an FHA loan, VA loan, or conventional loan, there should be a financing contingency addendum included with the offer and the buyer will need to fill in the maximum about that the seller will be obligated to pay in the event that there are lender-required repairs. Pay attention to this. Generally, I see buyers or their agents enter between $0 - $1,000, but it could be more. If the buyer’s agent enters $1,500 for example, that means that if there is a list of repairs required by the lender, you are contractually required to pay for those repairs up to $1,500. In some cases, if the repairs exceed that amount and the buyer is not willing or cannot afford to pay for any of the repairs, you may offer to pay more to get the loan approved and get to the finish line. That however is your election.

What you should aim for : I suggest aiming for 1/1000 of the purchase price; for a $750,000 home, $750

#5 - Long Time Frames To Address A Potential Appraisal Shortage

The financing contingency will also indicate how the appraisal is handled. With FHA loans, the financing contingency is going to state that the home must appraise for the purchase price on the contract. If it doesn’t, as the seller’s agent, I would reach out to the buyer’s agent and lender to see what could be agreed upon. With VA loans, the financing contingency is going to state that if the home does not appraise for the purchase price on the contract, the buyer, within five days of receipt of the appraisal, will decide if the buyer will proceed with the purchase. This can become a point of negotiation with you, the seller. With conventional loans, the buyer needs to fill in the amount of days the buyer has to notify you, the seller, if the home appraisal comes in less than the purchase price and what the buyer’s intention or request is, and the amount of days you have to respond back. Neither one should be more than two days – this negotiation should move pretty quickly.

What you should aim for : 2 days or less to discuss any appraisal shortages

What If The Financing Terms Aren't Ideal?

Everything is negotiable before you agree to a contract. You can propose changes to the buyer before you agree to sign the offer. I have, on many occasions, suggested tweaks on my seller’s behalf. It's not petty; it's important. My goal is always to get the seller the best terms possible. This includes financing terms that ensure that the buyer is a solid, qualified buyer that is invested in the purchase of the property, ready to move forward at a reasonable pace, and not going to put the seller in a position to have to overextend on the lender-required repairs and appraisal. You should never be afraid to ask for the terms you want. It’s your home and you deserve to get a deal done where you close on time the first time and net the most money possible.

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