Real Estate Financing Condition

[Anjali Reyome]

Whenyou make an offer to purchase a home, in addition to considering how much money to offer, you also need to think about any conditions that you want to include. Some common conditions deal with home inspections, the sale of another property, or insurance coverage. But possibly the most important condition deals with your ability to obtain financing. In a hot market, many buyers are tempted to waive all conditions to make their offer more attractive to the seller. This is at your own risk.

A financing condition is a clause in your offer to purchase that gives you a period of time to confirm you are able to get a mortgage approval for the home you want to buy. That time frame is usually five to seven business days. This allows you to walk away from the offer, with no penalties, if your financing is denied or the financing terms are not satisfactory to you.

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The agencies' regulations require that each insured depository institution adopt and maintain a written policy that establishes appropriate limits and standards for all extensions of credit that are secured by liens on or interests in real estate or made for the purpose of financing the construction of a building or other improvements.[1] These guidelines are intended to assist institutions in the formulation and maintenance of a real estate lending policy that is appropriate to the size of the institution and the nature and scope of its individual operations, as well as satisfies the requirements of the regulation.

Each institution's policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions' business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.

The lending policy should contain a general outline of the scope and distribution of the institution's credit facilities and the manner in which real estate loans are made, serviced, and collected. In particular, the institution's policies on real estate lending should:

The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions. Market supply and demand factors that should be considered include:

The lending policies should reflect the level of risk that is acceptable to the board of directors and provide clear and measurable underwriting standards that enable the institution's lending staff to evaluate these credit factors. The underwriting standards should address:

The supervisory loan-to-value limits should be applied to the underlying property that collateralizes the loan. For loans that fund multiple phases of the same real estate project (e.g., a loan for both land development and construction of an office building), the appropriate loan-to-value limit is the limit applicable to the final phase of the project funded by the loan; however, loan disbursements should not exceed actual development or construction outlays. In situations where a loan is fully cross-collateralized by two or more properties or is secured by a collateral pool of two or more properties, the appropriate maximum loan amount under supervisory loan-to-value limits is the sum of the value of each property, less senior liens, multiplied by the appropriate loan-to-value limit for each property. To ensure that collateral margins remain within the supervisory limits, lenders should redetermine conformity whenever collateral substitutions are made to the collateral pool.

The aggregate amount of all loans in excess of the supervisory loan-to-value limits should not exceed 100 percent of total capital.[4] Moreover, within the aggregate limit, total loans for all commercial, agricultural, multifamily or other non-1-to-4 family residential properties should not exceed 30 percent of total capital. An institution will come under increased supervisory scrutiny as the total of such loans approaches these levels.

In determining the aggregate amount of such loans, institutions should: (a) Include all loans secured by the same property if any one of those loans exceeds the supervisory loan-to-value limits; and (b) include the recourse obligation of any such loan sold with recourse. Conversely, a loan should no longer be reported to the directors as part of aggregate totals when reduction in principal or senior liens, or additional contribution of collateral or equity (e.g., improvements to the real property securing the loan), bring the loan-to-value ratio into compliance with supervisory limits.

Some provision should be made for the consideration of loan requests from creditworthy borrowers whose credit needs do not fit within the institution's general lending policy. An institution may provide for prudently underwritten exceptions to its lending policies, including loan-to-value limits, on a loan-by-loan basis. However, any exceptions from the supervisory loan-to-value limits should conform to the aggregate limits on such loans discussed above.

The board of directors is responsible for establishing standards for the review and approval of exception loans. Each institution should establish an appropriate internal process for the review and approval of loans that do not conform to its own internal policy standards. The approval of any such loan should be supported by a written justification that clearly sets forth all of the relevant credit factors that support the underwriting decision. The justification and approval documents for such loans should be maintained as a part of the permanent loan file. Each institution should monitor compliance with its real estate lending policy and individually report exception loans of a significant size to its board of directors.

The real estate lending policies of institutions will be evaluated by examiners during the course of their examinations to determine if the policies are consistent with safe and sound lending practices, these guidelines, and the requirements of the regulation. In evaluating the adequacy of the institution's real estate lending policies and practices, examiners will take into consideration the following factors:

Lending policy exception reports will also be reviewed by examiners during the course of their examinations to determine whether the institutions' exceptions are adequately documented and appropriate in light of all of the relevant credit considerations. An excessive volume of exceptions to an institution's real estate lending policy may signal a weakening of its underwriting practices, or may suggest a need to revise the loan policy.

You may not always know whether you are in a multiple offer situation. If you are working with an experienced, knowledgeable real estate professional, he or she can guide you through the available options. If you are in a multiple offer situation, you generally have four choices:

In multiple offer situations, it can be tempting to forego the requirement for a home inspection before closure. While it may make your offer more attractive by speeding up the closing process, you risk finding property defects, required repairs, or needed upgrades after taking possession of your home. This could lead to more costs and inconveniences with no recourse.

To make your offer more attractive, you may also offer a faster possession date. Depending on your current housing situation, this could incur unexpected costs, such as having to pay rent and make mortgage payments at the same time.

When buying a home, always read and understand all documents before signing. Seek help from qualified and licensed real estate, legal, and financial professionals. The DFPI licenses both online and brick-and-mortar mortgage lenders. We encourage homebuyers to do their research to ensure their mortgage lending company is licensed for the services they are offering.

Larger national banks and credit unions fall under Office of the Comptroller of the Currency (OCC) or National Credit Union Administration (NCUA) jurisdiction. You can look up nationally licensed mortgage professionals and lenders in the NMLS Consumer Access Directory.

For additional assistance with verifying a mortgage professional or lender, contact the DFPI at Ask....@dfpi.ca.gov or call us toll-free at (866) 275-2677. Additional homebuyer resources are available on the DFPI website.

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